Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - Mass Hysteria Entertainment Company, Inc. | Financial_Report.xls |
| EX-31.1 - CERTIFICATION - Mass Hysteria Entertainment Company, Inc. | f10q0513ex31i_masshysteria.htm |
| EX-32.2 - CERTIFICATION - Mass Hysteria Entertainment Company, Inc. | f10q0513ex32i_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 May 31, 2013
| 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.)
|
|
13331 Valley Vista Blvd.
Sherman Oaks, CA 91423
(Address of principal executive offices)
|
|
Issuer’s telephone number: (310) 285-7800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filed,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
|
|
Non-accelerated filer
|
¨
|
Smaller reporting company
|
x
|
|
(Do not check if a smaller reporting company)
|
|||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 9, 2013 the number of shares of the registrant’s classes of common stock outstanding was 713,819.
TABLE OF CONTENTS
|
Page
numbers
|
|||
|
|
|||
|
Item 1.
|
3
|
||
|
Item 2.
|
12
|
||
|
Item 3.
|
14
|
||
|
Item 4.
|
14
|
||
|
|
|||
|
Item 1.
|
15
|
||
|
Item 2.
|
15
|
||
|
Item 3.
|
15
|
||
|
Item 4.
|
15
|
||
|
Item 5.
|
15
|
||
|
Item 6.
|
15
|
||
|
16
|
|||
2
ITEM 1. FINANCIAL STATEMENTS
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)
Balance Sheets
(Unaudited)
|
May 31,
2013
|
November 30,
2012
|
|||||||
|
Assets
|
||||||||
|
Current assets
|
||||||||
|
Cash
|
$ | 284 | $ | 278 | ||||
|
Accounts receivable, net of allowance for doubtful accounts
|
- | - | ||||||
|
Other assets
|
- | 5,261 | ||||||
|
Total current assets
|
284 | 5,539 | ||||||
|
Intangible assets, net
|
82 | 519 | ||||||
|
Film costs
|
2,000 | 2,000 | ||||||
|
Total Assets
|
$ | 2,366 | $ | 8,058 | ||||
|
Liabilities and Stockholders' Deficit
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable
|
$ | 92,198 | $ | 108,922 | ||||
|
Accrued liabilities
|
384,597 | 331,656 | ||||||
|
Accrued payroll
|
562,857 | 353,973 | ||||||
|
Short-term debt
|
225,622 | 225,622 | ||||||
|
Short-term convertible debt, net of discount of $0 and $70,489, respectively
|
270,880 | 50,541 | ||||||
|
Derivative liability
|
244,313 | 223,637 | ||||||
|
Deferred revenue
|
1,000 | - | ||||||
|
Total current liabilities
|
1,781,467 | 1,294,351 | ||||||
|
Convertible long-term debt, net of discount of $31,691 and $41,697, respectively
|
168,309 | 158,303 | ||||||
|
Convertible long-term debt - related party
|
453,061 | 453,061 | ||||||
|
Stand ready obligation
|
250,000 | 250,000 | ||||||
|
Total Liabilities
|
$ | 2,652,837 | $ | 2,155,715 | ||||
|
Commitments and contingencies
|
||||||||
|
Stockholders' Deficit
|
||||||||
|
Series A preferred stock, $ 0.00001 par value; 10,000 shares authorized; 10 issued and outstanding.
|
- | - | ||||||
|
Common stock, $ 0.00001 par value; 2,000,000 shares authorized; 713,819 and 599,872 shares issued and outstanding as of May 31, 2013 and November 30, 2012, respectively.
|
7 | 6 | ||||||
|
Additional paid-in capital
|
6,640,964 | 6,482,837 | ||||||
|
Deficit accumulated during the development stage
|
(9,291,442 | ) | (8,630,500 | ) | ||||
|
Total Stockholders' Deficit
|
(2,650,471 | ) | (2,147,657 | ) | ||||
|
Total Liabilities and Stockholders' Deficit
|
$ | 2,366 | $ | 8,058 | ||||
The accompanying notes are an integral part of the financial statements.
3
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)
Statements of Operations
(Unaudited)
|
For the
period from
|
||||||||||||||||||||
|
Three Months ended
May 31, |
Six Months ended
May 31, |
Inception to
May 31,
|
||||||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
2013
|
||||||||||||||||
|
|
||||||||||||||||||||
|
Production revenue
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | 72,500 | ||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
General and administrative
|
201,611 | 246,062 | 437,852 | 500,278 | 3,849,593 | |||||||||||||||
|
Selling expense
|
- | - | - | - | 30,573 | |||||||||||||||
|
Impairment of Script Costs
|
- | - | - | - | 93,250 | |||||||||||||||
|
Total operating expenses
|
201,611 | 246,062 | 437,852 | 500,278 | 3,973,416 | |||||||||||||||
|
Operating loss
|
(201,611 | ) | (246,062 | ) | (437,852 | ) | (500,278 | ) | (3,900,916 | ) | ||||||||||
|
Other income (expenses):
|
||||||||||||||||||||
|
Other income
|
- | 6 | - | 65,006 | 65,432 | |||||||||||||||
|
Interest expense
|
(129,225
|
) | (43,363 | ) | (269,786 | ) | (92,440 | ) |
(588,259
|
) | ||||||||||
|
Loss on default
|
(65,350
|
) | - | - | - |
(65,350
|
) | |||||||||||||
|
Excess of fair value of derivative
|
- | (125,374 | ) | (26,838 | ) | (136,155 | ) | (304,407 | ) | |||||||||||
|
Loss on stand-ready obligation
|
- | - | - | - | (200,000 | ) | ||||||||||||||
|
Gain (loss) on change in fair value of derivative liability
|
(1,334 | ) | 92,737 | 73,534 | 134,334 | 258,934 | ||||||||||||||
|
Total other income (expense)
|
(195,909 | ) | (75,994 | ) | (223,090 | ) | (29,255 | ) | (833,650 | ) | ||||||||||
|
Net loss
|
$ | (397,520 | ) | $ | (322,056 | ) | $ | (660,942 | ) | $ | (529,533 | ) | $ | (4,734,566 | ) | |||||
|
Net loss per share – basic and diluted
|
$ | (0.56 | ) | $ | (1.41 | ) | $ | (0.96 | ) | $ | (2.81 | ) | ||||||||
|
Basic and diluted weighted average shares outstanding
|
713,807 | 227,888 | 691,684 | 188,220 | ||||||||||||||||
The accompanying notes are an integral part of the financial statements.
4
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)
Statements of Stockholders’ Deficit
(Unaudited)
|
Preferred A Stock
|
Common Stock
|
Deficit | ||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
|
Number of
Shares
|
Amount
|
Number of
Shares
|
Amount
|
Additional Paid
in Capital
|
During the
Development
Stage
|
Total
Shareholders'
Deficit
|
||||||||||||||||||||||
|
Balances at November 30, 2012
|
10 | -- | 599,872 | 6 | 6,482,837 | (8,630,500 | ) | (2,147,657 | ) | |||||||||||||||||||
|
Conversion of convertible note payable:Magna(12/04/12)
|
-- | -- | 13,890 | - | 2,500 | -- | 2,500 | |||||||||||||||||||||
|
Conversion of convertible note payable:Magna(12/18/12)
|
-- | -- | 33,333 | 1 | 3,999 | -- | 4,000 | |||||||||||||||||||||
|
Conversion of convertible note payable:Magna(01/17/13)
|
-- | -- | 33,333 | - | 2,000 | -- | 2,000 | |||||||||||||||||||||
|
Conversion of convertible note payable:Magna(02/01/13)
|
-- | -- | 33,333 | - | 2,000 | -- | 2,000 | |||||||||||||||||||||
|
Extinguished derivative liability
|
-- | -- | 27,628 | -- | 27,628 | |||||||||||||||||||||||
|
Other
|
-- | -- | 58 | - | - | -- | - | |||||||||||||||||||||
|
Share based compensation related to options granted during December 2009
|
-- | -- | 120,000 | -- | 120,000 | |||||||||||||||||||||||
|
Net loss
|
-- | -- | (660,942 | ) | (660,942 | ) | ||||||||||||||||||||||
|
Balances at May 31, 2013
|
10 | - | 713,819 | 7 | 6,640,964 | (9,291,442 | ) | (2,650,471 | ) | |||||||||||||||||||
The accompanying notes are an integral part of the financial statements.
5
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)
Statements of Cash Flows
(Unaudited)
|
For the Six Months Ended May 31, 2013
|
For the Six Months Ended May 31, 2012
|
From Inception to May 31, 2013
|
||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net loss
|
$ | (660,942 | ) | (529,533 | ) | $ | (4,734,566 | ) | ||||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||||||
|
Depreciation
|
437 | 437 | 3,059 | |||||||||
|
Bad debt expense
|
-- | -- | 31,616 | |||||||||
|
Share-based compensation
|
120,000 | 176,610 | 1,315,735 | |||||||||
|
Loss on settlement of convertible notes
|
-- | -- | (14,000 | ) | ||||||||
|
Contributed services
|
-- | -- | 89,500 | |||||||||
|
Change in fair market value of derivative liability
|
(73,534 | ) | (134,334 | ) | (258,934 | ) | ||||||
|
Loss on excess fair value of derivative liability
|
26,838 | 136,155 | 304,407 | |||||||||
|
Amortization of discount on convertible debt
|
175,495 | 67,409 | 426.188 | |||||||||
|
Loss on default
|
65,350 | -- | 65,350 | |||||||||
|
Impairment of script costs
|
-- | -- | 93,250 | |||||||||
|
Provision for Stand Ready Obligation
|
-- | -- | 200,000 | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Accounts receivable
|
-- | -- | (12,211 | ) | ||||||||
|
Prepaid expenses
|
-- | -- | (295 | ) | ||||||||
|
Accounts payable
|
23,276 | 18,634 | 148,363 | |||||||||
|
Accrued liabilities
|
52,941 | 45,261 | 333,442 | |||||||||
|
Accrued payroll
|
208,884 | 86,625 | 568,711 | |||||||||
|
Unearned Revenue
|
1,000 | -- | 1,000 | |||||||||
|
Bank credit line
|
-- | -- | (1,156 | ) | ||||||||
|
Net cash used in operating activities
|
$ | (60,255 | ) | $ | (132,736 | ) | $ | (1,440,541 | ) | |||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Film costs
|
-- | -- | (32,000 | ) | ||||||||
|
Other assets
|
5,261 | -- | 4,142 | |||||||||
|
Net cash provided by (used in) investing activities
|
$ | 5,261 | $ | -- | $ | (27,858 | ) | |||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Stand ready obligation
|
- | -- | 25,000 | |||||||||
|
Proceeds from issuance of convertible debt
|
55,000 | 65,000 | 550,001 | |||||||||
|
Proceeds from issuance of convertible debt to related parties
|
-- | -- | 453,061 | |||||||||
|
Proceeds from issuance of short-term debt
|
-- | 70,000 | 225,622 | |||||||||
|
Proceeds from sale of common stock
|
-- | 5,000 | 214,999 | |||||||||
|
Net cash provided by financing activities
|
$ | 55,000 | $ | 140,000 | $ | 1,468,683 | ||||||
|
Net increase in cash and cash equivalents
|
6 | 7,264 | 284 | |||||||||
|
Cash and cash equivalents, beginning balance
|
278 | 3,851 | - | |||||||||
|
Cash and cash equivalents, ending balance
|
$ | 284 | $ | 11,115 | $ | 284 | ||||||
|
Supplemental disclosures of cash flow information
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
-- | -- | -- | |||||||||
|
Income taxes
|
-- | -- | -- | |||||||||
|
Supplemental schedule of non-cash investing and financing activities:
|
||||||||||||
|
Conversion of convertible notes payable
|
$ | 10,500 | $ | 55,268 | $ | 101,768 | ||||||
|
Cash received under subscription agreement
|
$ | -- | $ | -- | $ | 200,000 | ||||||
|
Stock-based compensation to be issued, included in accrued liabilities, for script development
|
$ | -- | $ | 40,000 | $ | 40,000 | ||||||
|
Common stock issued in lieu of cash payment for script costs
|
$ | -- | $ | 23,250 | $ | 23,250 | ||||||
The accompanying notes are an integral part of the financial statements.
6
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2013
(Unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS
Michael Lambert, Inc. (“MLI”) was incorporated in Nevada on November 2, 2005. MLI was in the business of manufacturing handbags, but ceased operations in June 2009. To reflect the Company’s new business plan, on June 25, 2009, MLI changed their name to “Mass Hysteria Entertainment Company, Inc.” ("MHe", “Mass Hysteria” or the “Company”). MHe is an innovative motion picture production company that produces branded young adult film content for theatrical, DVD, and television distribution. MHe’s plan is to produce a minimum of three theatrical films a year that appeal specifically to the youth market.
The Company is entering a time of great change in the entertainment business. The motion picture business has had four significant revenue streams (theatrical, home video, cable and broadcast) since the early 1980's. Today, home video is in decline and new profit centers are opening up such as video-on-demand and Internet portals that rely on micro-transactions. The Company is endeavoring to be a company at the forefront of creating new revenue streams as they relate to the motion picture experience. Over the next twelve months, Mass Hysteria will be creating movies that will take advantage of traditional revenue streams that are still viable, and at the same time, identifying those revenue streams that will define new media's involvement in the film business such as downloading applications to smart phones that will allow the theater-goer to "participate" with the on-screen experience. Its plan is to combine these entertainment experiences into an alternative theatrical experience for young adults. Technology is evolving, too. Interactive mobile applications are in development by third parties. The Company expects to license or develop its own mobile applications in the near future, depending on its ability to raise capital and generate traditional sources of revenues. There are technology and competitive risks associated with interactive mobile devices and theatrical films.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year 2012 as reported in the Company's Form 10-K have been omitted. The results of operations for the three and six months ended May 31, 2013 and 2012 are not necessarily indicative of the results to be expected for the full year. In the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly the Company's financial position, results of operations and cash flows. These statements should be read in conjunction with the financial statements and related notes which are part of the Company's Annual Report on Form 10-K for the year ended November 30, 2012.
Loss per Share
Loss per share is computed on the basis of the weighted average number of common shares outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding. In loss periods, dilutive common equivalent shares are excluded as the effect would be anti-dilutive. At May 31, 2013, the Company’s dilutive securities outstanding consisted of (1) the CEO’s options to purchase shares of common stock (see Note 8), for which the exercise price is above the average closing price of the Company’s common stock and thus excluded under the treasury method; (2) 6,768 shares relative to convertible notes to a related party expected to be issued (post conversion) beginning in February 2015; (3) 5,818,432 shares relative to convertible notes (post conversion); and (4) no shares related to warrants issued with the $37,500 convertible note. The preceding common equivalent was excluded from the diluted net loss per share as the effects would have been anti-dilutive.
Reverse Stock Split
On December 28, 2012, the Company’s board of directors approved, a 1-for-1000 reverse stock split pursuant to which all shareholders of record received one share of common stock for each one thousand shares of common stock owned (subject to minor adjustments as a result of fractional shares). GAAP requires that the reverse stock split be applied retrospectively to all periods presented. As a result, all common stock, warrant and option transactions described herein have been adjusted to reflect the 1-for-1000 reverse stock split.
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. However, the Company is a development-stage company, has limited available capital, has limited revenues from intended operations, suffered losses since inception and used cash in operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. We are seeking debt or equity capital to meet our obligations and business needs. There is no assurance that future capital raising plans will be successful in obtaining sufficient funds to assure the eventual profitability of the Company. The financial statements do not include any adjustments that might result from these uncertainties.
NOTE 4 - ACCRUED LIABILITIES
Accrued liabilities by major classification are as follows:
|
May 31, 2013
|
November 30, 2012
|
|||||||
|
Accrued interest
|
$ | 147,136 | $ | 118,195 | ||||
|
Accrued consulting fees
|
91,000 | 91,000 | ||||||
|
Accrued payroll taxes on CEO’s compensation
|
116,461 | 98,461 | ||||||
|
Accrued auto allowances due CEO
|
30,000 | 24,000 | ||||||
|
Total accrued liabilities
|
$ | 384,597 | $ | 331,656 | ||||
Accrued interest represents interest on a long-term loan from a related party, and the interest on a short term notes payable from external parties. Accrued consulting fees are for scriptwriters and a film consultant. Other accrued expenses consist of accrued rent and related office parking.
Based on the CEO’s employment agreement, the Company accrues $30,000 per month for gross wages, while the CEO receives payments at various times only as cash becomes available. The CEO’s compensation is required to be reported on Internal Revenue Service (IRS) Form W-2; however, the Company has made no such reporting. Payroll taxes are accrued for the CEO’s salary to properly reflect the amount of expense related to his compensation which includes the contemplation of penalties and interest. In the event the IRS audits the Company, it will likely be liable for certain taxes, penalties and interest.
The Company entered into an employment agreement as of February 3, 2012 with its former Chief Financial Officer which provided for a base salary of $90,000 per year, payable monthly, on a month-to-month basis. The Company will pay these wages only as cash becomes available. The agreement was terminated on May 31, 2013 and no wages have been paid to date.
Accrued payroll is as follows:
|
May 31, 2013
|
November 30, 2012
|
|||||||
|
Accrued and unpaid compensation due CEO
|
$ | 444,732 | $ | 280,848 | ||||
|
Accrued and unpaid compensation due CFO
|
118,125 | 73,125 | ||||||
|
Total accrued payroll
|
$ | 562,857 | $ | 353,973 | ||||
NOTE 5 - BORROWINGS
Short-Term Debt
|
(A)
|
Related Parties
|
On February 28, 2012, the Company’s former Chief Financial Officer made an interest free demand advance of $30,000 to provide working capital, which remains outstanding at May 31, 2013. The Note was recorded at its estimated fair value of $27,778 at the acquisition date, and imputed interest was being accreted to non-cash interest expense to the maturity date, using an 8% interest rate. No demand for payment has been made and the note remains unpaid.
On July 13, 2010, March 22, 2012 and October 25, 2012, the Company borrowed $60,000, $50,000 and $10,000, respectively, from a shareholder for use as operating capital. On September 12, 2012, the Company, the shareholder and an external party entered into an Assignment Agreement whereby the external party agreed to assume $30,000 of the $60,000 July 13, 2010 debt in exchange for a 8% convertible note maturing October 24, 2013 (see Short-term Convertible Debt with Ratchet Provisions noted below). The due date on the remaining balance of $30,000 of the $60,000 advance was extended to December 31, 2013 and bears interest at the rate of 15% per annum; the due date of the $50,000 advance was March 7, 2013 and it beared interest at the rates of 15% per annum through March 7, 2013 and 18% per annum interest thereafter if the repayment date is extended; and the $10,000 advance is payable on demand at an interest rate of 15% per annum.
During the six months ended May 31, 2013, the Company incurred and accrued $5,984 in interest expense, respectively, related to this short-term debt. As of May 31, 2013, the Company has accrued a total of $32,202 of interest expense related to these notes.
8
|
(B)
|
Film Finance Agreement
|
On May 11, 2012, the Company entered into an agreement with Coral Ridge Capital Partners, LLC (“CRCP”) under which CRCP agreed to provide 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 on June 12, 2012. While it was the Company’s intent to commence filming of the Picture by September 1, 2012, certain casting delays have postponed the commencement date, to a date yet to be determined. In the event that the motion picture is abandoned, MHe is required to repay CRCP all funds paid to it, plus interest of 12% per annum. On January 25, 2013 the Company received a written notice of termination of agreement from CRCP and is currently negotiating a mutual settlement with CRCP. Accordingly, the Company has included the $100,000 advance within short-term debt until the status of the Picture has been better determined and has accrued interest payable of $5,622 through May 31, 2013.
Through May 31, 2013, the Company has paid cumulative expenses totaling $13,688 in connection with the Picture, which have been recorded within operating expenses.
Short-term Convertible Debt with Ratchet Provisions
|
(A)
|
Short-term Convertible Debt
|
(i) On January 11, 2012, March 1, 2012, May 9, 2012, July 9, 2012, September 14, 2012 and September 28, 2012 the Company borrowed $22,500, $10,000, $32,500, $30,000, $22,500 and $10,000 (for a total of $127,500), from external parties for use as operating capital. See iv. below for additional advances made by this party during the six months ended May 31, 2013. The parties entered into convertible notes payable agreements, which make the Company liable for repayment of the principal and 8% annual interest by the various agreements’ expiration dates which range between October 6, 2012 and June 28, 2013. If a default is called by the lender 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 well the principal balance is increased by 50% of the face amount of the note deemed in default.
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.
On March 18, 2013 the Company received a notice of default from one of the lenders holding a total of $131,200 of short-term convertible debt at that date. Based upon the foregoing, the Company is now in default under the Notes. Demand was made for the immediate payment of $196,050, representing 150% of the remaining outstanding principal balance) together with default interest as provided for in the Notes.
(ii) As discussed above, on September 12, 2012, the Company entered into an Assignment Agreement with an external party whereby $30,000 of 15% convertible short term debt due a shareholder was assigned effective October 24, 2012 to the external party in exchange for an 8% convertible note due October 24, 2013. The new note is convertible at any time, within a limit of 4.999% of our then issued and outstanding shares of common stock, into our common stock at a 40% discount off the average of the lowest three (3) trading prices for the Company’s common stock within the ten (10) days preceding the conversion. This note therefore also contain a “ratchet” provision, which protects the note holder in case the issuer sells stock during the term of the notes for a per-share price which is less than the effective conversion rate. Due to this ratchet provision, this note is considered to contain a derivative instrument associated with the embedded conversion feature. This liability is recorded on the face of the financial statements as “derivative liability”, and must be revalued each reporting period.
The Company discounts the notes by the fair market value of the derivative liability upon inception of each note. These discounts are accreted back to the face value of the notes over the note term using the effective interest method. Since the notes were substantially in default, all discounts on notes in technical default have been accreted to interest expense during the three months ended May 31, 2013.
(iii) On December 21, 2012, the Company issued a convertible note payable agreement in the amount of $40,000 to Indeglia & Carney, P.C. (“I&C”) in payment for legal services previously rendered to the Company. The convertible note makes the Company liable for repayment of the principal and 8% annual interest by the agreements’ expiration date of September 21, 2013. 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 note is 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. This note contains 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 was accreted back to the face value of the note during the three months ended May 31, 2013, due to the technical default on the note.
9
(iv) On January 14, 2013, the Company borrowed $55,000 from an external party, representing cash received of $44,000 for use as operating capital, and the direct payment of accounts payable in the amount of $11,000. 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 October 17, 2013. 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 contains 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 was accreted back to the face value of the note over due to the default as discussed i above.
|
(B)
|
Determination of Derivative Liability
|
The Company calculated the derivative liability using the Black-Scholes pricing model for each note upon inception and recorded the fair market value of the derivative liability as a discount to the note. When a derivative liability associated with a convertible note is in excess of the face value of the convertible note, the excess of fair value of derivative is charged to the statement of operations.
The derivative liabilities associated with these convertible notes were revalued during the period as principal was converted, using the Black-Scholes Model with the below range of inputs. Upon conversion of all or a portion of the convertible notes, the derivative liability associated with the principal converted is valued immediately before conversion using the Black-Scholes model. The change in fair value of the derivative liability associated with the principal converted is recorded as a gain/loss on fair value of derivative liability in the accompanying statement of operation, with the remaining value of that portion of the derivative liability written off with a corresponding credit to additional paid-in capital.
As of May 31, 2013, the Company has outstanding principal amounts on convertible debt of $270,880. At the inception of these notes, they were fully discounted due to the associated derivative liabilities. Aggregate remaining discounts on convertible notes to be accreted over the life of each respective note on an effective interest method are $0 as of May 31, 2013. For the six months ended May 31, 2013, interest expense from accretion of the discount, including converted notes, was $164,179.
Aggregate derivative liabilities associated with remaining convertible notes were $244,313 as of May 31, 2013. 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 net loss in fair value of derivative liability of $1,334 and a gain of $73,534 during the three and six months ended May 31, 2013, respectively.
As of May 31, 2013, the range of inputs used to calculate derivative liabilities noted above were as follows:
|
|
May 31, 2013
|
|||
|
Annual dividend yield
|
0.0 | % | ||
|
Expected life (years)
|
.01 - .41 yrs
|
|||
|
Risk-free interest rate
|
0.11 | % | ||
|
Expected volatility
|
477.0 | % | ||
10
Long-term Convertible Debt
On March 31, 2011, the Company borrowed $200,000 from an external party for use as operating capital. The parties entered into a long-term convertible note agreement which makes the Company liable for repayment of the principal and 2% annual interest by the agreement’s expiration date of December 28, 2014. Beginning September 27, 2011, the note is convertible into shares of our common stock at a fixed conversion price of $0.016 per share. As a result, the Company will be liable to issue up to 12,500 shares common stock upon conversion. Based on a $22 closing price on the day of note agreement, we recorded a discount of $75,000 as a result of the beneficial conversion feature (“BCF”). As such, the Company discounted the note by the value of the BCF upon inception of the note. During the six months ended May 31, 2013 interest expense from accretion of the discount was $10,006, leaving a remaining discount of $31,689. The discount being amortized approximates the effective interest method over the term of the note.
Related Party
Since July 2009, a member of the Control Group of the Company has made advances on behalf of the Company and purchased predecessor convertible debt totaling $305,430, for the period ended November 30, 2009. During the fiscal year ended November 30, 2010, $55,268 of convertible debt acquired by this related party, as part of the recapitalization and change in ownership, was converted into 5,900 shares of common stock for full satisfaction of the liability and the holder advanced the Company $88,199 in working capital for operations. The note is convertible into 4,230 common shares, based on $80 share price. The convertible note bears interest at 6% per annum, and is due February 28, 2015. These advances totaled $453,061 at May 31, 2013. The notes are to be immediately convertible on their respective due dates; no beneficial conversion feature was deemed applicable at the date of issuance. As of May 31, 2013, the Company has accrued $95,675 of interest expense related to these notes.
Also see Note 6 for subsequent issuances of convertible debt.
NOTE 6 - SUBSEQUENT EVENTS
Convertible Notes
On June 12, 2013, we issued an 8% convertible promissory note in the aggregate principal amount of $21,500 to an accredited investor. The note has a maturity date of March 14, 2014. Beginning December 9, 2013, the note is convertible into shares of our common stock at a conversion price of 45% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. The proceeds were used for working capital and general corporate purposes.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS “FORM 10-Q”), CONSTITUTE “FORWARD LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE “REFORM ACT”). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS “BELIEVES”, “EXPECTS”, “MAY”, “SHOULD”, OR “ANTICIPATES”, OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF MASS HYSTERIA ENTERTAINMENT COMPANY, INC. (“THE COMPANY”, “WE”, “US” OR “OUR”) TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO MAY 31, 2013.
General
We were incorporated in Nevada on November 2, 2005 under the name “Michael Lambert, Inc.”. Until August 5, 2009 we manufactured handbags. On August 5, 2009 (the “Effective Date”), pursuant to the terms of a Stock Purchase Agreement, Daniel Grodnik (our Chief Executive Officer) and affiliated parties purchased a total of 7,985 shares of our issued and outstanding common stock (the “Change of Control”). This constituted a majority control of the Company. In addition to the shares purchased, the Company also issued 42,015 shares to Daniel Grodnik and certain affiliated parties in connection with the Change of Control. The total of 50,000 shares issued to Daniel Grodnik and the affiliated parties represents 74.6% of the shares of outstanding common stock of the Company as of the Effective Date.
In connection with the Change of Control, we changed our name to Mass Hysteria Entertainment Company, Inc. (“we”, “us“, the “Company”, or “Mass Hysteria”) and also changed our business plan. We are now a development stage multi-media entertainment company created to produce feature films for theatrical, DVD, video on demand (VOD) and television distribution with an interactive component for commercial, documentary and educational film market. Our plan is to eventually produce a minimum of two original interactive theatrical films annually, and also create a second screen (mobile) experience for non-Mass Hysteria films. In addition, we intend to continue creating traditional film and television projects.
Plan of Operations
We are in the development stage and consequently is subject to the risks associated with development stage companies, including the need for additional financing; the uncertainty of the Company’s technology and intellectual property resulting in successful commercial products or services as well as the marketing and customer acceptance of such products or services; competition from larger organizations and dependence on key personnel. To achieve successful operations, the Company will require additional capital to finance the acquisition of film properties and their attendant costs, further development of our interactive technology, marketing and the creation and rendering of second screen content for original and repurposed movies for interactivity. No assurance can be given as to the timing or ultimate success of obtaining future funding.
Over the next twelve months, Mass Hysteria intends to 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 MAY 31, 2013 COMPARED TO THE THREE MONTHS ENDED MAY 31, 2012
We had no revenue for the three months ended May 31, 2013 and 2012. The lack of the revenue in both periods is due to the establishing and operationalization of our business plan. We begin to meet our business plan goals, we expects to generate revenue in the future. In the period from August 5, 2009 ("Inception") to date, we have assembled our management team, developed its intellectual property, and are continuing to implement our marketing and merchandising strategies. We are endeavoring to be a company at the forefront of creating new revenue streams as they relate to the motion picture experience. Mass Hysteria intends to create movies that take advantage of traditional revenue streams that are still viable, and at the same time, identifying those revenue streams that will define new media's involvement in the film business such as downloading applications to smart phones that will allow the theater-goer to "participate" with the on-screen experience. Our plan is to combine these entertainment experiences into an alternative theatrical experience for young adults. We expect to license or develop our own mobile applications in the near future, depending on our ability to raise capital and generate traditional sources of revenues.
12
For the three months ended May 31, 2013, we had general and administrative expenses of $201,611; net interest expense of $194,575, and loss in fair value of derivative liability of $1,334. For the three months ended May 31, 2012, we had general and administrative expenses of $246,062; net interest expense of $43,363, excess fair value of derivative of $125,374, and gain in fair value of derivative liability of $92,737. We had a large increase in interest expenses due to accretions of discounts of $120,507, much of which related short-term notes which were in technical default and deemed due on demand.
We had a net loss of $397,520, for the three months ended May 31, 2013, as compared to a net loss from continuing operations of $322,056, for the three months ended May 31, 2012.
RESULTS OF OPERATION FOR THE SIX MONTHS ENDED MAY 31, 2013 COMPARED TO THE SIX MONTHS ENDED MAY 31, 2012
We had no revenue for the six months ended May 31, 2013 and 2012. The lack of the revenue in both periods is due to the establishing and operationalization of our business plan. We begin to meet our business plan goals, we expects to generate revenue in the future. In the period from August 5, 2009 ("Inception") to date, we have assembled our management team, developed its intellectual property, and are continuing to implement our marketing and merchandising strategies. We are endeavoring to be a company at the forefront of creating new revenue streams as they relate to the motion picture experience. Mass Hysteria intends to create movies that take advantage of traditional revenue streams that are still viable, and at the same time, identifying those revenue streams that will define new media's involvement in the film business such as downloading applications to smart phones that will allow the theater-goer to "participate" with the on-screen experience. Our plan is to combine these entertainment experiences into an alternative theatrical experience for young adults. We expect to license or develop our own mobile applications in the near future, depending on our ability to raise capital and generate traditional sources of revenues.
For the six months ended May 31, 2013, we had general and administrative expenses of $437,852; net interest expense of $269,786, excess fair value of derivative of $26,838, and gain in fair value of derivative liability of $73,534. For the six months ended May 31, 2012, we had general and administrative expenses of $500,278; net interest expense of $92,440, excess fair value of derivative of $136,155, gain in fair value of derivative liability of $134,334, and other income of $65,006 resulting from the sale of certain of our intellectual property related to our mobile application for use other than within the field of cinema.
We had a net loss of $660,942, for the six months ended May 31, 2013, as compared to a net loss from continuing operations of $529,533, for the six months ended May 31, 2012.
LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $2,366 as of May 31, 2013, consisting of $284 in cash, $82 in net intangible assets, and $2,000 in capitalized film costs. We had a working capital deficit of $1,781,183.
We had total liabilities of $2,652,837 as of May 31, 2013, consisting of current liabilities, which included $92,198 of accounts payable; accrued liabilities of $384,597, accrued payroll of $562,857; short-term debt of $225,622; short-term convertible debt of $270,880 in stand ready obligation of $250,000 and derivative liability of $244,313. In addition, we had convertible long-term debt of $168,309 and related party convertible debt with a balance of $453,061 as of May 31, 2013.
We had a total stockholders’ deficit of $2,650,471 as of May 31, 2013, and an accumulated deficit as of May 31, 2013 of $9,291,442.
We had $60,255 in net cash used in operating activities for the six months ended May 31, 2013, which included $660,942 in net loss, offset by $120,000 in share-based compensation, $175,429 in amortization of discount on short-term debt, $73,535 of change in fair value of derivative liability and depreciation of $437. Cash flows used in operations were offset by changes in operating assets and liabilities totaling $286,103.
13
We had $55,000 of net cash provided by financing activities for the six months ended May 31, 2013, from the issuance of convertible debt. Since we have no liquidity and have suffered losses, we depend to a great degree on the ability to attract external financing in order to conduct our business activities and expand our operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. If we are unable to raise additional capital from conventional sources, including increases in related party and non-related party loans and/or additional sales of stock, we may be forced to curtail or cease our operations. Even if we are able to continue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results. We have no commitments to provide us with financing in the future, other than described above. Our independent registered public accounting firm included an explanatory paragraph raising substantial doubt about the Company’s ability to continue as a going concern.
In the future, we may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when it approaches a condition of cash insufficiency. The sale of additional equity securities, if accomplished, and the conversion of convertible debt, if converted, may result in dilution to our shareholders. We cannot provide assure, however, that financing will be available in amounts or on terms acceptable to us, or at all.
Off-Balance Sheet Arrangements
None.
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.
(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. The Company will continue to take steps to identify matters of accounting and disclosure.
(b) Changes in internal control over financial reporting. During the quarter ended May 31, 2013 we retained the services of an outside services firm to assist with closing of our books and records, and prepare our quarterly and annual filings with the SEC. This firm was not engaged for enough time during the period ended May 31, 2013 to have a material effect on our internal controls over financial reporting, but we anticipate that they will in future periods.
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.
14
None.
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.
|
1.
|
See Item 5 of our Annual Report on Form 10-K for the year ended November 30, 2012 filed July 16, 2013.
|
None.
Not applicable.
None.
The following exhibits are filed as part of this quarterly report on Form 10-Q:
|
Item No.
|
Description
|
Method of Filing
|
||
|
31.1
|
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
|
Filed herewith.
|
||
|
32.1
|
Section 1350 Certification of Chief Executive Officer
|
Filed herewith.
|
15
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Dated: August 19, 2013
|
Mass Hysteria Entertainment Company, Inc.
|
|
|
By:
|
/s/ Daniel Grodnik
|
|
|
Daniel Grodnik
|
||
|
President, Chief Executive Officer, Chairman and Secretary
(Principal Executive Officer and Principal Accounting Officer)
|
||
16