Mass Hysteria Entertainment Company, Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Mass Hysteria Entertainment Company, Inc.	Financial_Report.xls
EX-31.1 - RULE 13A-14(A)/ 15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Mass Hysteria Entertainment Company, Inc.	f10q0812ex31i_masshysteria.htm
EX-32.2 - RULE 13A-14(A)/ 15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - Mass Hysteria Entertainment Company, Inc.	f10q0812ex32ii_masshysteria.htm
EX-31.2 - RULE 13A-14(A)/ 15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - Mass Hysteria Entertainment Company, Inc.	f10q0812ex31ii_masshysteria.htm
EX-10.2 - EMPLOYMENT AGREEMENT FOR ALAN BAILEY - Mass Hysteria Entertainment Company, Inc.	f10q0812ex10ii_masshysteria.htm
EX-32.1 - RULE 13A-14(A)/ 15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - Mass Hysteria Entertainment Company, Inc.	f10q0812ex32i_masshysteria.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 31, 2012

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 x 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 22, 2012, 524,316,722shares of our common stock were outstanding.

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

FORM 10-Q

August 31, 2012

TABLE OF CONTENTS

		Page
PART I-- FINANCIAL INFORMATION

Item 1.	Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4
Item 4	Control and Procedures	4

PART II-- OTHER INFORMATION

Item 1	Legal Proceedings
Item 1A	Risk Factors	6
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6
Item 3.	Defaults Upon Senior Securities	6
Item 4.	Mine Safety Disclosures	6
Item 5.	Other Information	6
Item 6.	Exhibits	7

SIGNATURES		8

ITEM 1 –FINANCIAL INFORMATION

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(A Development-Stage Company)

BALANCE SHEETS

As of August 31, 2012 and November 30, 2011

(Unaudited)

	August 31,			November 30,
	2012			2011
Assets
Current Assets
Cash	$	14,280		$	3,851
Accounts receivable, net of allowances for doubtful accounts of $31,616 and $25,000, respectively		-			-
Other assets		5,855			5,855
Total current assets		20,135			9,706
Intangible assets, net		737			1,392
Film costs		95,250			95,250
Total Assets	$	116,122		$	106,348

Liabilities and Stockholders’ Deficit
Current Liabilities
Accounts payable	$	82,981		$	70,170
Accrued liabilities (Note 4)		308,105			246,538
Accrued payroll		279,596			172,181
Short-term debt (Note 5)		240,000			70,000
Short-term convertible debt, net of discount of $48,390 and $41,486, respectively (Note 5)		34,110			78,014
Derivative liability (Note 5)		70,705			116,635
Total current liabilities		1,015,497			753,538
Convertible long-term debt, net of discount of $46,700 and $61,711, respectively (Note 5)		606,361			591,350
Stand ready obligation		250,000			50,000
Total Liabilities		1,871,858			1,394,888

Stockholders’ Deficit Series A Preferred stock, $0.00001 and $ 0.001 par value, respectively 10,000,000 shares authorized; 10,000 issued and outstanding		-			10
Common stock, $0.00001 and $ 0.001 par value, respectively, 2,000,000,000 and 300,000,000 shares authorized, respectively; 474,731,356 and 108,431,950 shares issued and outstanding as of August 31, 2012 and November 30, 2011, respectively.		4,747			108,431
Additional paid-in capital		6,344,141			5,702,411
Deficit accumulated during the development stage		(8,104,624	)		(7,099,392	)
Total Stockholders’ Deficit		(1,755,736	)		(1,288,540	)

Total Liabilities and Stockholders’ Deficit	$	116,122		$	106,348

See notes to financial statements

F-1

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(A Development-Stage Company)

STATEMENTS OF OPERATIONS

Three and Nine Months Ended August 31, 2012 and 2011,

and for the period from Inception to August 31, 2012

(Unaudited)

	Three Months Ended August 31,						Nine Months Ended August 31,						For the Period from August 5, 2009 (Inception) to August 31,
	2012			2011			2012			2011			2012

Revenue	$	-		$	-		$	-		$	47,500		$	72,500

Operating expenses:
General and administrative		245,271			248,219			745,549			730,796			3,167,138
Selling expense		-			-			-			-			30,573
Total operating expenses		245,271			248,219			745,549			730,796			3,197,711
Operating loss		(245,271	)		(248,219	)		(745,549	)		(683,296	)		(3,125,211	)

Other income (expense):
Other income		-			-			65,006			-			65,006
Interest income		-			92			-			184			426
Interest expense		(46,722	)		(48,462	)		(139,162	)		(90,928	)		(317,507	)
Excess of fair value of derivative		(77,095	)		(10,656	)		(213,250	)		(20,540	)		(240,341	)
Gain on fair value of derivative liability		93,389			29,436			227,723			26,668			269,881
Loss on guarantee		(200,000	)		-			(200,000	)		-			(200,000	)
Total other income (expense)		(230,428	)		(29,590	)		(259,683	)		(84,616	)		(422,535	)

Net loss	$	(475,699	)	$	(277,809	)	$	(1,005,232	)	$	(767,912	)	$	(3,547,746	)

Basic and diluted weighted average shares
Outstanding		354,251,946			82,832,739			243,765,406			81,230,500

Basic and diluted net loss from continuing
Operations per share		-	*		-	*		-	*		(0.01	)

*Amount was less than $0.01 per share

See notes to financial statements

F-2

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(A Development-Stage Company)

STATEMENTS OF CASH FLOWS

Nine Months Ended August 31, 2012 and 2011,

and for the period from Inception to August 31, 2012

(Unaudited)

	August 31, 2012			August 31, 2011			For the Period from August 5, 2009 (Inception) to August 31, 2012
Cash Flows from Operating Activities:
Net loss	$	(1,005,232	)	$	(767,912	)	$	(3,547,746	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation		655			783			2,403
Bad debt expense		-			-			25,000
Share-based compensation		268,668			202,250			1,120,235
Loss on settlement of convertible notes		-			-			(14,000	)
Contributed services		-			-			89,500
Change in fair market value of derivative liability		(227,723	)		(26,668	)		(269,881	)
Loss on excess fair value of derivative liability		213,250			20,540			240,341
Amortization of discount on convertible debt		103,106			60,041			206,517
Loss on increase in stand ready obligation		200,000			-			200,000
Changes in operating assets and liabilities:
Accounts receivable		-			(28,818	)		(2,797	)
Prepaid expenses		-			1,213			(295	)
Accounts payable		12,811			56,818			96,346
Accrued liabilities		67,479			165,443			252,515
Accrued payroll		107,415			-			282,523
Bank credit line		-			-			(1,156	)
Net cash used in operating activities		(259,571	)		(316,310	)		(1,320,495	)

Cash Flows from Investing Activities:
Film costs		-			-			(32,000	)
Other assets		-			-			1,214
Net cash used in investing activities		-			-			(30,786	)
Cash Flows from Financing Activities:
Stand-ready obligation		-			50,000			25,000
Proceeds from issuance of convertible debt		95,000			-			432,500
Proceeds from issuance of convertible debt to related parties		-			327,500			453,061
Proceeds from issuance of short-term debt		180,000			-			250,000
Payments on short-term debt		(10,000	)		-			(10,000	)
Proceeds from sale of common stock		5,000			-			215,000
Net cash provided by financing activities		270,000			377,500			1,365,561

Net increase in cash and cash equivalents		10,429			61,190			14,280

Cash and cash equivalents, beginning balance		3,851			780			-
Cash and cash equivalents, ending balance	$	14,280		$	61,970		$	14,280

See notes to financial statements

F-3

	August 31, 2012		August 31, 2011		For the Period from August 5, 2009 (Inception) to August 31, 2012

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	-	$	-	$	-
Income taxes	$	-	$	-	$	800

Supplemental schedule of non-cash investing and financing activities:
Conversion of convertible debt and accrued interest	$	137,912	$	10,000	$	229,180
Cash received under subscription agreement	$	-	$	-	$	200,000
Stock-based compensation to be issued, included in accrued liabilities, for script development	$	-	$	-	$	40,000
Common stock issued in lieu of cash payment for script costs	$	-	$	-	$	23,250
Fair value of beneficial conversion feature received on convertible note payable	$	-	$	75,000	$	75,000
Derivative liability relieved by conversion	$	126,457	$	-	$	126,457

See notes to financial statements

F-4

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”) is an innovative development-stage entertainment company working on creating real time interactive capacity through Smart Phones and Tablets for Movies. Additionally, Mass Hysteria produces movies for theatrical, DVD, Cable and television distribution. These traditional revenue streams are pursued concurrently as we identify revenue streams that will define new media's involvement in the entertainment business such as downloading applications to smart phones that will allow theater-goers to "participate" with the experience. We will outsource development of our own mobile applications to exploit these new revenue streams; however, our success will depend on our ability to raise capital, as well as generate revenues from our current operations (see Note 3). There are technology and competitive risks associated with interactive mobile devices and related 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, 2011 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, evaluation of the Company’s stand-ready obligation and values of derivative instruments. We use the Black-Scholes valuation model for simplicity purposes to value derivative instruments. Various valuation techniques render varying amounts. We consistently use this model and use inputs that are appropriate. As the Company develops its technologies, and capitalization of costs occurs, the carrying value of those long-lived assets will need to be evaluated for impairment.

We base our estimates and judgments on historical experience and on various other factors that are considered reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources.

Actual results could differ materially from these estimates.

F-5

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 August 31, 2012 and November 30, 2011, the Company’s derivatives which include the embedded conversion feature on the convertible note payable were considered level 2 financial instruments. See Note 5 for valuation technique and assumptions used. The respective carrying value of certain on-balance sheet financial instruments approximated their fair values. These financial instruments include cash, prepaids, accounts payable, accrued liabilities, notes payable and convertible notes payable. Fair values for these items were assumed to approximate carrying values because of their short term nature or they are payable on demand. The Company did not have any level 3 instruments at August 31, 2012 and November 30, 2011.

Accounts Receivable

Accounts receivable are reported net of allowance for expected losses and represents the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expect to collect, are charged to operations in the year in which those differences are determined, with an offsetting entry to a valuation allowance. As of August 31, 2012 and November 30, 2011, the Company reserved $31,616 and $25,000 respectively against accounts receivable.

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, 2012, the Company’s dilutive securities outstanding consisted of (1) the CEO’s options to purchase shares of common stock (see Note 8), for which the exercise price is above the average closing price of the Company’s common stock and thus excluded under the treasury method; (2) 6,768,454 shares relative to convertible notes to a former related party (post conversion) beginning in February 2015; (3) approximately 194,887,620 shares relative to convertible notes (post conversion) beginning in September 2012 and (4) 206,349 shares related to the warrant issued with the August 9, 2011 $37,500 convertible note. The proceeding common stock equivalents were excluded from the diluted net loss per share as the effects would have been anti-dilutive.

New Accounting Pronouncements

The FASB issues ASUs to amend the authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. Except for the ASUs listed above, those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.

F-6

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, 2012		November 30, 2011

Accrued interest	$	106,111	$	75,973
Accrued consulting fees		91,000		91,000
Accrued payroll taxes		89,994		63,800
Other accrued expenses		21,000		15,765
Total accrued liabilities	$	308,105	$	246,538

Accrued interest at August 31, 2012 represents interest on convertible long-term debt and convertible and non-convertible short-term debt from multiple external parties. Accrued consulting fees are for script writers and a film consultant.

On December 17, 2009, the Company entered into an employment agreement with our President and Chief Executive Officer (“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. As of August 31, 2012 and November 30, 2011, accrued and unpaid wages due the CEO of $228,971 and $172,181, respectively, are reflected as accrued payroll on the accompanying balance sheet. The portion of the CEO’s paid compensation is required to be reported on IRS Form W-2; however, only partial reporting has been made by the Company to date. Payroll taxes are accrued for the CEO’s salary on which reporting is due to properly reflect the amount of the employer’s share of payroll taxes related to his paid compensation, which includes the contemplation of penalties and interest estimated to cumulatively total $89,994 and $63,800 through August 31, 2012 and November 30, 2011, respectively.

The Company entered into an employment agreement as of February 3, 2012 with our Chief Financial Officer (“CFO”) which provides for a base salary of $90,000 per year, payable monthly, on a month-to-month basis. The Company pays these wages only as capital becomes available. No wages have been paid to date. As of August 31, 2012, accrued wages due the CFO were $50,625 and are reflected as accrued payroll on the accompanying balance sheet.

NOTE 5 – BORROWINGS

Short-Term Debt

(A)	Related Parties

On February 28, 2012, our Chief Financial Officer made a demand interest free advance of $30,000 to the Company to provide working capital, which remains outstanding at August 31, 2012.

F-7

NOTE 5 – BORROWINGS (CONTINUED)

Short-Term Debt (Continued)

On July 13, 2010 and March 22, 2012, the Company borrowed $60,000 and $50,000 respectively from a shareholder for use as operating capital. Both parties entered into loan agreements which make the Company liable for repayment of the principal with interest at the rate of 15% per annum for the period from inception through maturity dates of January 11, 2013 and March 7, 2013 respectively. During the three and nine months ended August 31, 2012 and 2011, the Company incurred and accrued $4,158 and $11,144; and $2,300 and $6,750 respectively, in interest expense on these loans. As of August 31, 2012 and November 30, 2011, the Company had cumulatively accrued interest of $22,560 and $11,416 respectively.

(B)	Film Finance Agreement

On May 11, 2012, we entered into an agreement with Coral Ridge Capital Partners, LLC (“CRCP”) under which CRCP agreed to provide up to $300,000 in equity financing towards the production of the motion picture currently entitled “End of the Gun” (the "Picture"). The initial $100,000 under this agreement was paid to us on June 12, 2012. While it was the Company’s intent to commence filming of the Picture by September 1, 2012, certain delays have postponed the commencement date to a date yet to be determined. CRCP has agreed to this postponement. In the event that the motion picture is abandoned, we are required to repay CRCP all funds paid to us, plus interest of 12% per annum. Accordingly, we have included the $ 100,000 advance within short-term debt until the status of the Picture has been better determined.

At August 31, 2012, cumulative expenses totaling $12,188 have been paid in connection with the Picture, which have been recorded as an expense during the three months ended August 31, 2012.

Short-term Convertible Debt with Ratchet Provisions

On January 11, 2012, March 1, 2012, May 9, 2012 and July 9, 2012, the Company borrowed $22,500, $10,000, $32,500, and $30,000 respectively, from external parties for use as operating capital. The parties entered into convertible notes payable agreements which make the Company liable for repayment of the principal and 8% annual interest by the agreements’ expiration dates ranging between October 6, 2012 and April 11, 2013. If a default is called by the lender after failure to repay principal or interest when due, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes’ inception date on the unpaid amount. As of August 31, 2012, none of the holders have held the Company in default for non-payment.

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

Additionally, a $37,500 convertible note agreement entered into on August 9, 2011 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 $985 and $9,895 at August 31, 2012 and November 30, 2011. Because the warrant reflected a derivative liability, the entire value was recorded as a loss on derivative at the date of grant and the liability is recorded on the face of the financial statements. Additionally, this derivative liability will be revalued each quarterly reporting period.

F-8

NOTE 5 – BORROWINGS (CONTINUED)

Short-term Convertible Debt with Ratchet Provisions (Continued)	August 31, 2012			November 30, 2011
Annual dividend yield		-			-
Expected life (years)		3.93			5.0
Risk-free interest rate		.45	%		.91	%
Expected volatility		245	%		269	%

The Company calculated the derivative liability using the Black-Scholes pricing model for each note upon inception and recorded the fair market value of the derivative liability as a discount to the note. When a derivative liability associated with a convertible note is in excess of the face value of the convertible note, the excess of fair value of derivative is charged to the statement of operations.

The derivative liabilities associated with these convertible notes were revalued during the quarter when and if principal was converted and as of August 31, 2012 using the Black-Scholes Model with the below range of inputs. Upon conversion of all or a portion of the convertible notes, the derivative liability associated with the principal converted is valued immediately before conversion using the Black-Scholes model. The change in fair value of the derivative liability associated with the principal converted is recorded as a gain/loss on fair value of derivative liability in the accompanying statement of operation, with the remaining value of that portion of the derivative liability written off with a corresponding credit to additional paid-in capital.

As of August 31, 2012 and November 30, 2011, the Company has outstanding principal amounts on convertible debt of $82,500 and $119,500, respectively. At these notes inception, they were fully discounted due to the associated derivative liabilities. Aggregate remaining discounts on convertible notes to be accreted over the life of each respective note on a straight-line method are $48,390 and $41,486 as of August 31, 2012 and November 30, 2011, respectively. During the three and nine months ended August 31, 2012, interest expense from accretion of the discount, including converted notes, was $ 30,693 and $88,095, respectively.

During the nine months ended August 31, 2012, lenders of convertible notes converted $137,912 of principal and interest thereon through the issuance of 289,875,644 shares. The remaining derivative liability written off from converted principal credited to additional paid-in capital was $126,457 for the nine months ended August 31, 2012. As part of these conversions, convertible notes from May 6, 2011, August 2, 2011 and October 18, 2011 were fully satisfied and the note from January 11, 2012 was partially satisfied with a reduction of $12,500 to $10,000.

Aggregate derivative liabilities associated with remaining convertible notes were $70,705 as of August 31, 2012. Based on this revaluation at quarter end and the revaluation of derivative liabilities measured during the period immediately before extinguishment of associated convertible notes, the Company recognized a gain in fair value of derivative liability of $227,723 during the nine months ended August 31, 2012.

As of August 31, 2012 and November 30, 2011, the range of inputs used to calculate derivative liabilities noted above were as follows:

	August 31, 2012			November 30, 2011
Annual dividend yield		-			-
Expected life (years)		.10 - .62	yrs		.01 - .63	yrs
Risk-free interest rate		.09% - .14	%		.01% - .09	%
Expected volatility		91%-258	%		52%-235	%

F-9

NOTE 5 – BORROWINGS (CONTINUED)

Short-term Convertible Debt with Ratchet Provisions (Continued)

The range of inputs used to calculate derivative liabilities on those convertible notes converted during the quarter ended August 31, 2012 were as follows:

Annual dividend yield	-
Expected life (years)	.001-.13	yrs
Risk-free interest rate	0.06% - 0.10	%
Expected volatility	71%-93	%

Convertible Long-term Debt

On March 31, 2011, the Company borrowed $ 200,000 from an external party for use as operating capital. The parties entered into a loan 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 $0.0016 per share. As a result, the Company will be liable to issue up to 12,500,000 shares of common stock upon conversion. Based on a $0.022 closing price on the day of the 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 three and nine months ended August 31, 2012, interest expense from accretion of the discount was $5,004 and $15,011, respectively, leaving a remaining discount of $46,700 as of August 31, 2012. During the three and nine months ended August 31, 2011, interest expense from accretion of the discount was $5,004 and $8,286, respectively. The discount is being amortized using the effective interest method over the term of the note, which is effectively straight-lines the amortization since the note is due in a balloon payment at the end of its term.

From July 2009 to November, a former related party and significant stockholder of the Company 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 former 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, this 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 an $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, this 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, this 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, resulting in an aggregate total debt of $ 453,061. The notes are immediately convertible; no beneficial conversion feature was deemed applicable at the date of issuance. As of August 31, 2012 and November 30, 2011, the Company has accrued $75,344 and $54,863 of interest expense related to these notes respectively

F-10

NOTE 6 - COMMITMENTS AND CONTINGENCIES

Office Lease

On April 14, 2011, the Company entered into a lease for office space for one (1) year and currently leases the same space on a month-to-month basis requiring monthly payments of $2,927 in addition to a security deposit of $5,855 (equal to 2 month’s rent in advance).

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 August 31, 2012 and November 30, 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.

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 August 31, 2012, 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.

Film Costs and Movie Rights Option Contract

On November 1, 2010, the Company entered in to an “option/purchase” agreement with Richard Taylor (the “Writer”) in which the Company would be granted the exclusive right and option (“Option”) to acquire all motion picture, television and allied and ancillary rights to the Writer’s screenplay – “Bad Monday”. The initial term of this option agreement was for one year; however, the Company subsequently obtained an extension through October 31, 2012. As consideration, the Company paid the Writer $2,000 which is included in Film Costs. It is the intention of the Company to produce the motion picture and to either renew the option for an additional six month period through April 30, 2013 for the payment of $3,500 or to exercise the Option., at which point the Writer would be paid a purchase price of between $40,000 and $100,000, depending on the final production budget for the motion picture. Additionally, the Writer would be entitled to 5% of the net proceeds of the picture, and an additional 2.5% of net proceeds if the Writer received shared writing credit on the picture.

The additional amount of $93,250 included in Film Costs relates to payments to Pat Proft, a related party, to deliver a finished script to a comedic motion picture which the Company intends will be the first interactive "second screen" motion picture produced and distributed to help launch the Company's interactive technology.

F-11

NOTE 7 - STOCKHOLDERS’ DEFICIT

Amended and Restated Charter

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

Stock Incentive Plans

2012 Stock Incentive Plan

On March 13, 2012, our Board of Directors adopted the 2012 Stock Incentive Plan. The purpose of our 2012 Stock Incentive Plan is to advance the best interests of the Company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either common stock or stock options under the plan is 56,000,000 shares, subject to adjustment. As of August 31, 2012, 45,867,206 shares have been granted under the plan.

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

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

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

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

F-12

NOTE 7 - STOCKHOLDERS’ DEFICIT (CONTINUED)

Stock Incentive Plans (Continued)

2012 Stock Incentive Plan #2

On August 21, 2012, our Board of Directors adopted the 2012 Stock Incentive Plan #2. The purpose of our 2012 Stock Incentive Plan #2 is to advance the best interests of the Company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either common stock or stock options under the plan is 132,800,000 shares, subject to adjustment. As of August 31, 2012, no shares have been granted under the plan.

Common Stock

Following is the activity for our shares of common stock during the nine months ended August 31, 2012:

Shares
Shares outstanding as of November 30, 2011		108,431,950
Issuance for conversion of convertible notes and accrued interest thereon	289,875,644		See Note 5
Issuance for services and operating expenses:
Legal		61,440,647
Investor relations		6,000,000
Issuance in connection with technology transfer and license		3,983,115
Stock purchase		5,000,000
Shares outstanding as of August 31, 2012		474,731,356

F-13

NOTE 7 - STOCKHOLDERS’ DEFICIT (CONTINUED)

Common Stock (Continued)

On February 8, 2011, the Company entered into a Fee Agreement pursuant to which the Company agreed to issue common stock to Indeglia& Carney, P.C. (“I&C”) for legal services rendered to the Company. During the nine months ended August 31, 2012, our Board of Directors approved the issuance of a total of 58,940,647 shares of common stock to I&C in consideration of legal services rendered and recorded a reduction of accrued legal fees of $70,127. For the nine months ended August 31, 2011, the Board of Directors approved the issuance of a total of 1,935,000 shares of common stock to I&C in consideration of legal services rendered and recorded a reduction of accrued legal fees of $39,120 during the period.

In addition, our Board of Directors approved (a) the issuance of a total of 2,500,000 shares of common stock to a third party attorney in consideration of legal services rendered and an expense of $11,750 based on the stock’s closing market price of $0.0047 on the date of the grant; and (b) the issuance of a total of 6,000,000 shares of common stock to a third party marketing consultant in consideration of services rendered and an expense of $ 4,800 based on the stock’s closing market price of $0.0008 on the date of the grant.

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

Technology Transfer and License.

On February 6, 2012, we entered into two related agreements with Three Point Capital (“3PC”). In exchange for $65,000 in cash and five Class B Units in 3PC’s subsidiary FanCloud, LLC (representing a 5% interest), we transferred certain of our intellectual property related to our mobile application. Concurrently with this transfer, 3PC granted us an exclusive, irrevocable, worldwide license to such transferred technology within the field of cinema. The $65,000 receipt was recorded as “other income” in the three months ended February 29, 2012.

On February 6, 2012, in connection with a Technology and Transfer License (above) with Three Point Capital (“3PC”) our Board of Directors approved the issuance of (i) 1,991,559 shares to three individuals for services, including the development of a long-term business plan and (ii) 1,991,559 shares to 3PC for services rendered, based on the combined fair market value totaling $1,991 of the Company’s common stock at that time.

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, 2012 and 2011 and the period from Inception to August 31, 2012, stock compensation related to this grant was $60,000, $180,000, $60,000, $180,000,and $648,667, respectively. Future compensation expense is $240,000 annually through 2014.

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NOTE 9 - SUBSEQUENT EVENTS

Conversion of short-term convertible debt.

Subsequent to August 31, 2012, the Company issued a total of 32,585,366 shares of common stock to third party holders of short-term convertible debt for the conversion of $12,170 of principal and $1,310 in accrued interest based on a conversion price of $0.00041.

Convertible Notes

On September 14 and 28, 2012, we borrowed $22,500 and $10,000 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 of June 19, 2013 and June 28, 2013 respectively. Failure to repay principal or interest when due triggers a default interest rate (from notes’ inception date) of 22%, per annum, on the unpaid amount. After 180 days, the notes are convertible into common stock at a 41% discount of 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 contains 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 will be recorded on the face of the financial statements as “derivative liability”, and must be revalued each reporting period.The Company will discount the notes by the fair market value of the derivative liability upon inception of the notes. This discount will be accreted back to the face value of the notes over the note terms using the straight line method.

Issuance of Common Stock Related to Services Rendered

On October 10, 2012 our Board of Directors approved the issuance of 17,000,000 shares of common stock to I&C in consideration of legal services rendered and accordingly recorded a reduction of accrued legal fees.

F-15

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN 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 AUGUST 31, 2012.

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 (the “Effective Date”), 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 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 of Mass Hysteria 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 now a development stage multi-media entertainment company created to produce feature films for theatrical, DVD, video on demand (VOD) and television distribution with an interactive component.

Plan of Operations for the Next Twelve Months

We are in the development stage and consequently are subject to the risks associated with development stage companies, including the need for additional financing; the uncertainty of our 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, we will require additional capital to finance the acquisition of film properties and their attendant costs, further development of our interactive technology, marketing and the creation and rendering of second screen content for original and repurposed movies for interactivity. No assurance can be given as to the timing or ultimate success of obtaining future funding.

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

We also intend to enter into negotiations with leading entertainment companies with similar objectives and technologies relating to the creation and exhibition of an interactive viewing experience, with the objective of exploring possible joint ventures and mergers to combine synergies and expertise in the interactive area

COMPARISON OF OPERATING RESULTS

RESULTS OF OPERATION FOR THE THREE MONTHS ENDED AUGUST 31, 2012 COMPARED TO THREE MONTHS ENDED AUGUST 31, 2011

Revenues.We had no revenues for the three months ended August 31, 2012 and the three months ended August 31, 2011. We did not have any films in production in the three months ended August 31, 2012 although we are continuing to develop and to secure the casting to five scripts, “End of the Gun”, “Bad Monday”, “The Boiling Point”, “Sleeping Together” and “Fight Town”, which if and when placed into production will generate producer fee revenue for the Company. We are also in active negotiation with three software programming companies for the development of the “proof of concept” to our mobile interactive cinema technology, which when launched will also produce licensing revenue.

General and Administrative Expenses.Our general and administrative expenses decreased to $245,271 in the three months ended August 31, 2012 from $248,219 in the comparable period in 2011.

Interest Expense.Our interest expense decreased to $46,722 in the three months ended August 31, 2012 from $48,462 in the comparable period in 2011. This decrease is attributable to decreased borrowings subject to interest charges during the period.

Net Loss. Our net loss increased to $475,699 for the three months ended August 31, 2012 from $277,809 for the comparable period in 2011. The increase was primarily attributable to a loss on guarantee of $200,000 due to the corresponding increase in the stand-ready obligation relating to the motion picture “Carjacked” which has not performed according to original expectations.

The lack of significant revenue in both periods is a direct reflection of our development stage of 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, 2012, we have 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, 2012 COMPARED TO NINE MONTHS ENDED AUGUST 31, 2011

Revenues.We had no revenues for the nine months ended August 31, 2012 compared with revenues of $47,500 during the nine months ended August 31, 2011. Our revenues in the first nine months of 2011 were primarily related to film production revenues. We did not have any films in production during the first nine months ended August 31, 2012.

General and Administrative Expenses.Our general and administrative expenses increased to $745,549 in the nine months ended August 31, 2012 from $730,796 in the comparable period in 2011. The increase was primarily attributable to higher legal and professional fees in the nine months ended August 31, 2012 as compared to the comparable period in 2011.

Other Income(Expense). We recorded net other expense of $259,683 for the nine months ended August 31, 2012 compared with a net other expense of $84,616 for the nine months ended August 31, 2011. The increase in net other expense for the nine months ended August 31, 2012 resulted primarily from the loss on guarantee of $200,000 to our stand-ready obligation on “Carjacked”, less $65,000 received from the sale of certain of our intellectual property related to our mobile application in the initial stages of development, for use other than within the field of cinema. There was no such other income or expense in the comparable period in 2011.

Interest Expense.Our interest expense increased to $139,162 in the nine months ended August 31, 2012 from $90,928 in the comparable period in 2011. This increase is attributable to increased borrowings of convertible debt during the period and accretion of discount on short term convertible debt.

Net Loss. Our net loss increased to $1,005,232 for the nine months ended August 31, 2012 from $767,912 for the comparable period in 2011. The increase was primarily attributable to the loss on guarantee of $200,000, and to higher interest and general and administrative expense during the nine months ended August 31, 2012 from the comparable period in 2011.

LIQUIDITY AND CAPITAL RESOURCES

We had total assets of $116,122 as of August 31, 2012, consisting of $14,280 in cash, $737 in net intangible assets, $5,855 in other assets and $95,250 in capitalized film costs. We had a working capital deficit of $995,362 as of August 31, 2012.

We had total liabilities of $1,871,858 as of August 31, 2012, consisting of $1,015,497 in current liabilities, which included $82,981 of accounts payable; $308,105 of accrued liabilities; $279,596 of accrued payroll; short term debt of $240,000; short term convertible debt, net of discount, of $34,110 and a derivative liability of $70,705. Our accrued liabilities include accrued payroll taxes of $89,994 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 FormW-2. Our convertible long term debt, net of discount, was $606,361, including convertible long term debt of $435,061 as of August 31, 2012 due to a former related party and significant stockholder who provided capital for expenses and purchased predecessor notes. We also have a stand-ready obligation of $250,000.

We had a total stockholders’ deficit of $1,755,736 as of August 31, 2012, and an accumulated deficit as of August 31, 2012 of $8,104,624.

We used $259,571 in net cash from operating activities for the nine months ended August 31, 2012, which included $1,005,232 in net loss, adjusted by: non-cash items of $655 in depreciation; $268,668 in share-based compensation; $227,723 net gain in change in fair value of derivative liabilities; $213,250 net loss on excess fair value of derivative liability, $103,106 amortization of discount on convertible debt; Increase in our stand-ready obligation of $200,000 and operating account variances of $187,705.

We had no cash provided by investment activities in the nine months ended August 31, 2012.

We had $270,000 of cash provided by financing activities for the nine months ended August 31, 2012, which included net proceeds from the issuance of convertible debt of $95,000; an increase of $170,000 in other short-term debt (net) and $5,000 from the sale of common stock.

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 our 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 our prior Form 10-K filed with the Securities and Exchange Commission for the year ended November 31, 2011.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, 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.

Use of Estimates:

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.

Revenue Recognition:

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured.

Stock-Based Compensation:

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

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.

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. During the quarter ended August 31, 2012, we issued an aggregate of 198,437,782 shares of common stock upon conversions of various convertible notes. The aggregate principal and interest amount of these notes that were converted was $32,058. 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.

2. On September 14, 2012, we issued an 8% convertible promissory note in the aggregate principal amount of $22,500 to a single accredited investor. The note has a maturity date of June 19, 2013. Beginning March 13, 2013, this note is convertible into shares of our common stock at a conversion price of fifty nine percent (59%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. The proceeds were used for working capital and general corporate purposes. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.

3. On September 28, 2012, we issued an 8% convertible promissory note in the aggregate principal amount of $10,000 to a single accredited investor. The note has a maturity date of June 28, 2013. Beginning March 27, 2013, this note is convertible into shares of our common stock at a conversion price of fifty nine percent (59%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. The proceeds were used for working capital and general corporate purposes. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.

ITEM 3 – DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

Item No.	Description	Method of Filing

4.1	Form of 8% Convertible Note	Filed as an exhibit to our Quarterly Report on Form 10Q for the period ended May 31, 2012 and incorporated by reference herein

10.1	Form of Securities Purchase Agreement	Filed as an exhibit to our Quarterly Report on Form 10Q for the period ended May 31, 2012 and incorporated by reference herein.

10.2	Employment Agreement for Alan Bailey	Filed herewith.

31.1	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer	Filed herewith.

31.2	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer	Filed herewith.

32.1	Section 1350 Certification of Chief Executive Officer	Filed herewith.

32.2	Section 1350 Certification of Chief Financial Officer	Filed herewith.

101.INS	XBRL Instance Document	Filed herewith.

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

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 22, 2012	/s/ Daniel Grodnik
	Daniel Grodnik
	President
	(Principal Executive Officer)
October 22, 2012	/s/ Alan Bailey
	Alan Bailey
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Attached files

Mass Hysteria Entertainment Company, Inc. Reports

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