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

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EX-31.1 - CERTIFICATION - Mass Hysteria Entertainment Company, Inc.	f10q0810ex31i_masshysteria.htm
EX-32.1 - CERTIFICATION - Mass Hysteria Entertainment Company, Inc.	f10q0810ex32i_masshysteria.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 31, 2010

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

For the transition period from ______to______.

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(Exact name of registrant as specified in Charter)

Nevada		000-53739		20-3107499
(State or other jurisdiction of incorporation or organization)		(Commission File No.)		(IRS Employee Identification No.)

5555 Melrose Avenue, Swanson Building

Suite 400

Hollywood, CA 90038

(Address of Principal Executive Offices)

________________________

(323) 956-8388

(Issuer Telephone number)

________________________

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer 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, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer	o	Accelerated Filer	o
Non-Accelerated Filer	o	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 13, 2010, there were 78,851,077 shares of our common stock issued and outstanding.

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

FORM 10-Q

August 31, 2010

TABLE OF CONTENTS

		Page
PART I-- FINANCIAL INFORMATION

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4T	Control and Procedures	14

PART II-- OTHER INFORMATION

Item 1	Legal Proceedings	15
Item 1A	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 5.	Other Information	15
Item 6.	Exhibits	15

SIGNATURES		16

ITEM 1. FINANCIAL STATEMENTS

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(A Development-Stage Company)

BALANCE SHEETS

As of August 31, 2010 and November 30, 2009

	August 31, 2010			November 30, 2009
	(Unaudited)			(Audited)
CURRENT ASSETS
Cash	$	18,992		$	160
Subscription receivable		-			200,000
Other current assets		514			-
TOTAL CURRENT ASSETS		19,506			200,160

Intangible assets, net of $613 and $90 accumulated amortization as of August 31, 2010 and November 30, 2009, respectively		2,527			3,140
Film costs (Note 9)		93,250			-
Other assets		10,130			9,700
TOTAL ASSETS	$	125,413		$	213,000

LIABILITIES & STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES
Accounts payable	$	18,594		$	5,111
Accounts payable – related party		-			6,150
Accrued liabilities		118,657			5,620
Note payable (Note 5)		60,000			-
Common stock liability (Note 7)		-			200,000
TOTAL CURRENT LIABILITIES		197,251			216,881

Convertible long-term debt – related party (Note 5)		447,256			305,430
TOTAL LIABILITIES		644,507			522,311

Commitments and contingencies (Note 6)		-			-

STOCKHOLDERS’ DEFICIT
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding		-			-
Common stock, $0.001 par value, 140,000,000 shares authorized, 78,851,077 and 68,530,952 shares issued and outstanding as of August 31, 2010 and November 30, 2009, respectively.		78,851			68,531
Additional paid-in capital		5,183,481			4,589,816
Accumulated deficit		(5,781,426	)		(4,967,658	)

TOTAL STOCKHOLDERS’ DEFICIT		(519,094	)		(309,311	)
TOTAL LIABILITIES & STOCKHOLDERS’ DEFICIT	$	125,413		$	213,000

See notes to financial statements

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(A Development-Stage Company)

STATEMENTS OF OPERATIONS

Three and Nine Months Ended August 31, 2010 and 2009, and for the period from Inception to August 31, 2010

(Unaudited)

	Three Months Ended August 31,						Nine Months Ended August 31,						For the Period from August 5, 2009 (Inception) to
	2010			2009			2010			2009			August 31, 2010

Revenue	$	-		$	-		$	-		$	-		$	-

Operating expenses:
General and administrative, including share-based compensation of $238,467, $0, $64,000 and $0 for the three and nine months ended August 31, 2010 and 2009, respectively, and $396,047 for the period from Inception to August 31, 2010.		255,237			99,915			757,076			99,915			1,152,065
Selling expense, including share-based compensation of $20,000, $0, $20,000 and $0 for the three and nine months ended August 31, 2010 and 2009, respectively, and $20,000 for the period from Inception to August 31, 2010.		36,698			590			38,782			590			50,574
Total operating expenses		291,935			100,505			795,858			100,505			1,202,639

Other income (expenses):
Interest income		-			-			225			-			225
Interest expense		(7,666	)		(376	)		(18,135	)		(376	)		(22,133	)
Total other income (expense)		(7,666	)		(376	)		(17,910	)		(376	)		(21,908	)

Net loss from continuing operations		(299,601	)		(100,881	)		(813,768	)		(100,881	)		(1,224,547	)
Net loss from discontinued operations		-			(1,388,276	)		-			(1,695,858	)		-

Net loss	$	(299,601	)	$	(1,489,157	)	$	(813,768	)	$	(1,796,739	)	$	(1,224,547	)

Basic and diluted loss from continuing operations per share	$	-	*	$	-	*	$	(0.01	)	$	(0.01	)
Basic and diluted loss from discontinued operations per share	$	-	*	$	(0.04	)	$	-	*	$	(0.08	)

Basic and diluted weighted average shares outstanding		77,668,468			34,751,984			74,293,189			19,974,642

*Amount was less than $0.01 per share

See notes to financial statements

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(A Development-Stage Company)

STATEMENT OF STOCKHOLDERS’ DEFICIT

For the nine months ended August 31, 2010

(Unaudited)

	Common Shares		Common Stock at Par Value		Additional Paid-in Capital		Shares Committed to be Issued		Accumulated Deficit			Total
Balances at November 30, 2009		68,530,952	$	68,531	$	4,589,816		-	$	(4,967,658	)	$	(309,311	)
Shares issued for services:
On December 10, 2009 at $0.10 per share		152,000		152		15,048		-		-			15,200
On January 10, 2010 at $0.07 per share		20,000		20		1,380		-		-			1,400
On January 28, 2010 at $0.18 per share		50,000		50		8,950		-		-			9,000
On February 22, 2010 at $0.11 per share		145,000		145		15,805		-		-			15,950
On March 9, 2010 at $0.08 per share		375,000		375		29,625		-		-			30,000
On May 27, 2010 at $0.032 per share		78,125		78		2,422		-		-			2,500
Common shares issued to extinguish debt acquired from predecessors by Control Group member		5,900,000		5,900		49,368		-		-			55,268
Shares committed to be issued		3,000,000		3,000		197,000		-		-			200,000
Shares issued for services:
On June 23, 2010 at $0.04 per share		600,000		600		23,400		-		-			24,000
Share based compensation related to options issued granted during December 2009		-		-		168,667		-		-			168,667
Contributed services		-		-		82,000		-		-			82,000
Net loss		-		-		-		-		(813,768	)		(813,768	)

Balances at August 31, 2010		78,851,077	$	78,851	$	5,183,481	$		$	(5,781,426	)	$	(519,094	)

See notes to financial statements

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(A Development-Stage Company)

STATEMENTS OF CASH FLOWS

Nine Months Ended August 31, 2010 and 2009, and for the period from Inception to August 31, 2010

(Unaudited)

	August 31, 2010			August 31, 2009			For the Period from August 5, 2009 (Inception) to August 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(813,768	)	$	(1,796,739	)	$	(1,224,547	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation		613			90			613
Share-based compensation		258,467			510,000			416,047
Contributed services		82,000			-			89,500
Loss on extinguishment of debt		-			1,144,000			-
Gain on settlement of convertible notes		-			-			(14,000	)
Imputed rent expense		-			1,800			-
Imputed interest on debt		-			3,349			-
Changes in:
Prepaid expenses		(430	)		(64	)		(430	)
Miscellaneous receivables		(514	)		-			(514	)
Inventory		-			4,401			-
Accounts payable		7,333			63,157			29,067
Accrued liabilities		58,037			-			47,156
Bank credit line		-			-			(1,156	)
NET CASH USED IN OPERATING ACTIVITIES		(408,262	)		(70,006	)		(658,264	)

CASH FLOWS FROM INVESTING ACTIVITIES
Film costs		(30,000	)		-			(30,000	)
Purchase of intangibles		-			(3,230	)		-
NET CASH USED IN INVESTING ACTIVITIES		(30,000	)		(3,230	)		(30,000	)

CASH FLOWS FROM FINANCING ACTIVITIES
Short-term debt		60,000			-			60,000
Loans from stockholders		-			89,032			-
Principal payments on loans from stockholders		-			(15,982	)		-
Proceeds from sale of common stock		200,000			-			200,000
Proceeds from convertible long-term debt - related party		197,094			-			447,256
NET CASH PROVIDED BY FINANCING ACTIVITIES		457,094			73,050			707,256

NET CHANGE IN CASH		18,832			(186	)		18,992
Cash balance, beginning of period		160			186			-

Cash balance, end of period	$	18,992		$	-		$	18,992

Supplemental Disclosures:
Cash paid for interest	$	-		$	-		$	-
Cash paid for income taxes	$	-		$	-		$	-

Supplemental schedule of non-cash investing and financing activities:
Common stock issued in lieu of cash payment for script costs	$	48,250		$	-		$	48,250
Capitalization of accrued liabilities for script costs	$	15,000		$	-		$	15,000
Conversion of short-term convertible notes into common stock	$	55,268		$	-		$	73,268
Accrued salaries waived as contributed services	$	82,000		$	-		$	82,000

See notes to financial statements

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

(A Development-Stage Company)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – ORGANIZATION, BUSINESS AND CHANGE IN CONTROL

Mass Hysteria Entertainment Company, Inc. (the “Company” or “MHYS”) is a development stage company at a time of great change in the entertainment business. Like much of corporate America, the entertainment sector is currently going through an upheaval. 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. We are working with filmmakers who have realized great success such as producer Albert Ruddy (two Academy Awards for best picture, The Godfather and Million Dollar Baby), writer Pat Proft (Police Academy, Hot Shots, Naked Gun, and Scary Movie) and also with executives from the Webisode and social networking sectors. Our plan is to combine these entertainment experiences into an alternative theatrical experience for young adults.

NOTE 2 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim financial statements of MHYS 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, 2009 have been omitted.

Significant Accounting Policies

Development-Stage Company

On August 5, 2009, the Company entered into the development stage with its intended new business, which currently has no revenues. Management expects to sustain losses from operations until such time it can generate sufficient revenues sufficient to meet its anticipated cost structure. The Company is considered a development-stage company in accordance with Accounting Standards Codification (“ASC”) 915 – “Development-Stage Entities.” Upon distribution of the Company’s products, it will exit the development stage. The nature of our operations is highly speculative, and there is a consequent 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.

Discontinued Operations

When specific operations of a business are sold, abandoned, or otherwise disposed of, the business must account for these related revenues and expenses (including any gains or losses on related assets disposed of) as gain (loss) from discontinued operations. Continuing operations must be reported separately in the income statement from discontinued operations, and any gain or loss from the disposal of a segment must be reported along with the operating results of the discontinued segment.

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 and capitalization of script costs.

The Company bases its estimates and judgments on historical experience and on various other factors that are considered reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources. Actual results could differ materially from these estimates.

Fair Value of Financial Instruments

In the first quarter of fiscal year 2009, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures ("ASC 820-10"). ASC 820-10 defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of ASC 820-10 did not have a material impact on the Company's financial position or operations, but does require that the Company disclose assets and liabilities that are recognized and measured at fair value on a non-recurring basis, presented in a three-tier fair value hierarchy, as follows:

Level 1. Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

As of August 31, 2010, the Company did not have any Level 1, 2, or 3 financial assets or liabilities which require valuation.

Film Costs

The Production Company capitalizes film production costs in accordance with Statement of Position ASC 926 – “Entertainment”, formerly ("SOP") 00-2, Accounting by Producers or Distributors of Films. Film costs include costs to develop and produce films, which primarily consist of salaries, equipment and overhead costs, as well as the cost to acquire rights to films. Film costs include amounts for completed films and films still in development. The Company began capitalizing script costs on March 1, 2010. See Note 9 for additional disclosure.

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, 2010, 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; and (2) 6,574,947 shares relative to convertible notes to a related party expected to be issued (post conversion)beginning in February 2015.

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, with limited available capital and no revenues from intended operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon the Company's ability to meet its financing requirements, raise additional capital, and the success of its future operations. There is no assurance that future capital raising plans will be successful in obtaining sufficient funds to assure the eventual profitability of the Company. Management believes that actions planned and presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. 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, 2010		November 30, 2009

Accrued interest	$	22,135	$	-
Accrued consulting fees		63,000		-
Accrued legal fees		3,075		-
Accrued payroll taxes		18,800		-
Other accrued expenses		11,647		5,620

Total accrued liabilities	$	118,657	$	5,620

Accrued interest represents interest on a long term loan from a related party, and the interest on a short term note payable from an external party. Accrued consulting fees are for script writers and a film consultant. Payroll taxes are accrued for the CEO’s salary, and other accrued expenses consist of accrued rent and related office parking. During the current quarter, accrued wages of $82,000 were personally forgiven by the CEO; as a result, this amount was recorded to contributed services in the accompanying statement of stockholders’ deficit.

NOTE 5 - CONVERTIBLE LONG-TERM DEBT 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, as of November 30, 2009. During the quarter ended February 28, 2010, $55,268 of convertible debt acquired by this related party, as part of the recapitalization and change in ownership, was converted into 5,900,000 shares of common stock for full satisfaction of the liability. During the quarter ended February 28, 2010, the holder advanced the Company $88,199 in working capital for operations. Cumulative advances as of February 28, 2010 were established in a convertible note totaling $338,362. Such note is convertible into 4,229,512 common shares, based on $0.08 share price. The convertible note bears interest at 6% per annum, and is due February 28, 2015. During the quarter ended May 31, 2010, the holder advanced the Company an additional $75,383. Both parties have drafted the terms of the note agreement and such note will be 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 has been drafted 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. The notes are to be immediately convertible; no beneficial conversion feature was deemed applicable.

On July 13, 2010, the Company borrowed $60,000 from a shareholder for use as operating capital. Both parties entered into a loan agreement which makes the Company liable for repayment of the principal and 15% annual interest within a twelve month period following the execution of the loan agreement.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

Employment Agreements

In August 2009, the Company entered into a one year engagement agreement with successful comedy writer Pat Proft to hire him as the Senior Vice President of Comedy. His role is to create and write our movies. Per the terms of his engagement, Mr. Proft received 200,000 shares of our common stock (see Note 7), and an initial monthly salary 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 salary in the form of stock compensation – retroactive from January 2010. As of the quarter ended August 31, 2010, 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.

On December 17, 2009, the Company entered into an employment agreement with our President and CEO which provides for a base salary of $360,000 per year, payable semi-monthly for a period of five years, expiring December 17, 2014. Among other things, the employment agreement calls for periodic increases in the base salary and bonuses based upon performance. The agreement also allows for the Company, at the discretion of the Board of Directors, to provide for medical insurance and a contribution to a retirement benefit plan. The President and CEO was also awarded options to purchase common stock. See Note 8. During the current quarter, the President and CEO voluntarily forgave $82,000 of accrued wages; the Company recorded these contributed services as equity at August 31, 2010.

On May 20, 2010, we entered into an agreement with a law firm for legal representation pertaining to general corporate and entertainment matters. Per this agreement, fees for services performed would be billed at 65 percent of the firm’s normal rates until November 1, 2010; then the fees revert back to normal rates. The remainder of the firm’s fees are payable in the form of warrants to purchase up to 2.5 percent of the issued and outstanding common stock of the Company (determined on a fully diluted basis). During June 2010, the Company decided not to proceed with this agreement, and pay full rates instead. Accrued legal fees due the law firm as of August 31, 2010, were $13,931.

NOTE 7 – STOCKHOLDERS’ DEFICIT

Capital Stock

The Company has two classes of stock:

1.	Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding; and,

2.	Common stock, $0.001 par value, 140,000,000 shares authorized, 78,851,077 and 68,530,952 shares issued and outstanding as of August 31, 2010 and November 30, 2009, respectively.

Reorganization and Settlement of Liabilities with Common Stock

In connection with the recapitalization, the convertible notes totaling $55,238 acquired by a Control Group member were paid in full through the issuance of 5,900,000 shares of common stock during the quarter ended February 28, 2010. Because this note was part of the recapitalization, the conversion of the shares was afforded such treatment.

Issuance of Common Stock Related to Employment Agreements and Services Rendered

In December 2009, upon Board approval the Company issued 152,000 shares to four individuals for consulting and Board of Director services to the Company. These shares were expensed to share-based compensation for $15,200, based on a closing stock price per share of $0.10 on the date of issuance.

In January 2010, upon Board approval the Company issued 50,000 shares to one individual for consulting services rendered to the Company. These shares were expensed by the Company at $9,000, based on a price per share of $0.18 on the date of issuance.

Also during January 2010, upon Board approval, the Company issued 20,000 shares to an outside consulting firm for services rendered. These shares were expensed by the Company at $1,400, based on a price per share of $0.07 on the date of issuance.

On February 11, 2010, upon Board approval, the Company issued 145,000 shares to five individuals for various operational services rendered to the Company. These shares vested immediately and were expensed by the Company at $15,950, based on a price per share of $0.11 on the date of issuance.

On February 20, 2010, 1,000,000 shares of common stock issued to two prior shareholders during August 2009 were cancelled upon a request by the CEO and concurrence by the two shareholders.

On March 9, 2010, upon Board approval, a revised employment agreement (retroactive to January 1, 2010) was negotiated between the Company and Pat Proft to reflect that half of his monthly $10,000 salary would be paid in the form of stock compensation. Thus, on the date of the agreement, for the months of January, February and March 2010, $15,000 of accrued wages due Pat would be converted into 166,667 shares of common stock based on the market price on of the Company’s common stock on the preceding day of $0.09 per share. As of August 31, 2010, accrued wages for shares yet to be issued are $40,000. The liability is included in accrued liabilities in the accompanying balance sheet.

On March 9, 2010, upon Board approval, the Company issued 375,000 shares to three individuals for operational consulting and advisory services rendered to the Company. These shares were fully vested and expensed by the Company at $30,000, based on a price per share of $0.08 on the date of issuance.

On May 27, 2010, upon Board approval, the Company issued 78,125 shares to an individual for accounting and advisory services rendered to the Company. These shares were fully vested and expensed by the Company at $2,500 based on a price per share of $0.03 on the date of issuance.

On June 23, 2010, upon Board approval, the Company issued 600,000 shares to five individuals / entities for consulting services rendered to the Company. One consultant, who received 100,000 shares for services rendered, is a brother of the CEO. These shares were fully vested and expensed by the Company in the amount of $24,000 based on a price per share of $0.04 on the date of issuance.

Sale of Common Stock

On November 30, 2009, the Company sold 1,000,000 shares to an individual pursuant to a subscription agreement at a price of $0.20 per share. The cash was received on December 1, 2009. The subscription agreement executed by the Company calls for an adjustment (“Ratchet”) after six months. If, on that date, the Company’s closing bid price for the immediately preceding trading day was less than $0.20 per share, then the Company was required to issue additional shares of its common stock to the purchaser to offset the purchaser’s total investment. Initially, since the number of shares under the ratchet provision was indeterminate and based on a fixed dollar amount to the market price at the end of six months, management recorded the common stock as a liability in the accompanying balance sheet at November 30, 2009. Upon the adjustment date of May 31, 2010, the additional amount of shares required to be issued were determinable and thus were reclassified from liability to equity as the adjustment provision expired. Based on a closing common stock price of $0.05 on the next business day, the Company was committed to issuing an additional 3,000,000 shares of common stock to the individual. As of the date of this filing, the Company has not issued the required shares of common stock.

NOTE 8 – EMPLOYEE STOCK OPTIONS

In addition to his annual salary, the President and CEO’s Employment Agreement 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 shall vest equally over a five-year period (4,000,000 shares per year), commencing 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.”

Using the Simplified Method under ASC 718, the expected term of these options would be approximately 6.5 years. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. In determining historical volatility, we used both the Company’s volatility as well as the volatility for other similar public companies. We believe due to the limited history in the Company’s stock, this was the best approach. The selection of another methodology to calculate volatility or even a different weighting between implied volatility and historical volatility could materially impact the valuation of stock options and other equity based awards and the resulting amount of share-based compensation expense recorded in a reporting period.

These options, granted in December 2009, have a fair market value of $1,200,000, as calculated using the Black-Scholes pricing model with inputs as defined below:

Expected volatility		238	%
Dividend yield		0	%
Expected option life (years)		6.5
Risk-free interest rate		2.24	%
Market price of option	$	0.06

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. Through August 31, 2010, stock compensation of $168,667 of this had been recorded as expense. Future compensation expense is $240,000, annually.

NOTE 9 – FILM PRODUCTION COSTS

The Company capitalizes film production costs in accordance with Statement of Position ASC 926 – “Entertainment”, formerly ("SOP") 00-2, Accounting by Producers or Distributors of Films. Film costs include costs to develop and produce films, which primarily consist of salaries, equipment and overhead costs, as well as the cost to acquire rights to films. Film costs include amounts for completed films and films still in development. The Company began capitalizing script costs on March 1, 2010. Related expenses incurred during the nine months ended August 31, 2010, totaling $93,250, have been recorded to script costs in non-current assets.

NOTE 10 – MEDIA DISTRIBUTION AGREEMENT

On July 12, 2010, the Company entered into an agreement with NY-based Screen Media Ventures, LLC, (“Screen Media”) in which the Company agreed to license to Screen Media the distribution rights to the motion picture currently entitled “Slam I Am” (aka “A Funny Dirty Stoner Movie") written by Kevin Sepe and Tom Alexander and produced by Kevin Sepe, the control group member that funded the Company’s working capital as discussed in Note 5. Current release date is February 2011.

Under this ten year agreement, the Company and Screen Media will share net proceeds from Home Video (“HV”) and Video on Demand (“VOD”) sales on a 50/50 ratio. Net proceeds is defined as gross proceeds less a five percent service fee to Screen Media and any third party distribution/marketing costs directly related to the distribution of the movie.

For all distribution excluding HV and VOD, Screen Media shall earn a 25% distribution fee and shall be reimbursed for all legitimate distribution costs as defined by both parties. The balance of the proceeds is then distributed to Mass Hysteria, which in turn pays the producer and financier (the related party discussed in Note 5) these proceeds less an amount defined in a drafted agreement between the Company and the producer/financier. The agreement, pending formal execution by both parties, allows for the Company to be paid 10% of the first $600,000 in proceeds received from Screen Media, and 15% for any proceeds in excess of $600,000. Additionally, the Company will be reimbursed up to a maximum of $10,000 in actual out-of-pocket expenses incurred in the distribution process.

NOTE 11 - DISCONTINUED OPERATIONS

The Company’s decision to discontinue the operations of its handbag business coincided with the Control Change which occurred at the beginning of June 2009. As a result, all financial data pertaining directly to the operations relative to the handbag business was collapsed with the net amount reported separately from the continuing operations. This collapsing effect was used to restate the financials for all periods presented. For the three and nine months ended August 31, 2010 and 2009 and the period from Inception to August 31, 2010, losses from discontinued operations were $0; $1,388,276; $0; $1,695,858; and $0, respectively.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

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 MICHAEL LAMBERT, INC. ("THE COMPANY", "MLI", "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, 2010.

DESCRIPTION OF BUSINESS

Mass Hysteria Entertainment Company, Inc. is a development stage company at 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. Mass Hysteria Entertainment 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 is working toward creating a seismic shift in how young adults view and enjoy filmed entertainment. Combining mobile technology, social networking, and gaming with the theatrical movie experience is at the heart of what the Company is developing. We have created our first screenplay that will host these joint disciplines into one. Mass Hysteria Entertainment movies will take advantage of traditional revenue streams that are still viable, and at the same time, work on creating, developing and identifying those revenue streams that will define the future of filmed entertainment such as down-loading applications to smart phones that will allow the theater-goer to "participate" with the Mass Hysteria on-screen experience. Mass Hysteria Entertainment is working with filmmakers who have realized great success such as former Walt Disney President of Production, Oren R. Aviv; producer Albert S. Ruddy who has won two Academy Awards for best picture, "The Godfather" and "Million Dollar Baby"; writer Pat Proft who has written movies that have grossed over a billion dollars, "Police Academy", "Hot Shots", "Naked Gun", "Scary Movie"; and also with executives from the Webisode, mobile and social networking sectors. Mass Hysteria Entertainment's plan is to combine top tier motion picture makers with new media to create a revolutionary entertainment experience for young adults. As with many development stage companies, the excitement surrounding Mass Hysteria lies in uncharted waters.

Management is very seasoned, and as such, understands the importance of continuing to create traditional film and television projects. Currently, Mass Hysteria is partnering with one of the top reality show producers, Base Productions, to produce two reality television series for the Company. One series is based on divorce lawyers in Palm Beach, and the other is centered around a fashion business based in Los Angeles. Base Productions is assembling marketing materials, referred to as "sizzle reels", on both projects which will be used when the projects are presented to the networks for sale. Both of these reality television series represent a potential revenue stream for the Company, pending their purchase by a network for broadcast.

Additionally, the Company is developing traditional movies that don't take advantage of new technology. The first one to be produced with Mass Hysteria begins principal photography in Baton Rouge, Louisiana, November 18th, 2010. The film, entitled “Carjacked”, is a thriller intended for theatrical release. It stars Maria Bello, who starred in such pictures as David Cronenberg's "The History of Violence" and "The Cooler", and Stephen Dorff, who stars in Sophia Coppola's new movie "Somewhere" that won the Golden Lion grand prize at the Venice Film Festival in September 2010. John Bonito, who directed "The Marine" for 20th Century Fox and is a top commercial director, is directing. "Carjacked" will become a revenue stream for the Company beginning in the fourth quarter of 2010.

The Company has just finished producing a six-minute promotional movie to demonstrate what it will be like for young audiences to participate in a Mass Hysteria movie. This "demo" movie, along with a Key Note, has taken months to write, create and produce, and will be available during the fourth quarter. The Company intends to use this publication to enlist corporate financing, sponsorships, and strategic partners for 2011 and beyond. With the demo film, Mass Hysteria intends to aggressively begin marketing the Company.

COMPARISON OF OPERATING RESULTS

Results of Operation for the Three months Ended August 31, 2010 Compared to the Three months Ended August 31, 2009

We did not have any sales revenues or related costs of sales for the three month periods ended August 31, 2010, or August 31, 2009, other than those related to the discontinued operations (handbag company). We recognized $0 net loss from discontinued operations during the three months ended August 31, 2010 vs. $1,388,276 in net losses from discontinued operations during the three months ended August 31, 2009. The lack of sales in current period is a direct reflection of the change of control and introducing a new focus and business plan. As the new Company meets its business plan goals, we expect to generate revenue in the future.

For the three months ended August 31, 2010, we had general and administrative expenses of $255,237, whereas only $99,915 for the three months ended August 31, 2009. Selling expenses for the three months ended August 31, 2010 and 2009 were $36,698 and $590, respectively. We incurred net interest expense of $7,666 for the three months ended August 31, 2010; whereas we had interest income of $376 for the three months ended August 31, 2009. The general and administrative, selling and interest expenses were a result of expenses incurred relative to the change in control and overall business focus to the film and entertainment industry.

We had a net loss from continuing operations of $299,601, and a net loss from discontinued operations of $0 for the three months ended August 31, 2010, compared to a net loss from continuing operations of $100,881, and discontinued operations of $1,388,276 for the three months ended August 31, 2009.

Results of Operation for the Nine months Ended August 31, 2010 Compared to the Nine months Ended August 31, 2009

We did not have any sales revenues or related costs of sales for the nine month periods ended August 31, 2010, or August 31, 2009, other than those related to the discontinued operations (handbag company). We recognized $0 net loss from discontinued operations during the nine months ended August 31, 2010 vs. $1,695,858 in net losses from discontinued operations during the nine months ended August 31, 2009. The lack of sales in current period is a direct reflection of the change of control and introducing a new focus and business plan. As the new Company meets its business plan goals, we expect to generate revenue in the future.

For the nine months ended August 31, 2010, we had general and administrative expenses of $757,076; selling expenses of $38,782; interest income of $225; and interest expense of $18,135. For the nine months ended August 31, 2009, we had general and administrative expenses of $99,915; selling expenses of $590; and interest income of $376. All other expenses incurred were for the handbag business which has since been discontinued. The general and administrative, selling and interest expenses were a result of expenses incurred relative to the change in control and overall business focus to the film and entertainment industry.

We had a net loss from continuing operations of $813,768, and a net loss from discontinued operations of $0 for the nine months ended August 31, 2010, compared to a net loss from continuing operations of $100,881, and discontinued operations of $1,695,858 for the nine months ended August 31, 2009.

Liquidity and Capital Resources

We had total assets of $125,413 as of August 31, 2010, including cash on hand of $18,992; $514 of miscellaneous receivables; $10,130 of prepaid rent, a security deposit, and a legal retainer; $2,527 of intangible assets (website); and $93,250 in film production costs which are being capitalized.

We had total liabilities of $644,508 as of August 31, 2010, consisting of current liabilities, which included $18,594 of accounts payable; $118,657 of accrued liabilities, and a $60,000 note payable. Included in the accrued liabilities is approximately $20,926 of accrued interest to a related party as it relates to our long-term convertible debt of $447,256.

We had negative net working capital of $177,745, a total shareholders’ deficit of $519,094 as of August 31, 2010 and an accumulated deficit as of August 31, 2010 of $5,781,426.

We had $408,262 in net cash used in operating activities for the nine months ended August 31, 2010, which included $813,768 in net loss, offset by $258,467 in shares issued for services; and a $58,037 increase in accrued liabilities.

We had $457,094 of net cash provided by financing activities for the nine months ended August 31, 2010, which included $197,094 in proceeds from loans payable to related party and $200,000 for sale of common stock.

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. We are currently funded solely by our shareholders. We anticipate that our founders and shareholders will continue to support our operations and loan us additional funds on an as needed basis until such time as we can support our operations with revenues from our products, if ever.

If we are unable to raise additional capital from conventional sources, including increases in the related party note payable 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.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

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

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

ITEM 1A. RISK FACTORS

Not required for smaller reporting companies.

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

On November 30, 2009, the Company sold 1,000,000 shares to an individual pursuant to a subscription agreement at a price of $0.20 per share. The cash was received on December 1, 2009. Due to a ratchet clause contained within the agreement, the Company issued an additional 3,000,000 shares to this individual on May 31, 2010.

We claim an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuances did not involve a public offering, the recipients took the shares for investment and not resale and we took appropriate measures to restrict transfer. No underwriters or agents were involved in the foregoing issuances and we paid no underwriting discounts or commissions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits

31.1 Certifications of Chief Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002

32.1 Certifications of Chief Executive Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

DATED: October 13, 2010	By: /s/ Daniel Grodnik
	Daniel Grodnik Chief Executive Officer and Principal Accounting Officer

Mass Hysteria Entertainment Company, Inc. - FORM 10-Q - October 13, 2010

Attached files

Mass Hysteria Entertainment Company, Inc. Reports