CERTIFICATION PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Corporate History
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 majority control of the Company. In addition to the shares purchased, the Company also issued 42,015 shares to Daniel Grodnik and certain affiliated parties in connection with the Change of Control. The total of 50,000 shares issued to Daniel Grodnik and the affiliated parties represented 74.6% of the shares of outstanding common stock of the Company as of the Effective Date.
In connection with the Change of Control, we changed our name to Mass Hysteria Entertainment Company, Inc. (“we”, “us“, the “Company”, or “Mass Hysteria”) and also changed our business plan. We are now a 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.
Address and Telephone Number
Our executive offices are located at 13331 Valley Vista Blvd., Sherman Oaks, CA 91423. Our telephone number at our executive office is (310) 285-7800.
Industry Overview
Film Industry
Industry analysts hold that the film business has a high profile among consumers worldwide which can be leveraged for ancillary revenue, marketing and promotional activities. While new technologies continue to expand the revenue and profit potential of motion pictures, the filmed entertainment industry has proven to be resistant to the economic cycles that adversely affect other businesses. For example, during the last recession in the U.S. when annual GDP (Gross Domestic Product) growth was 0.8% and 1.6% in 2000 and 2001, respectively, the U.S. box office grew by 10% and 13%, respectively, in each of those years. Despite the very difficult economic climate in 2009, U.S. box office increased 6.5% over the record year of 2008 to $10.5 billion. PricewaterhouseCoopers projects U.S. box office to continue to grow by 5.2% through 2013 reaching $12.6 billion. Increase will be driven by the continued expansion of digital projection and the growth of 3-D technology.
International markets, accounting for 65% of worldwide revenue, were up 17% over 2004 figures, totaling $18.3 billion. Continuing the trend, industry analysts project worldwide box office to reach a projected market size of $37.7 billion, by 2013.
1
Production Process
The process begins with the development of a screenplay. During the development phase, the studio engages writers to draft and revise the screenplay and begins to obtain tentative commitments from a director and principal cast before ultimately deciding to "greenlight" (i.e., approving) the film for production. A proposed production schedule and budget may also be prepared during this phase.
At times, an independent film company can attract top-level talent as a more creative and friendly environment than the larger studio can. In addition, independents typically can produce a film for substantially less than a studio, has lower development costs and overhead. Finally, independents can take more creative risks than studios which rely on franchises, sequels and formulaic approaches. This is a further attraction for fresh talent.
The production process starts with the acquisition and development of a screenplay and continues with i) pre-production, ii) principal photography, and iii) post-production as seen below.Pre-productionincludes the securing of necessary production facilities and personal, the finalization of motion picture budgets and production schedules, and the selection of motion picture shooting locations and the building of necessary sets.
Productioninvolves principal photography.
Post-productionincludes picture editing, the creation of special visual effects and opticals, the composing and recording of the musical score, sound editing, synchronizing dialogue, sound effects and music insertion, and ultimately the “final cut” and completion of the elements necessary for distribution.
Distribution to traditional media
Films are distributed through several windows of exploitation. Theatrical exhibition occurs first when release prints of the film are distributed to movie theaters worldwide in concert with extensive advertising (P&A, prints and advertising expense). Typically, theater owners retain approximately 50-60% of consumer ticket prices which in the aggregate comprise box office gross. Theatrical releases overseas occur at different times in each country and can be as much as 6 months after the U.S. release.
About 4-6 months after theatrical release is the DVD release. distributors receive wholesale prices on product that is sold directly to consumers from retail outlets such as Wal-Mart and Best Buy and earn a percentage of rental income from chains such as Blockbuster and Netflix. Related costs for advertising, duplication, packaging, mastering and shipping typically run about 35% of distributor’s revenue. Soon after DVD “street date” is the pay-per-view window.
The pay TV window (HBO, Showtime, Encore) begins approximately 18 months after theatrical release. Prices received by distributors are based on contractual output arrangements and are tied to the film’s box office performance. A year or two later, the distributor will sell the film to a network or major cable channel and then about 5 years later, the film will be sold into syndication or re-sold to pay or cable.
The major film studios perform all of these activities in the U.S. and through owned and operated offices in about 30 overseas markets that comprise the lion’s share of international revenue. Producers often sell a film’s distribution rights through a sales agent to separate independent distributors in each overseas market. These sales are referred to as “pre-sales”, “advances” or “minimum guarantees”. These independent distributors, many of which are owned by major media companies and have considerable leverage in their home markets, will perform the above mentioned distribution functions. For each unit of revenue earned, the local distributor deducts a distribution fee, local distribution costs, and the advance that it paid and remits the remainder to the producer.
2
New Media
Online content has established itself as an emerging powerhouse in the broader media market. With an increasing number of viewers incorporating online content into their established media intake, at times replacing older mediums, we believe the industry is poised to redefine media consumption.
Three industry trends: (1) Multi-screen engagements; (2) social networking; and (3) mobile commerce are merging to become what we believe will be a powerful force influencing consumer behavior According to a July 2011 report from Pew Research Center, 35% of U.S. adults own and use smart phones, 8% use and own tablets, and 63% of online adults use social networking sites, of which 83% of these adults range from ages 18 – 29. Furthermore, in Forrester’s Mobile Commerce Forecast, 2011 to 2016 published in June 2011, it was estimated that mobile online shopping would reach $6 billion in 2011. These older reports have since been widely exceeded.
Accordingly, we believe these consumer dynamics and mobile usage patterns have created a demand for multi-screen solutions at cinematic events to allow moviegoers to actively participate and share event experiences in real-time with friends instead of passively watching. We have initiated the introduction in this new media market with our SideFlick™ technology, and have retained an independent software programmer (“PGAH”) to assist with the development of this technology. MHYS has developed the concept of interactive movies through a second screen mobile experience and has the capability and knowledge to produce engaging: content. PGAH has demonstrated an initial "proof of concept" regarding the synchronization of content between the second screen and the primary screen and we believe PGAH has the skill and knowledge to build and service a custom built application(s) for use on Android, iPhones/iPads and Microsoft mobile phones and .on other future platforms to provide interactivity between filmed entertainment and mobile phones and handsets
We will form a separate wholly-owned subsidiary corporation called Mass Hysteria Interactive, Inc. ("MHI") through which the SideFlick™ Technology, process patents and SideFlick trademark will be exclusively distributed, licensed and exploited, including the receipt of any and all receipts and proceeds derived from thatch exploitation. PGAH agreed that the Technology will be for the exclusive use of MHI. PGAH and MHYS further agreed that the technology, including all modifications, enhancements, fixes and upgrades thereto and derivative works thereof will be jointly owned by PGAH and MHYS, which will split any and all net profits equally (50/50) from the exploitation of the technology in all media in perpetuity, after deduction for mutually agreed, actual and necessary operating costs, including the costs of filing process patents in the US and in Europe, which patents will be also be co-owned by MHYS and PGAH. When the SideFlick™ trademark has been obtained by PGAH, PGAH will arrange for such trademark to be assigned to MHYS for co-ownership of PGAH and MHYS.
All costs associated with the development and servicing of the technology up to and including actual exploitation and revenue generation will bourne by PGAH. MHI will pay all costs associated with creating the filmed entertainment content for the test. For original filmed entertainment that has interactive elements on the first and second screens, that content will be labeled "Mass Hysteria". For original filmed entertainment that has interactive elements solely on the second screen, such content will be labeled "SideFlick". When MHl licenses the technology to third parties, the technology will be labeled "SideFlick".
Our Business
We are a development stage multi-media entertainment company created to produce feature films for theatrical, DVD, VOD and television distribution with an interactive component for the commercial, documentary and educational film market. Our mission is to bring multi-screen engagement to the theatrical motion picture venue. Eventually, we plan to produce a minimum of two original interactive theatrical films annually, and also create a second screen (mobile) experience for currently produced non-interactive films. We may also license our IP to other film companies that wish to create interactive entertainment. In addition, we intend to continue creating traditional film and television projects.
3
While multiple screen engagement through mobile handsets is becoming more common, current usage at events has limited tools and interactivity (i.e. photo, text, single event usage). We intend to deliver multi-platform technology solutions for audiences to enhance their entertainment experiences across cinema events. Some of the features our solution offers will include, without limitation: (i) interactive mobile application experience; (ii) unique event custom content, games and viewing angles; (iii) multiple social communication options (social media and live event based); (iv) mobile commerce and product discount offerings; (v) reward based point system and leaderboard across all Mass Hysteria events; (vi) event integration across venue touch points (video board, concessions); (vii) Interactive two-way event engagement; (viii) integration with friends event and social networking communications; and (ix) pre and post-event features and integration.
We believe our custom content and multiple viewing offerings will create a more engaged experience causing the audience to become more invested in the event. Movies, in our opinion, become more communal in nature through real-time, social media based, interactive games and features accessible on a mobile device. Users will be able to participate in event specific activities with friends and other Mass Hysteria event participants or share event details with their social networking community. Users will also earn points or badges to attain social prestige and sponsor based rewards.
Furthermore, Mass Hysteria members can personalize their offering and feature set to dictate their experience at each Mass Hysteria event and control the data delivered and shared across their mobile device. Our product is designed to multi-platform technology solutions for audiences to enhance their entertainment experiences across cinema events.
Our plan is to change the theatrical paradigm. In that regard, we intend to produce an experience that is more fun in the theater than on a laptop; to transform the theatrical experience from passive to engaged, by encouraging the audience to interact with the film by downloading applications on their smart phones which will offer a dynamic range of in-movie features including gaming, texting, contests and additional content using our Side Flick software. Our core business, which we call, “Mass Hysteria Cinema”, intends to introduce full-spectruminteractivity and social networkinginto the movie-going experience. In ordinary movies the audience is ordered to turn off their handheld devices. In our movies the audience will be encouraged to turn on their handhelds and participate in the presentation, creating a radical new form of entertainment. Our goal is tofully immerse the audience in our movie,letting theminteractwith the Content, and, in some cases, even become collaborators in the Mass Hysteria brand.
We also intend to create a Mass Hysteria-branded website to extend the consumer’s Mass Hysteria experience outside of the theater. We hope this future site will not only be a content destination, but also be the source of ourproprietary software applicationsenabling the integration of handheld devices into the movie narrative.
Beyond our unique cinema experience and destination website, our creative strategy also involves compiling an “Idea Database” from which we will draworiginal content and interactive initiatives. This will provide Mass Hysteria a cutting-edge blueprint forsuccess through innovation.
Additionally, our branded website will be the nexus of a three-phase content deployment plan designed to:
| | |
| ● | Virally market our moviesacross all media platforms |
| | |
| ● | Engage the audiencebetween theatrical releases |
| | |
| ● | Build a loyal communityaround the Mass Hysteria brand |
Our three-phase plan will begin 3-4 months in advance of the first original Mass Hysteria theatrical release, and then our plan will repeat itself for each successive release:
4
Phase One: Pre-Launch
Using short form comically compelling video content modeled after public service announcements (i.e. “Friends don’t let Friends go to regular movies”), we intend to virally market our brand and movies, engage the audience with User-Gen contests and build a community around the Mass Hysteria brand. This phase will also see theonline distribution sourcefor our “Apps” to fully enable handheld devices for our Mass Hysteria Cinema experience.
Phase Two: In-Theatre
With the theatrical release of each Mass Hysteria movie we will also release exclusive “in-theatre” content through our SideKick™ technology. This additional material will be of unlockable “easter eggs” (hidden content), movie contest rewards and otherexclusive downloadable contentin the form of pictures, music and ring tones that will integrate the movie experience and handheld devices such as tablets and smartphones..
Phase Three: Post-Launch
Immediately following the theatrical release of each movie, we intend that the Mass Hysteria website will make available select portions of the movie content. Community members will be encouraged to create their own “mash-ups” (user-gen remixes) of our content for sponsored prizes and giveaways. We expect this will generatea fresh supply of no-cost user-generated contenton the Mass Hysteria site.
We intend to build a technology ecosystem that enables a range of interactions, via handset between theatre audience members and a cloud server. The nature of the interaction involves social connectivity, conversation between audience members’ narrative extensions, in-experience gaming and 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.
Joint Venture:
In November, 2013, we entered into a joint venture with entertainment networking company 22 Social Club Productions Inc., for the production of live events and the development of film and broadcast content. The new joint venture will operate under Hysteria Productions, Inc., a controlled subsidiary of MHYS, and will operate as “Hysteria Productions”. We intend to develop talent management, concert series and similar management activities in this joint venture. 22 Social Club Productions, Inc. received a 20 percent ownership interest in Hysteria Productions, Inc. as part of the joint venture agreement.
Revenue Streams
We expect to generate revenues in the following categories:
Licensing Revenue
Licensing revenue will be generated through two distinct forms of service (A) customs solutions and (ii) plug-n-play software solution.
Custom Solutions-Mass Hysteria will design and produce custom content experiences for venues. A nominal service fee will be charged based on estimated attendance. Fees will increase for individual users based on historic usage.
5
Plug-n-Play Software Solution–In the future, access to our system may be granted for a licensee to build it’s own experience using our API and a uniquely designed SDK (software development kit). Clients can pick and choose features to use through an online menu of feature options.
Premium Content.
While a majority of the developed content will be free at every event, certain “premium" content will be available based on the uniqueness of the content and the need to invest in additional venue systems/hardware, pay technical service fees or pay any potential league fees.
E-commerce Solutions
We intend to provide venues with solutions to improve sales of concessions and merchandise by allowing users to order products through the mobile application which would allow users to order items through the mobile device and picked up multiple venue designated locations. We expect to charge a 5% commission on all orders completed through the application.
Advertising
We also intend to offer a variety of advertising solutions focused on: (1) providing event-based ads targeted based on age, event type, location or usage behavior; and (2) sponsorship deals with brands cleverly integrated across events and content offerings.
Film Revenue
Mass Hysteria will receive a licensing fee for all Mass Hysteria branded and enabled films. Mass Hysteria will also secure production fees associated with the development of Mass Hysteria branded films. These production fees will come in the form of a production services payment and a percentage of film related revenue (box office revenue, DVD/blue-ray sales, VOD and digital streaming and distribution). U.S. box office performance is the key variable that drives worldwide ancillary revenue (e.g., DVD, TV). A film’s “first cycle” generally begins with a U.S. theatrical release. The film’s performance at the box office will then drive its release into other domestic and international corridors. We intend to use a third party distributor for DVD distribution and television sales. We will receive royalty fees from distributors.
Government Regulation
Our business may be subjected to governmental regulation and required to comply in the following areas:
Distribution Arrangements. We intend to release our films in the United States through existing distribution companies. We will retain the right for ourselves to market the films on a jurisdiction-by-jurisdiction basis throughout the rest of the world and to market television and other uses separately. To the extent that we may engage in foreign distribution of our films, we will be subject to all of the governmental regulations of doing business abroad including, but not limited to, government censorship, exchange controls, and copying, and licensing or qualification. At this point it is not possible to predict, with certainty, the nature of the distribution arrangements and extent of exact governmental regulations that may impact our business.
Intellectual Property Rights.Rights to motion pictures are granted legal protection under the copyright laws of the United States and most foreign countries, including Canada. These laws provide substantial civil and criminal penalties for unauthorized duplication and exhibition of motion pictures. Motion pictures, musical works, sound recordings, artwork, and still photography are separately subject to copyright under most copyright laws. The results of such investigations may warrant legal action, by the owner of the rights, and, depending on the scope of the piracy, investigation by the Federal Bureau of Investigation and/or the Royal Canadian Mounted Police with the
6
possibility of criminal prosecution. Under the copyright laws of Canada and the United States, copyright in a motion picture is automatically secured when the work is created and "fixed" in a copy. We intend to register our films for copyright with both the Canadian Copyright Office and the United States Copyright Office. Both offices will register claims to copyright and issue certificates of registration but neither will "grant" or "issue" copyrights. Only the expression (camera work, dialogue, sounds, etc.) fixed in a motion picture can be protected under copyright. Registration with the appropriate office establishes a public record of the copyright claim.
Censorship.An industry trade association, the Motion Picture Association of America, assigns ratings for age group suitability for domestic theatrical distribution of motion pictures under the auspices of its Code and Rating Administration. The film distributor generally submits its film to the Code and Rating Administration for a rating. We plan to follow the practice of submitting our motion pictures for ratings. We intend that all Mass Hysteria branded content will carry a rating no greater than PG13.
Labor Laws. Many of the screenplay writers, performers, directors and technical personnel in the entertainment industry who we intend to be involved in our productions are members of guilds or unions that bargain collectively on an industry-wide basis and may have state and governmental regulations that we must comply with.
Employees
As of November 30, 2013, we employed one person, our Chief Executive Officer and director, Daniel Grodnik. Our former Chief Financial Officer, Alan Bailey, resigned from his position on May 31, 2013. Accordingly, Mr. Grodnik is our sole officer, director and employee as of the date of this report. We believe that our employee and labor relations are good.
Fiscal 2013 and First Quarter 2014 Developments
Reverse Stock Split. In February 1, 2013, we effectuated a 1,000 for 1 reverse split of our common stock. All share-related data has been retroactively adjusted herein to reflect the reverse stock split.
Termination of Film Finance Agreement. On January 25, 2013, we received notification from Coral Ridge Capital Partners (“CRCP”) of the termination of our May 11, 2012 Film Finance Agreement with them. They terminated the agreement due to our non-performance of certain milestones set forth in the original agreement and have demanded repayment of $100,000 production contribution previously made by CRCP plus 12% accrued interest. CRCP had agreed to provide, subject to certain milestones being met, up to $300,000 in financing towards the production of the motion picture currently entitled “End of the Gun”. The initial $100,000 was paid to the Company on June 12, 2012. The balance was due from CRCP within two weeks prior to the start of filming, provided that a completion bond was in place and we had received a commitment letter from a senior debt lender with respect to financing the balance of budgeted production costs. In consideration of CRCP’s investment, we agreed to pay CRCP a bonus of up to $50,000 and a minimum of 20% perpetual equity interest in the adjusted gross receipts of the subject motion picture. If the motion picture was abandoned, we were required to repay the CRCP for all funds actually paid to us, plus interest of 12% per annum.
Distribution Agreement. In January 2013, we entered into a definitive distribution agreement with the Megas Media Fund, who has an arrangement with Cinemavault, an international sales agent and Canadian distributor based in Toronto specializing in commercially viable and unique feature film and television projects, to distribute our next action/horror motion picture production entitled "Chomped 3D". The movie revolves around genetically enhanced alligators that invade the tiny island community of Grand Lafitte, Louisiana. Cinemavault began selling the movie in Berlin in March. The Company will recognize revenue from the sale of this film if and when it gets completed and sold.
7
Termination of Previously Announced Acquisition Memorandums of Understandings. In December 2012, we abandoned our previously announced potential acquisitions of two subsidiary businesses to provide revenue and cash flow – a real estate development company and an international air cargo company. We announced execution of the Memorandums of Understandings related to these two potential acquisitions in August 2012. After conducting due diligence, our board of directors decided to abandon these opportunities and instead to maintain our focus to enhancing and invigorating our core motion picture business.
Software Development Agreement. In November 2012, we entered into a software development agreement with Patrick Greene and Alexander Hamilton for the development of technology that will allow theater audiences to engage with motion pictures in live-time using their Smart-phones. The technology will be exclusively owned by Mass Hysteria Entertainment and Greene and Harrington are participants in 50 percent of the) is designed to allow audience members to engage with unique second screen content on their Smart phones in sync with the movie up on the big screen.
Joint Venture Agreement. At the end of November, we entered into the joint venture agreement with 22 Social Club Productions, Inc. and exepect to commence operations in the management and production arenas in the year ending 2014.
Where You Can Find More Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). These filings are not deemed to be incorporated by reference into this report. You may read and copy any documents filed by us at the Public Reference Room of the SEC, 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are also available to the public through the SEC’s website athttp://www.sec.gov.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. In any event, there are no such unresolved comments.
ITEM 2. DESCRIPTION OF PROPERTY
Our business office is located at 13331 Valley Vista Blvd., Sherman Oaks, CA, 91423 . The office space is being provided by our Chief Executive Officer, free of charge.
ITEM 3. LEGAL PROCEEDINGS
To the best of our knowledge, there are no known or pending litigation proceedings against us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
8
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the OTC Market under the symbol MHYS. The following table shows the high and low bid prices for our common stock for each quarter during the fiscal years ended November 30, 2013 and 2012 as reported by the OTC Electronic Market. All share prices have been adjusted to provide for 1 for 1,000 reverse stock split effectuated on February 1, 2013. We consider our stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of the stock. Some of the bid quotations from the OTC Markets set forth below may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| | | | | | | | |
Year ended November 30, 2013 | | High Closing Price | | | Low Closing Price | |
First quarter | | $ | 0.34 | | | $ | 0.06 | |
Second quarter | | | 0.29 | | | | 0.03 | |
Third quarter | | | 0.15 | | | | 0.05 | |
Fourth quarter | | | 0.05 | | | | 0.015 | |
| | | | | | | | |
Year ended November 30, 2012 | | High Closing Price | | | Low Closing Price | |
First quarter | | $ | 4.00 | | | $ | 0.50 | |
Second quarter | | | 2.30 | | | | 0.70 | |
Third quarter | | | 1.90 | | | | 0.50 | |
Fourth quarter | | | 0.80 | | | | 0.10 | |
| | | | | | | | |
As of November 30, 2013, there were 94 holders of record of our common stock.
We have not paid any cash dividends since our inception and do not contemplate paying dividends in the foreseeable future. It is anticipated that earnings, if any, will be retained to retire debt and for the operation of the business.
Shares eligible for future sale could depress the price of our common stock, thus lowering the value of a buyer’s investment. Sales of substantial amounts of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for shares of our common stock.
Our revenues and operating results may fluctuate significantly from quarter to quarter, which can lead to significant volatility in the price and volume of our stock. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
9
RECENT SALES OF UNREGISTERED SECURITIES
| |
● | On October 14, 2013, we issued an 8% convertible promissory note in the aggregate principal amount of $20,500 to an accredited investor. The note has a maturity date of July14, 2014. Beginning April 11, 2014, the note is convertible into shares of our common stock at a conversion price of forty-five percent (45%) of the average of the lowest trading price per share market values during the thirty (30) trading days immediately preceding a conversion date. The proceeds were used for payment of outstanding payable balances. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended. |
● | 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 forty-five percent (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. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended. |
| |
● | On January 14, 2013, we issued an 8% convertible promissory note in the aggregate principal amount of $55,000 to an accredited investor. The note has a maturity date of October 17, 2013. Beginning July 13, 2013, the note is convertible into shares of our common stock at a conversion price of fifty nine percent (59%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. The proceeds were used for working capital and general corporate purposes. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended. |
| |
● | On December 21, 2012, we issued an 8% convertible promissory note in the aggregate principal amount of $40,000 to an accredited investor. The note has a maturity date of September 21, 2013. Beginning June 21, 2013, the note is convertible into shares of our common stock at a conversion price of fifty nine percent (59%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. The note was issued in consideration of accrued and unpaid legal fees. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended. |
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K (THIS “FORM 10-K”), 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-
10
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-K, UNLESS ANOTHER DATE IS STATED, ARE TO NOVEMBER 30, 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.
Over the next twelve months, we intend to develop at least one short-film to be interactive with a custom built application (“App”) and beta test it with a live audience. We intend to outsource the building and testing of the App that will allow audiences to interact, via their handset, between the theatrical movies, other audience members and a cloud server. The nature of the interaction involves social connectivity, conversation between audience members’ narrative extensions, in-experience gaming and content acquisition. The three core
innovations are a mobile app, a mobile website and specially designed cloud architecture -- together these three technologies will create what we believe to be a unique immersive quality that can offer each theatrical audience member a customizable and sharable movie entertainment experience.
We also intend to enter into negotiations with leading entertainment companies with similar objectives and technologies relating to the creation and exhibition of an interactive viewing experience, with the objective of exploring possible joint ventures and mergers to combine synergies and expertise in the interactive area.
COMPARISON OF OPERATING RESULTS
RESULTS OF OPERATION FOR THE YEAR ENDED NOVEMBER 30, 2013 COMPARED TO THE YEAR ENDED NOVEMBER 30, 2012
We had no revenue for the years ended November 30, 2013 and November 30, 2012. The lack of significant revenue in both periods is a directly related to the establishment of our business plan. As the Company meets its business plan goals, we expect to generate more revenue in the future. In the period from August 5, 2009 ("Inception") to date, the Company has assembled its management team, developing its intellectual property and is fine-tuning its marketing and merchandising strategies.
11
For the year ended November 30, 2013, we had general and administrative expenses of $1,461,526; net interest expense of $342,811, excess fair value of derivative of $69,071, and gain in fair value of derivative liability of $66,982. For the year ended November 30, 2012, we had general and administrative expenses of $990,150; net interest expense of $205,478.
We had a net loss of $1,806,426, for the year ended November 30, 2013, as compared to a net loss from continuing operations of $1,531,108, for the year ended November 30, 2012.
LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $2,009 as of November 30, 2013, consisting of $9 in cash and $2,000 in other assets. We had a working capital deficit of $2,860,686.
We had total liabilities of $3,039,011 as of November 30, 2013, consisting of current liabilities, which included $137,740 of accounts payable; accrued liabilities of $443,766, accrued payroll of $742,857; short term debt of $237,622; short term convertible debt of $270,629, stand ready obligation of $250,000, deferred revenue of $1,000, related party convertible debt with a balance of $453,061and derivative liability of $324,020. In addition, we had convertible long-term debt of $178,316 as of November 30, 2013.
We had a total stockholders’ deficit of $3,037,002 as of November 30, 2013, and an accumulated deficit as of November 30, 2012 of $10,436,926.
We had $139,602 in net cash used in operating activities for the year ended November 30, 2013, which included 1,806,426 in net loss, offset by $840,000 in share-based compensation, $200,041 in amortization of discount on short-term debt, $66,982 of change in fair value of derivative liability, $69,071 loss on excess fair value of derivative liability, and depreciation of $519. Cash flows used in operations were offset by changes in operating assets and liabilities totaling $558,825.
We had $137,000 of net cash provided by financing activities for the year ended November 30, 2013, which was from the issuance of convertible debt.
Our registered public accounting firm issued an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern.
During December 2012, the Company issued an 8 percent convertible promissory note to raise $40,000 to pay legal services owed. The Note matures on September 21, 2013, and any unpaid principal or interest at that date accrues interest at the default rate of 22 percent annually. The note may be converted into common stock, at 41% discount off the average of the lowest three (3) trading prices for the Company’s common stock within the ten (10) days preceding the conversion, at any time after 180 days from the issuance date until the maturity date. On January 14, 2013, the Company entered issued an 8 percent convertible promissory note to raise $55,000 in operating capital. The Note matures on October 17, 2013, and any unpaid principal or interest at that date accrues interest at the default rate of 22 percent annually. The note may be converted into common stock, at 59 percent of market price, at any time after 180 days from the issuance date until the maturity date. On June 12, 2013, the Company issued 8% convertible promissory notes to raise $21,500 in operating capital. These Note mature on March 14, 2014. The note may be converted into common stock, at 45% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date at any time after 180 days from the issuance date until the maturity date. On October 14, 2013, we issued an 8% convertible promissory note in the aggregate principal amount of $20,500 to pay payables that were owed. The note has a maturity date of July14, 2014. The note is convertible into shares of our common stock at a conversion price of forty-five percent (45%) of the average of the lowest trading price per share market values during the thirty (30) trading days immediately preceding a conversion date at any time after 180 days from the issuance date until the maturity date.
12
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.
Critical Accounting Policies and Estimates
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Use of Estimates:
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition:
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured. We had $0 in revenue for the twelve months ended November 30, 2013 and for the twelve months ended November 30, 2012 relating to continuing operations.
Stock-Based Compensation:
The Company accounts for its stock-based compensation under the provisions of ASC 718 “Compensation-Stock Compensation.” Accounting for Stock Based Compensation. Under ASC 718, the Company is permitted to record expenses for stock options and other employee compensation plans based on their fair value at the date of grant. Any such compensation cost is charged to expense on a straight-line basis over the periods the options vest. If the options had cashless exercise provisions, the Company utilizes variable accounting.
13
Derivative Financial Instruments:
The provisions of ASC 815 “Derivatives and Hedging” applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined ASC 815 and to any freestanding financial instruments that are potentially settled in an entity's own common stock. The guidance impacts the Company's financial statements and position due to certain warrants and embedded conversion features in which the exercise or conversion price resets upon certain events. See Note 5 for the impact of such transactions on the financial statements.
Our issued and outstanding common stock purchase warrants and embedded conversion features are recorded at their fair value upon issuance and at each reporting period. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model. The value of the embedded conversion feature also determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed.
Off-Balance Sheet Arrangements
None.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The accompanying notes are an integral part of the financial statements.
19
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND CHANGE IN CONTROL
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.
On June 9, 2009, the Company entered into a material definitive agreement with Belmont Partners, LLC by which Belmont acquired 11,286 shares of the Company’s common stock in a private transaction. Following the transaction, Belmont Partners, LLC controlled approximately 85.41% of the Company’s outstanding capital stock.
To better reflect the Company’s new business plan, on June 25, 2009, MLI changed their name to “Mass Hysteria Entertainment Company, Inc. (“Mass Hysteria” or the “Company”). The Company is an innovative motion picture production company that produces branded young adult film content for theatrical, DVD, and television distribution. The Company’s plan is to produce a minimum of three theatrical films a year that appeal specifically to the youth market.
On August 5, 2009 (date of “Inception” for financial reporting purposes), Daniel Grodnik was appointed as the Company's President, Chief Executive Officer, Chief Financial Officer, Chairman of the Board and Secretary. Mr. Grodnik has worked in the movie industry for almost thirty years. He has served as the Chairman and CEO of the National Lampoon, a publicly-traded entertainment company. On August 5, 2009, pursuant to the terms of a stock purchase agreement, an affiliate of Mr. Grodnik purchased a total of 7,985 shares of issued and outstanding common stock of The Company from Belmont Partners. At this time, Belmont Partners’ designee was the sole officer and director of the Company. In addition to the shares sold by Belmont Partners, the Company also issued 42,015 shares to Mr. Grodnik and certain affiliated parties in connection with the change of control (the “Control Group”). The total of 50,000 shares were issued to, or purchased by, Daniel Grodnik and the affiliated parties represents 74.6% of the shares of outstanding common stock of the Company at the time of transfer. For financial accounting purposes, this change in control by The Company was treated as a recapitalization with the assets contributed and liabilities assumed recorded at their historical basis. There were no assets significant acquired by the Company shareholders upon the change in control, which would have been recorded at fair value.
The Company is entering a time of great change in the entertainment business. The motion picture business has had four significant revenue streams (theatrical, home video, cable and broadcast) since the early 1980's. Today, home video is in decline and new profit centers are opening up such as video-on-demand and internet portals that rely on micro-transactions. 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. Our 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 our own mobile applications in the near future, depending on our ability to raise capital and generate traditional sources of revenues. There are technology and competitive risks associated with interactive mobile devices and theatrical films.
20
NOTE 2 – SUMMARY OF 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 minimal 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 consequently a risk of loss of your investment. The success of our plan of operation will depend to a great extent on the operations, financial condition, and management of the identified business opportunity.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require the Company's most significant, difficult and subjective judgments include the valuation and recognition of share-based compensation, evaluation of the Company’s stand-ready obligation and values of derivative instruments. We use the Black-Scholes valuation model for simplicity purposes. Various valuation techniques render varying amounts. We consistently use this model and use inputs that are appropriate. As the Company develops its technologies, and capitalization of costs occurs, the carrying value of those long-lived assets will need to be evaluated for impairment.
We base our estimates and judgments on historical experience and on various other factors that are considered reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources. Actual results could differ materially from these estimates.
Fair Value of Financial Instruments
The Company accounts for financial instruments under the guidance of ASC 820-10 – “Fair Value Measurements”. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As of November 30, 2013 and 2012, the Company’s derivatives which include the embedded conversion feature on the convertible note payable were considered level 2 financial instruments. See Note 5 for valuation technique and assumptions used.
21
The Company's financial remaining instruments consisted primarily of (level 1), accounts payable, accrued liabilities, and short-term debt. The carrying amounts of the Company's financial instruments generally approximate their fair values as of November 30, 2013 and 2012 due to the short term nature of these instruments.
The Company did not have any level 3 instruments at November 30, 2013 and 2012.
Cash and Cash Equivalents
For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.
The Company may maintain cash and cash equivalent balances at financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000. Deposits with these banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk. The Company did not have any cash equivalents at November 30, 2013 and 2012.
Film Costs
The Company capitalizes film production costs in accordance with ASC 926 – “Entertainment”. Film costs include costs to develop and produce films, which primarily consist of consulting fees, equipment and overhead costs, as well as the cost to acquire rights to films. Film costs include amounts for films still in development. The Company began capitalizing script costs on March 1, 2010. See Note 9 for additional disclosure.
Website Development Costs
Website development costs are for the development of the Company's Internet website. These costs have been capitalized when acquired and installed, and are being amortized over its estimated useful life of three years on a straight line basis. The Company accounts for these costs in accordance with ASC 340, “Other Assets and Deferred Costs”, which specifies the appropriate accounting for costs incurred in connection with the development and maintenance of websites. At November 30, 2013, the Company owned a website costing $3,140 which had an estimated useful life of three (3) years. Amortization expenses related to website development costs during each of the years ended November 30, 2013 and 2012 were $519 and $874, respectively.
Software Development Costs
Software development costs for internal use are capitalized and, once placed in service, amortized using the straight-line method over the estimated useful life, generally three years. The Company applies the principles of FASB ASC 985-20,Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed(“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.
22
All other property and equipment is depreciated or amortized on a straight-line basis over the estimated useful lives of three to ten years.
Derivative Financial Instruments
The provisions of ASC 815 - “Derivatives and Hedging” applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC 815 and to any freestanding financial instruments that are potentially settled in an entity's own common stock. The guidance impacts the Company's financial statements and position due to certain warrants and embedded conversion features in which the exercise or conversion price resets upon certain events. See Note 5 for the impact of such transactions on the financial statements.
Our issued and outstanding common stock purchase warrants and embedded conversion features are recorded at their fair value upon issuance and at each reporting period. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model. The value of the embedded conversion feature also determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed.
Convertible Debt
If a conversion feature of conventional convertible debt is not accounted for as a derivative instrument and provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount. In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
Guarantees
During the year ended November 30, 2011, the Company entered into an agreement to provide for a guarantee of indebtedness. The Company’s exposure to credit loss, in the event of nonperformance of the related film financed by the indebtedness, is represented by the amounts stipulated in the agreement, and is limited to a maximum of $250,000. The total guarantee accruals do not necessarily represent future cash requirements or cash reserves. As of November 30, 2013, management has evaluated the guarantee liability under ASC 460-10 – “Guarantees” and ASC 450-20 – “Loss Contingencies” by reviewing the ability to repay the obligation under contract to determine if there is a probable chance of a default, and if so, provide a reasonable estimate for losses. At November 30, 2013 management determined that the full guarantee will be called. See Note 6 for Management’s determination.
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 November 30, 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;
23
(2) 6,768 shares relative to convertible notes to a related party expected to be issued (post conversion) beginning in February 2015; (3) 692,959 shares relative to convertible notes (post conversion); and (4) 72 shares related to warrants issued with the $37,500 convertible note. At November 30, 2012, the Company’s dilutive securities outstanding consisted of (i) 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) 131,643 shares relative to convertible notes (post conversion) and (4) 944 shares related to warrants issued with the $37,500 convertible note. The preceding common equivalent was excluded from the diluted net loss per share as the effects would have been anti-dilutive.
Impairment of Long-Lived Assets
The Company has adopted ASC 360-10, - "Property, Plant and Equipment" which requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long-lived assets for impairment, annually, or more often, if events and circumstances warrant such. At November 30, 2012 management considered that the values of the $ 93,250 of script costs were impaired and they were accordingly expensed.
Recoupable Costs and Producer Advances
Recoupable costs and producer advances represent amounts paid by the Company that will be expected to be subsequently recouped through the collection of fees associated with the Company's licensing of content represented by third parties. In connection with the film production segment's content operations which may be represented by others, the Company will enter into sales agency agreements whereby the Company will act as a sales agent for a producer's film ("Sales Agency Agreements"). These Sales Agency Agreements typically include provisions whereby certain costs that are incurred for promotion related activities will be paid by the Company on behalf of the producer (such as movie trailer and ad material costs). The Company may also pay the producer an advance for the related film prior to the distribution of such film. As the Company subsequently licenses the producer's film and license fees are collected, the recoupable costs and producer advances will be recovered by the Company through these license fee collections. License fees typically are not paid to the producer of the related film until such recoupable costs and producer advances have been fully recovered by the Company.
Producers Fees
Producer fees will be recognized upon receipt of the fees and delivery of the related services. If upon receipt of the fees all services have not been provided, the fees will be deferred and recognized as the services are performed.
Royalties
Royalty and profit participation will be recognized when the amounts are known and the receipt of the royalties is reasonably assured. Accordingly, recognition generally occurs upon receipt (usually quarterly or semi-annually).
Distribution Revenues
Distribution revenues will be recognized when earned and appropriately reported by third (3rd) party distribution companies and recorded gross along with any distribution expenses charged by the Distributor and upon receipt of such revenues.
24
Producer Development, Production Service Fees and Film Distribution Fees
As these services are provided, these fees will be invoiced to the third party financiers and producers and recognized when the amount has been determined and receipt is reasonably assured.
Stock Options
In accordance with the provisions of ASC 718 “Compensation-Stock Compensation,” the Company accounts for employee and non-employee director stock issuances and stock options under the fair value method which requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at grant date based on the estimated fair value of the award. The Company uses the straight-line attribution method to recognize share-based compensation costs over the requisite service period of the award.
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.
Accounting for Non-Employee Stock-Based Compensation
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505 - “Equity”. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company's common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty's performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.
Deferred Producer Liabilities
Deferred producer liabilities represent outstanding amounts due to the producer or to be retained by the Company upon the collection of license fee amounts related to the sale of content represented by the Film Production segment. In accordance with the Sales Agency Agreements entered into by the Company and represented content producers, when license fees associated with the Company's sale of represented content are collected, the amounts are paid to the producer and/or retained by the Company. Amounts are paid to the Company for its sales agency commission, recoupment of outstanding film costs and producer advances ("Recoupable Costs") or as market fee revenue. The terms of the Sales Agency Agreements provide that collected license fees will be distributed to the producer and/or retained by the Company based on a specific allocation order as defined by each agreement. The allocation order is dependent on certain criteria including total license fee collections, outstanding Recoupable Cost balances and certain other criteria as specified by the Sales Agency Agreements. Because these criteria cannot be reasonably determined until the license fees are collected, the appropriate allocation order of uncollected license fees cannot be established. Accordingly, the uncollected license fee amounts are recorded as deferred producer liabilities until such
25
Income Taxes
The Company makes certain estimates and judgments in determining its income tax provision expense. These estimates and judgments are used in the determination of tax credits, benefits and deductions, and the calculation of certain tax assets and liabilities which are a result of differences in the timing of the recognition of revenue and expense for tax and financial statement purposes. The Company also uses estimates and judgments in determining interest and penalties on uncertain tax positions. Significant changes to these estimates could result in a material change to the Company's tax provision in subsequent periods.
The Company is required to evaluate the likelihood that it will be able to recover its deferred tax assets. If the Company's evaluation determines that the recovery is unlikely, it would be required to increase the provision for taxes by recording a valuation allowance against the deferred tax assets equal to the amount that is not expected to be recoverable. The Company currently estimates that its deferred tax assets will be recoverable. If these estimates were to change and the Company's assessment indicated it would be unable to recover the deferred tax assets, the Company would be required to increase its income tax provision expense in the period of the change in estimate.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of tax regulations. The Company adopted the provisions of ASC 740 “Income Taxes”. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax position liabilities. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This process is based on various factors including, but not limited to, changes in facts and circumstances, changes in tax law, settlement of issues under audit, and new audit activity. Changes to these factors and the Company's estimates regarding these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.
Recent Accounting Pronouncements
The FASB issues ASUs to amend the authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. Those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
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.
26
NOTE 4 – ACCRUED LIABILITIES
Accrued liabilities by major classification are as follows:
| | |
| November 30, 2013 | November 30, 2012 |
Accrued interest | $ 182,305 | $ 118,195 |
Accrued consulting fees | 91,000 | 91,000 |
Accrued payroll taxes on CEO’s compensation | 134,461 | 98,461 |
Accrued auto allowances due CEO | 36,000 | 24,000 |
Total accrued liabilities | $ 443,766 | $ 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
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 capital 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. See Note 6 for details of the CEO’s employment agreement.
The Company entered into an employment agreement as of February 3, 2012 with our 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 pays these wages only as capital becomes available. No wages have been paid to date.
Accrued payroll is as follows:
| | |
| November 30, 2013 | November 30, 2012 |
Accrued and unpaid compensation due CEO | $ 624,732 | $ 280,848 |
Accrued and unpaid compensation due CFO | 118,125 | 73,125 |
Total accrued payroll | $ 742,857 | $ 353,973 |
27
NOTE 5 – BORROWINGS
Short-Term Debt
On February 28, 2012, our former Chief Financial Officer made an interest free demand advance of $30,000 to the Company to provide working capital, which remains outstanding at November 30, 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 had been made as of November 30, 2013 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 bore 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 years ended November 30, 2013 and 2012, the Company incurred and accrued $13,678 and $14,802 in interest expense, respectively, related to this short-term debt. As of November 30, 2013 and 2012, the Company has accrued $39,897 and $29,003 of interest expense related to these notes respectively.
| |
(B) | Film Finance Agreement |
On May 11, 2012, we entered into an agreement with Coral Ridge Capital Partners, LLC (“CRCP”) under which CRCP agreed to provide up to $300,000 in equity financing towards the production of the motion picture currently entitled “End of the Gun” (the "Picture"). The initial $100,000 under this agreement was paid to us on June 12, 2012. While it was the Company’s intent to commence filming of the Picture by September 1, 2012, certain casting delays have postponed the commencement date, to a date yet to be determined. In the event that the motion picture is abandoned, we are required to repay CRCP all funds paid to us, plus interest of 12% per annum. On January 25, 2013 we received a written notice of termination of agreement from CRCP and we are currently negotiating a mutual settlement. Accordingly, we have included the $100,000 advance within short-term debt until the status of the Picture has been better determined and we have accrued interest payable of $17,622 through November 30, 2013.
Through November 30, 2013, we have paid cumulative expenses totaling $13,688 in connection with the Picture, which have been recorded within operating expenses.
28
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 nine months ended August 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 (which occurred as noted below) after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes’ inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default.
On March 18, 2013 the Company received a notice of default from one of the lenders holding a total of $130,700 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 of 22% as provided for in the Notes.
During December 2012, the Company issued an 8% convertible promissory note to raise $40,000 to pay legal services owed. The Note matured on September 21, 2013, and any unpaid principal or interest at that date accrues interest at the default rate of 22% annually. The note may be converted into common stock, at 41% discount off the average of the lowest three (3) trading prices for the Company’s common stock within the ten (10) days preceding the conversion, at any time after 180 days from the issuance date until the maturity date, or, if later, until paid.
On January 14, 2013, the Company issued an 8% convertible promissory note to raise $55,000 in operating capital. The Note matured on October 17, 2013, and any unpaid principal or interest at that date accrued interest at the default rate of 22% annually. The note may be converted into common stock, at 59 percent of market price, at any time after 180 days from the issuance date until the maturity date, or, if later, until paid. If a default is called by the lender (which occurred as noted below) after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes’ inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default.
On June 12, 2013, the Company issued 8% convertible promissory notes to raise $21,500 in operating capital. This Note matured on March 14, 2014. The note may be converted into common stock, at 45% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date at any time after 180 days from the issuance date until the maturity date, or, if later, until paid. . If a default is called by the lender (which occurred as noted below) after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes’ inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default.
29
On October 14, 2013, the Company issued an 8% convertible promissory note in the aggregate principal amount of $20,500 to pay payables that were owed. The note has a maturity date of July14, 2014. The note is convertible into shares of our common stock at a conversion price of forty-five percent (45%) of the average of the lowest trading price per share market values during the thirty (30) trading days immediately preceding a conversion date at any time after 180 days from the issuance date until the maturity date. If a default is called by the lender (which occurred as noted below) after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes’ inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default.
The Company discounts the notes by the fair market value of the derivative liability upon inception of each note. These discounts will be accreted back to the face value of the notes over the note term using the effective interest method.
(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.
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 November 30, 2013 and November 30, 2012, the Company has outstanding principal amounts on convertible debt of $296,780 and $121,030, respectively. At the inception of these notes inception, they were fully discounted due to the associated derivative liabilities. Aggregate remaining discounts on convertible notes to be accreted over the life of each respective note on an effective interest method are $26,151 and $70,489 as of November 30, 2013 and November 30, 2012, respectively. For the year ended November 30, 2013, interest expense from accretion of the discount, including converted notes, was $200,041.
During the year ended November 30, 2013, lenders of convertible notes converted $26,600 of principal and interest thereon through the issuance of 1,758,108 shares.
30
Aggregate derivative liabilities associated with remaining convertible notes were $324,020 as of November 30, 2013 and $223,637 as of November 30, 2012. Based on this revaluation at year end and the revaluation of derivative liabilities measured during the period immediately before extinguishment of associated convertible notes, the Company recognized a net gain in fair value of derivative liability of $66,982 and $143,242 during the year ended November 30, 2013 and 2012, respectively.
During the years ended November 30, 2013 and 2012, the range of inputs used to calculate derivative liabilities noted above were as follows:
| | | | | | | | |
| | November 30, 2013 | | | November 30, 2012 | |
Annual dividend rate | | | 0.0 | % | | | 0.0 | % |
Conversion price |
| $0.0089-$0.18 |
|
| $0.18-$0.51 |
|
Expected life (years) | | .01 - 1 years | | | .01 - .92 years | |
Risk-free interest rate | | | .03% - .13 | % | | | .03% - .18 | % |
Expected volatility | | | 331.50% - 479.40 | % | | | 71.35% - 350.90 | % |
Long-term Convertible Debt
On March 31, 2011, the Company borrowed $200,000 from an external party for use as operating capital. The parties entered into a long-term convertible note agreement, which makes the Company liable for repayment of the principal and 2% annual interest by the agreement’s expiration date of December 28, 2014. Beginning September 27, 2011, the note is convertible into shares of our common stock at a fixed conversion price of $16 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 year ended November 30, 2013, interest expense from accretion of the discount was $20,013, leaving a remaining discount of $21,684. The discount being amortized approximates the effective interest method over the term of the note.
Former Related Party
At November 30, 2013, the Company has convertible notes totaling $453,061 due to a former affiliate and significant stockholder of the Company. The notes are convertible into common shares, based on $40 to $80 share price, most of which is at the higher price. The convertible notes bear interest at 6% per annum and are due May 31, 2015. As of November 30, 2013, the Company has accrued $109,304 of interest expense related to these notes.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Office Leases
On April 14, 2011, the Company entered into a lease for office space. The lease was for one (1) year and required monthly payments of $2,927 in addition to a security deposit of $8,782 (equal to three month’s rent in advance). The security deposit was reduced after six months of on-time rent payments, with the reduction applied to against one month’s rent. Subsequent to the initial one year lease, the Company continued to rent the office space on a month-to-month basis until December 31, 2012 when it vacated the offices. Office lease expense for the years ended November 30, 2013 and 2012 was $2,927 and $35,129, respectively.
31
Consulting 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 was to create and write our movies. Per the terms of his engagement, Mr. Proft received 200 shares of our common stock (see Note 7), and an initial monthly fee of $10,000 for a minimum of one year. During March 2010, a new agreement was negotiated which reflected that Mr. Proft would be paid half of this monthly fee in the form of stock compensation – retroactive from January 2010. As of the years ended November 30, 2013 and 2012, accrued cash compensation of $15,000 and stock compensation of $40,000 was due to Mr. Proft and included in accrued liabilities on the accompanying balance sheet. This agreement terminated in August 2010.
Employment Agreement
On December 17, 2009, the Company entered into an employment agreement with our 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. Our CEO was also awarded options to purchase common stock. See Note 8. During fiscal 2010, our CEO voluntarily forgave $82,000 of accrued wages, which the Company recorded in equity as contributed services. A total of $624,732 in accrued salary is reflected on the Company’s financial statements under this agreement as of November 30, 2013.
Stand-Ready Obligation
During the production of the filmCarjacked,the production company Carjacked Entertainment, LLC and Carjacked Investments, LLC (collectively “Carjacked LLC’s”) obtained financing from Wet Rose Productions, LLC (“Wet Rose”) in the amount of $850,000. Grodfilm Corp, owned by the Company's CEO, is the managing member of the LLCs and acts on behalf of 9207-8856 Quebec Inc., a Quebec company and owner of the copyright to the motion picture "Carjacked".
On October 5, 2010, the Company entered into an indirect guarantee of the indebtedness in which the Company guaranteed any shortfalls in repayment of the $850,000 of debt related to the investment provided by Wet Rose up to an amount not to exceed $250,000. The financing from Wet Rose becomes due and payable at a date which is 30 months after first release of the filmCarjacked. The film was released on November 22, 2011 and accordingly a payable may become due in approximately 21 months on May 22, 2014. As of November 30, 2013, management evaluated the guarantee liability under ASC 460-10 – “Guarantees” and ASC 450-20 – “Loss Contingencies” by reviewing the projected ability of theCarjackedfilm to repay the obligation under contract to determine if there is a probable chance of a default, and if so, provides a reasonable estimate for losses. As of November 30, 2013, management believed that past performance and current projections indicated that full repayment by the Company to Wet Rose was probable. Accordingly, management recorded a provision for loss of $200,000 related to the stand-ready obligation during the year ended November 30, 2012, together with the $50,000 “guarantor fee” previously recorded as a stand-ready obligation in the prior year, a total of $250,000 is reflected as a stand-ready obligation as of November 30, 2013.
32
Film Costs and Movie Rights Option Contract
On November 1, 2010, the Company entered in to an “option/purchase” agreement with Richard Taylor (the “Writer”) in which the Company would be granted the exclusive right and option (“Option”) to acquire all motion picture, television and allied and ancillary rights to the Writer’s screenplay – “Bad Monday”. The initial term of this option agreement was for one year; however, the Company subsequently obtained an extension through October 31, 2013. As consideration, the Company paid the Writer $2,000 which is included in Film Costs. It is the intention of the Company to produce the motion picture and has renewed the option for which the Writer will be paid a purchase price of $150,000. Additionally, the Writer would be entitled to 5% of the net proceeds of the picture, and an additional 2.5% of net proceeds if the Writer received shared writing credit on the picture.
NOTE 7 - STOCKHOLDERS’ DEFICIT
Capital Stock
The Company has two classes of stock:
| |
● | Series A Preferred stock, $0.00001; 10,000,000 shares authorized; 10,000 issued and outstanding; and, |
| |
● | Common stock, $0.00001 par value; 2,000,000,000 shares authorized; 18,145,865 and 599,872 shares issued and outstanding as of November 30, 2013 and 2012, respectively. |
Amended and Restated Charter
We filed amended and restated articles of incorporation with the Nevada Secretary of State on each of December 16, 2011 and January 5, 2012, respectively (with the January 5, 2012 version superseding the previously filed version), which amended and restated articles (i) increased our authorized common stock to two billion (2,000,000,000) shares; (ii) reduced the par value for its capital stock from $0.001 per share to $0.00001 per share; (iii) granted authority to our board of directors to effectuate a stock split or reverse stock split without stockholder approval; (iv) elected not to be governed by certain provisions pertaining to “resident domestic corporations” under the Nevada Revised Statutes; and (v) elected not to be governed by certain provisions relating to “issuing corporations” under the Nevada Revised Statutes. A copy of the amended and restated articles was filed as an exhibit to our Definitive Information Statement on Form 14C, filed with the Securities and Exchange Commission on January 13, 2012. The amended and restated articles were effective on February 17, 2012, as stated therein.
Stock Incentive Plans
2012 Stock Incentive Plan
On March 13, 2012, our Board of Directors adopted the 2012 Stock Incentive Plan..The purpose of our 2012 Stock Incentive Plan is to advance the best interests of the Company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either common stock or stock options under the plan is 56,000 shares, subject to adjustment. As of November 30, 2013, all shares have been granted under the plan.
33
Our Board of Directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable and proper. Any decision made, or action taken, by our board of directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive.
The Board of Directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the Company, and such other persons as the board of directors or compensation committee may select, and permit holders of common stock options to exercise such options and hold the common stock issued. Stock options may also be granted by our board of directors or compensation committee to non-employee directors of the Company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the Company.
In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan.
Our Board of Directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our Board of Directors may deem appropriate and in our best interest.
2012 Stock Incentive Plan #2
On August 21, 2012, our Board of Directors adopted the 2012 Stock Incentive Plan #2. The purpose of our 2012 Stock Incentive Plan #2 is to advance the best interests of the Company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either common stock or stock options under the plan is 132,800 shares, subject to adjustment. As of November 30, 2013, 17,000 shares have been granted under the plan.
Our Board of Directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable and proper. Any decision made, or action taken, by our board of directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive.
The Board of Directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the Company, and such other persons as the board of directors or compensation committee may select, and permit holders of common stock options to exercise such options and hold the common stock issued. Stock options may also be granted by our board of directors or compensation committee to non-employee directors of the Company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the Company.
34
In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan.
Our Board of Directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our Board of Directors may deem appropriate and in our best interest.
Common Stock
Stock Split
On June 23, 2009, the directors of the Company approved a three (3) for one (1) stock split (the “Forward Split”) of the Company’s issued and outstanding common stock by written consent in lieu of a special meeting in accordance with the Nevada Corporation Law.
On June 29, 2009, we notified The Financial Industries Regulatory Authority (“FINRA”), is the independent regulator for all securities firms doing business in the United States, of our name change and the forward split of our common shares. On July 31, 2009, FINRA declared the name change effective and as a result of the effectiveness of the name change our symbol was changed to MHYS. FINRA also declared our forward split effective with a record date of June 23, 2009 and a payable date of August 5, 2009.
On December 28, 2012, the Company’s board of directors approved a One (1) for One Thousand (1,000) reverse stock split. All common stock, warrant and option transactions described herein have been adjusted to reflect the Reverse Split.
Issuance of Series A Preferred Shares
On April 5, 2011, our Board approved the issuance of 10,000 shares of Series A Preferred Stock to our CEO, Dan Grodnik, in consideration of $10,000 of accrued compensation due Mr. Grodnik. The Board’s sole director determined and approved the fair market value of these shares to be $1.00 per share. The shares were issued on April 13, 2011.
On April 13, 2011, pursuant to a resolution passed by our director under the authority of our certificate of incorporation, as amended, we filed a Certificate of Designation with the Nevada Secretary of State to create and set for the terms of a series of preferred stock of the Company known as Series A Preferred Stock, par value $0.001 per share. The Series A Preferred Stock is not convertible. Holders of the Series A Preferred Stock do not have any preferential dividend or liquidation rights. The shares of Series A Preferred Stock are not redeemable. Pursuant to the certificate of designation establishing the Series A Preferred Stock, on all matters submitted to a vote of the holders of the common stock, including, without limitation, the election of directors, a holder of shares of the Series A Preferred Stock shall be entitled to the number of votes on such matters equal to the product of (a) the number of shares of the Series A Preferred Stock held by such holder, (b) the number of issued and outstanding shares of our common stock, as of the record date for the vote, or, if no such record date is established, as of the date such vote is taken or any written consent of stockholders is solicited, and (c) 0.0002.
The issuance of the Series A Preferred Stock effectively transferred voting control of the Company to Mr. Grodnik.
Reorganization and Settlement of Liabilities with Common Stock
In June 2009, the Company issued 4,800 shares of common stock upon conversion of notes with predecessors which resulted in an extinguishment charge of $1,124,957 based on the closing price of the Company’s common stock of $240 per share shortly after the extinguishment.
35
On August 5, 2009, the Control Group acquired or received 50,000 shares of common stock, as well as 6,000 shares of common stock from the conversion of $10,000 of notes acquired. 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 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
| |
● | On August 24, 2009, the Company issued 200 shares per the terms of the employment agreement with Pat Proft which were immediately vested. These shares were valued at $62,000 based on the closing price per share on the date of issuance of $310. |
| |
● | On September 29, 2009, the Company issued 100 shares of common stock to one individual for Board of Director services rendered to the Company. This issuance was expensed as share-based compensation at a cost of $43,000, or $430 per share based on the closing stock price on the date of issuance. |
| |
● | On October 6, 2009, the Company issued 100 shares of common stock to one individual for services rendered to the Company as the Senior Vice President of Technology. This issuance was expensed as share-based compensation at a cost of $42,000, or $420 per share based on the closing stock price on the date of issuance. |
| |
● | On October 16, 2009, the Company issued 2 shares of common stock to two individuals for consulting services rendered to the Company. This issuance was expensed as share based compensation at a cost of $580, or $290 per share-based on the closing stock price on the date of issuance. |
| |
● | On November 25, 2009, the Company issued 100 shares of common stock to four individuals for legal services provided to the Company. This issuance was expensed as share based compensation at a cost of $10,000, or $100 per share-based on the closing stock price on the date of issuance. |
| |
● | In December 2009, upon Board approval the Company issued 152 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 $100 on the date of issuance. |
| |
● | In January 2010, upon Board approval the Company issued 50 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 $180 on the date of issuance. |
| |
● | Also during January 2010, upon Board approval, the Company issued 20 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 $70 on the date of issuance. |
| |
● | On February 22, 2010, upon Board approval, the Company issued 145 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 $110 on the date of issuance. |
| |
● | On February 20, 2010, 1,000 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. |
36
| |
● | 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 167 shares of common stock based on the market price on of the Company’s common stock on the preceding day of $90 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 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 $80 on the date of issuance. |
| |
● | On May 27, 2010, upon Board approval, the Company issued 78 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 $30 on the date of issuance. |
| |
● | On June 23, 2010, upon Board approval, the Company issued 600 shares to five individuals / entities for consulting services rendered to the Company. One consultant, who received 100 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 $40 on the date of issuance. |
| |
● | On September 1, 2010, upon Board approval, the Company issued 1,255 shares to three individuals for consulting services rendered to the Company. These shares were fully vested and expensed by the Company in the amount of $39,000 based on a price of $30 per share on the date of issuance. |
| |
● | On February 18, May 5, June 17, July 14, and October 18, 2011, the Company’s Board approved the issuances of 420, 900, 450, 165, and 3,500 shares of common stock, respectively, to a professional services firm for legal services rendered. Based on the closing market prices on the respective days ranging from $3.20 to $27.00 per share, the Company recorded stock compensation of $50,320 related to these transactions. |
| |
● | On June 15 and September 1, 2011, the Company’s Board approved the issuances of 1,000 and 900 shares, respectively to one individual for consulting services rendered to the Company. Based on closing market prices on the respective days ranging from $8 to $20 per share, the Company recorded stock compensation of $27,200 related to these transactions. |
| |
● | On September 1, 2011, the Company’s Board approved the issuance of 1,500 shares to one individual for consulting and advisory services rendered to the Company. These shares were fully vested and expensed by the Company in the amount of $12,000 based on a price of $8 per share on the date of issuance. |
| |
● | On August 15 and October 24, 2011, the Company’s Board approved the issuances of 225 and 250 shares, respectively to two vendors for services rendered to the Company. These shares were fully vested and expensed by the Company in the amount of $3,000 based on closing market prices on the respective days ranging from $3 to $10 per share on the date of issuance. |
| |
● | On November 1, 2011, the Company’s Board approved the issuance of 1,000 shares to one individual for employment services rendered to the Company. These shares were fully vested and expensed by the Company in the amount of $4,000 based on a price of $4 per share on the date of issuance. |
37
| |
● | During the years ended November 30, 2011 and 2010 and the period from Inception to November 30, 2011, the Company recorded $96,520, $128,800 and $382,900 in stock-based compensation related to services in general and administrative expense in the accompanying statement of operations. These expenses are exclusive of stock option expense in Note 8. |
| |
● | On February 8, 2011, the Company entered into a Fee Agreement pursuant to which the Company agreed to issue common stock to Indeglia & Carney, P.C. (“I&C”) for legal services rendered to the Company. During the year ended November 30, 2012, our Board of Directors approved the issuance of a total of 75,941, shares of common stock to I&C in consideration of legal services rendered and recorded a reduction of accrued legal fees of $78,627. For the year ended November 30, 2011, the Board of Directors approved the issuance of a total of 1,935 shares of common stock to I&C in consideration of legal services rendered and recorded a reduction of accrued legal fees of $39,120 during the period. |
| |
● | In addition, our Board of Directors approved (a) the issuance of a total of 2,500 shares of common stock to a third party attorney in consideration of legal services rendered and an expense of $11,750 based on the stock’s closing market price of $4.70 on the date of the grant; and (b) the issuance of a total of 6,000 shares of common stock to a third party marketing consultant in consideration of services rendered and an expense of $4,800 based on the stock’s closing market price of $0.80 on the date of the grant. |
| |
● | On February 14, 2012 our Board of Directors approved the issuance of 5,000 shares to a relative of our CEO for $5,000 received on January 3, 2012 based on the stock’s closing market price on the date of the grant. The stock issuance was exempt under Section 4(2) of the Securities Act of 1933, as amended. |
| |
● | In October 2013 our Board of Directors approved the issuance of 5,000,000 shares valued at $200,000 based on the stock’s closing market price on the date of the grant to a relative of our CEO in compensation for advisory services performed prior to October 31, 2013. |
| |
● | In October 2013 our Board of Directors approved the issuance of 10,000,000 valued at $400,000 based on the stock’s closing market price on the date of the grant to a third-party consultant in compensation for advisory services performed prior to October 31, 2013. |
| |
● | In addition, our Board of Directors approved (a) the issuance of a total of 785,000 shares of common stock to a third party attorney in consideration of legal services rendered and an expense of $11,767 based on the stock’s closing market price of $0.015 on the date of the grant. |
Technology Transfer and License.
On February 6, 2012, we entered into two related agreements with Three Point Capital (“3PC”). In exchange for $65,000 in cash and five Class B Units in 3PC’s subsidiary FanCloud, LLC (representing a 5% interest), we transferred certain of our intellectual property related to our mobile application. Concurrently with this transfer, 3PC granted us an exclusive, irrevocable, worldwide license to such transferred technology within the field of cinema. The $65,000 receipt was recorded as “other income” fiscal 2012.
38
On February 6, 2012, in connection with a Technology and Transfer License (above) with Three Point Capital (“3PC”) our Board of Directors approved the issuance of (i) 1,992 shares to three individuals for services, including the development of a long-term business plan and (ii) 1,992 shares to 3PC for services rendered, based on the combined fair market value totaling $1,992 of the Company’s common stock at that time.
NOTE 8 – EMPLOYEE STOCK OPTIONS
In addition to his annual salary, the President and CEO’s Employment Agreement grants employee stock options to purchase common stock in an amount equal to 20,000 shares at an exercise price of $70 per share. The options shall vest equally over a five-year period (4,000 shares per year), commencing on December 17, 2009. 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 | | $ | 60 | |
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. During the years ended November 30, 2013 and 2012 and the period from Inception to November 30, 2013, stock compensation of $240,000, $240,000, and $948,667 has been recorded as expense in general and administrative in the accompanying statement of operations, respectively. Future compensation expense is $240,000, annually through 2014. As of November 30, 2013, approximately 15,831options are fully vested and are exercisable by the CEO.
The weighted average options outstanding as of November 30, 2013 and 2012 equaled the options issued to the CEO above, 20,000, there were no other options issued, exercised or forfeited during the years then ended. The weighted average exercise price was $70 for both the years ended November 30, 2013 and 2012. The weighted average remaining contractual life of the options for the years ended November 30, 2013 and 2012 was approximately two (2) and three (3) years, respectively. There is no intrinsic value for options outstanding as all exercise prices are above the year end closing Company stock price.
39
Stock Incentive Plans
On February 16, 2011, our board of directors adopted the 2011 Stock Incentive Plan. The purpose of our 2011 Stock Incentive Plan is to advance the best interests of the Company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either stock options or compensation stock under the plan is 23,000 shares, subject to adjustment. As of November 30, 2013, the Company had no shares remaining to be issued under the plan.
On March 13, 2012, our board of directors adopted the 2012 Stock Incentive Plan.
On August 21, 2012, our board of directors adopted the 2012 Stock Incentive Plan # 2.
NOTE 9 – FILM PRODUCTION COSTS
The Company capitalizes film production costs in accordance with Statement of Position ASC 926 – “Entertainment”.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. Costs incurred during the year ended November 30, 2010, totaling $95,250, were recorded to script costs in non-current assets in connection with Mass Hysteria, the movie. The Company has assessed script costs in determining that $93,250 write-off of capitalized costs was necessary as of November 30, 2012.
NOTE 10– MEDIA DISTRIBUTION AGREEMENTS - RELATED PARTIES
Slam I Am
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 ”Stonerville” written by Kevin Sepe and Tom Alexander and produced by Kevin Sepe, the Control Group member that funded the Company’s working capital. This movie was released in January 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, executed on December 1, 2010, 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.
As of November 30, 2013, no monies are due to the Company with respect to the distribution referred to above and no revenues are expected in the future.
40
Carjacked
Carjacked Entertainment, LLC (the “LLC”) was formed to produce Carjacked, a feature film. The rights to Carjacked, the movie, are held by a Montreal, Canada company. Mass Hysteria’s CEO is the managing member and holds an equity interest in the LLC through a company he controls, Grodfilm Corp. See Note 6 for guarantee agreement provided by Mass Hysteria in connection with an unrelated investor in the amount of $250,000.
The Company was assigned an agreement by Grodfilm Corp (owned by the Company’s CEO, Dan Grodnik) which entitled Mass Hysteria to $75,000 in revenue for its participation in the pre-production of the movie. Under this agreement, Mass Hysteria received $25,000 during pre-production of the movie during fiscal 2010 and $25,000 during fiscal 2011. We will not receive the final payment, and accordingly, we provided an allowance for such amount.
SideFlick™
The Company believes that consumer dynamics and mobile usage patterns have created a demand for multi-screen solutions at cinematic events to allow moviegoers to actively participate and share event experiences in real-time with friends instead of passively watching. The Company has initiated the introduction in this new media market with our SideFlick™ technology, and has retained an independent software programmer (“PGAH”) to assist with the development of this technology. MHYS has developed the concept of interactive movies through a second screen mobile experience and has the capability and knowledge to produce engaging: content. PGAH has demonstrated an initial "proof of concept" regarding the synchronization of content between the second screen and the primary screen and we believe PGAH has the skill and knowledge to build and service a custom built application(s) for use on Android, iPhones/iPads and Microsoft mobile phones and .on other future platforms to provide interactivity between filmed entertainment and mobile phones and handsets
The Company will form a separate wholly-owned subsidiary corporation called Mass Hysteria Interactive, Inc. ("MHI") through which the SideFlick™ Technology, process patents and SideFlick trademark will be exclusively distributed, licensed and exploited, including the receipt of any and all receipts and proceeds derived from thatch exploitation. PGAH agreed that the Technology will be for the exclusive use of MHI. PGAH and MHYS further agreed that the technology, including all modifications, enhancements, fixes and upgrades thereto and derivative works thereof will be jointly owned by PGAH and MHYS, which will split any and all net profits equally (50/50) from the exploitation of the technology in all media in perpetuity, after deduction for mutually agreed, actual and necessary operating costs, including the costs of filing process patents in the US and in Europe, which patents will be also be co-owned by MHYS and PGAH. When the SideFlick™ trademark has been obtained by PGAH, PGAH will arrange for such trademark to be assigned to MHYS for co-ownership of PGAH and MHYS.
NOTE 11 – INCOME TAXES
We have identified our U.S. Federal tax returns as our “major” tax jurisdiction, and our corporate offices are located in California. The United States Federal return years 2008 through 2012 are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations. The Company is subject to examination by various State agencies for the years ended 2007 through 2012 and currently does not have any ongoing tax examinations. The Company has had losses to date, and therefore has paid no income taxes. The Company has not filed tax returns for the fiscal year 2011, 2012 and 2013.
Deferred income taxes arise from temporary timing differences in the recognition of income and expenses for financial reporting and tax purposes. The Company elected to capitalize all start-up costs for income tax reporting purposes under Section 195 and 248 of the Internal Revenue Code. The Company's deferred tax assets consist entirely of start-up costs. Effective August 5, 2009 (Inception), prior net operating loss carry forwards are no longer available to the Company, due to the Company’s abandonment of the related handbag manufacturing business.
41
Aggregate start-up costs capitalized through November 30, 2013, is approximately $3.5 million; the deferred tax asset is approximately $1.5 million. The amount of benefits the Company may receive from the start-up costs for income tax purposes is further dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined. Accordingly, management recorded a valuation allowance for 100% of the deferred tax assets of approximately $1.5 million, an increase from the prior year of $0.3 million. In fiscal 2012, management increased the valuation allowance approximately $0.4 million.
The difference between the federal rate of approximately 34% and the actual rate is due to non-deductible stock and accrued compensation, changes in derivative liabilities aggregating approximately $0.3 million and the valuation allowance described above.
NOTE 12 - SUBSEQUENT EVENTS
Conversion of short-term convertible debt
Subsequent to November 30, 2013, the Company issued 7,400,001 shares of common stock to a holder of short-term convertible debt for the conversion of $17,760 of principal. The conversion price was $0.0024. The remaining principal on this note through the date of this report is approximately $940.
Subsequent to November 30, 2013, the Company issued 1,700,000 shares of common stock to a holder of short-term convertible debt for the conversion of $72 of principal and $1,876 of accrued interest. The conversion price was $0.00226. The remaining principal on this note through the date of this report is approximately $39,928. The remaining dilutive impact of this convertible note, which converts at a discount to current market, or approximately $0.002 per share, is substantial, and at the current market, would result in the issuance of approximately 19,964,000 additional shares of common stock to fully convert the note.
Subsequent to November 30, 2013, the Company issued another 1,700,000 shares in conversion of $1,729 of principal and $2,082 in interest on a promissory note previously issued to Metacomet Company.
Shares issued for services
In February 2014, 5,000,000 shares were issued to an advisory board member for his service and 7,500,000 shares were issued to the Company CEO for his service. There are an additional 17,500,000 shares which were approved to be issued in January 2014 to an advisory member and a consultant in the area of film and distribution.
As a result of the post-November 30, 2013 issuances, there were 41,445,866 common shares issued and outstanding at March 17, 2014.
Promissory note
In November, 2013, we agreed to a $3,000 promissory note to Metacomet for the payment of outstanding payables. The loan was funded in December, 2013 although the note was dated November 27, 2013. The funded amount will be reported in our next quarterly report.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC Rule 13a-15 or Rule 15d-15, our Chief Executive and Principal Accounting Officers carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing evaluation, we have concluded that our disclosure controls and procedures are not effective as of November 30, 2013 and that they do not allow for information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive and Principal Accounting Officers as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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.
43
Management’s assessment of the effectiveness of the small business issuer’s internal control over financial reporting is as of the November 30, 2013. We believe that internal control over financial reporting is not effective. The matters involving internal controls and procedures that the Company’s management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were:
(1) lack of a functioning audit committee and lack of a majority of outside directors on the Company’s board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures;
(2) inadequate segregation of duties consistent with control objectives;
(3) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and
(4) ineffective controls over period end financial disclosure and reporting processes.
The aforementioned material weaknesses were identified by the Company’s Chief Financial Officer in connection with the review of our financial statements as of November 30, 2013 and communicated the matters to our management. Management believes that the material weaknesses set forth in items (2), (3) and (4) above did not affect the Company’s financial results. However, management believes that the lack of a functioning audit committee and lack of a majority of outside directors on the Company’s board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures can affect the Company’s results and its financial statements for the future years.
We are committed to improving our financial organization. As part of this commitment, we will create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to the Company: i) Appointing one or more outside directors to our board of directors who shall be appointed to the audit committee of the Company resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures; and ii) Preparing and implementing sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on the Company’s Board. In addition, management believes that preparing and implementing sufficient written policies and checklists will remedy the following material weaknesses (i) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and (ii) ineffective controls over period end financial close and reporting processes. Further, management believes that the hiring of additional personnel who have the technical expertise and knowledge will result proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support the Company if personnel turn over issues within the department occur. This coupled with the appointment of additional outside directors will greatly decrease any control and procedure issues the company may encounter in the future.
Changes in Internal Control: There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
44
Limitations on Effectiveness of Controls: The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures or its system of internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system of internal control are met. The design of the Company’s control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.
This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits us to provide only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below is certain information concerning our directors and executive officers as of the date of this report:
| | | | |
Name | | Age | | Position |
Daniel Grodnik | | 61 | | President, Chief Executive Officer and Chairman |
Set forth below is a brief description of the background and business experience of our executive officers and directors for the past five years.
Daniel Grodnikis a director and our President and Chief Executive Officer. Mr. Grodnik has worked in the movie industry for almost thirty years. He has served as the Chairman and CEO of the National Lampoon, a publicly traded entertainment company. Mr. Grodnik has produced dozens of movies over the course of his career including “Bobby,” which had an all-star cast including Anthony Hopkins, Demi Moore, Sharon Stone, Helen Hunt, Lawrence Fishburne, Elijah Wood, Lindsay Lohan, William H. Macy, Nick Cannon, and Heather Graham and for which he was nominated for a Golden Globe for Best Picture; Powder, Blind Fury and “1969” starring Robert Downey and Kiefer Sutherland and scores of other theatrical and television movies with stars such as Ashley Judd, Tim Allen, Richard Dreyfuss, Christian Slater, Alec Baldwin, Jeff Goldblum, Winona Ryder, etc. Mr. Grodnik is a member of the Producer’s Guild of America and for the past 20 years has been an oral panelist at his Alma-Mater USC to grade the Masters’ Thesis in producing.
45
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board
Information about our Board and its Committees
We do not have either an audit committee, compensation committee, or a nominating committee. It is the view of the board of directors that it is appropriate to not have any of these committees since they are not required to maintain a listing on the OTC Markets, since it only has one director who would serve on any such committees in any event, and due to the additional and unnecessary costs associated with administering the committees.
We do not have any defined policy or procedure requirements for stockholders to submit recommendations or nominations for directors. Our board of directors believes that, given the early stages of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. We do not currently have any specific or minimum criteria for the election of nominees to our board of directors and we do not have any specific process or procedure for evaluating such nominees. Our board of directors assesses all candidates, whether submitted by management or stockholders, and makes recommendations for election or appointment.
A stockholder who wishes to communicate with our board of directors may do so by directing a written request to our Company addressed to our Chief Executive Officer. We intend to hold annual meetings of stockholders during the summer season, at which meetings our directors will be up for re-election. We currently do not have a policy regarding the attendance of board members at the annual meeting of stockholders.
Family Relationships
There are no family relationships between or among any of the current directors, executive officers or persons nominated or charged by the Company to become directors or executive officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
| |
● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
| |
● | had any bankruptcy petition filed by or against any business of which he was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time; |
| |
| |
● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; or |
| |
| |
● | been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. |
46
Director Independence
Our board of directors has determined that currently none of it members qualify as “independent” as the term is used in Item 407 of Regulation S-B as promulgated by the SEC and in the listing standards of The Nasdaq Stock Market, Inc. - Marketplace Rule 4200. The chairman of the board is also an officer of the Company. The Company plans to appoint an outside director as chairman in the future.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers, and stockholders holding more than 10% of our outstanding common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in beneficial ownership of our common stock. Executive officers, directors and greater-than-10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.
To our knowledge, based solely on review of the copies of such reports furnished to us for the period ended November 30, 2013, no Section 16(a) reports required to be filed by our executive officers, directors, and greater-than-10% stockholders were filed on a timely basis.
Code of Ethics
We have adopted a code of ethics that applies to the principal executive officer and principal financial and accounting officer. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be directed to our principal executive offices at 13331 Valley Vista Blvd., Sherman Oaks, CA 91423.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officer during the years ended November 30, 2012, and 2011 in all capacities for the accounts of our executive, including the Chief Executive Officer and former Chief Financial Officer:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Summary Compensation Table | |
| | | | | | | | | | | Stock | | | Option | | | | All Other | | | | |
Name and Position | | Year | | Salary | | | | Bonus | | | Awards ($) | | | Awards ($) | | | | Compensation | | | Total ($) | |
Daniel Grodnik | | 2013 | | $ | 360,000 | (1) | | | | -- | | | | -- | | | $ | 240,000 | (3) | | | | -- | | | $ | 600,000 | |
President and Chief Executive Officer | | 2012 | | $ | 360,000 | (2) | | | | -- | | | | -- | | | $ | 240,000 | (3) | | | | -- | | | $ | 600,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Alan Bailey | | 2013 | | $ | 45,000 | (4) | | | | -- | | | | -- | | | | -- | | | | | -- | | | $ | 75,000 | |
Chief Financial Officer (February 8, 2012 to May 31, 2013) |
| 2012 | | $ | 75,000 | (5) | | | | -- | | | | -- | | | | -- | | | | | -- | | | $ | 75,000 |
|
| |
(1) | $360,000 of this amount was accrued as salary but not paid. |
(2) | $73,125 of this amount was accrued as salary but not paid. |
| |
(3) | On December 17, 2009, the Company agreed to Mr. Grodnik an option award of 20,000 shares with exercise price of $70. Our stock price was $60 on December 17, 2009. The options vest equally (pro-rata per day) over a five year period. As such 4,000 and, 4,000 shares under such option vested in the years ended November 30, 2013, and 2012 respectively. In 2014, Mr. Grodnik received a vested option to acquire 22,500,000 shares of common stock at $0.0253 per share. |
47
| |
(4) | $45,000 of this amount was accrued as salary but not paid. |
| |
(5) | $73,125 of this amount was accrued as salary but not paid. |
Grants of Plan-Based Awards
We did not grant any plan based awards to executive officers in the year ended November 30, 2013. In February 2014, Mr. Grodnik was awarded a vested option to acquire 22,500,000 shares at $0.0253 per share.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth all outstanding equity awards made to each of the Named Executive Officers that are outstanding at the end of the year ended November 30, 2013.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | | | Stock Awards | |
Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | | Number of Securities Underlying Unexercised Options (#) Un exercisable | | | | Option Exercise Price ($) | | | Option Expiration Date | | | | Number of Shares or Units of Stock That Have Not Vested (#) | | | Market Value of Shares or Units of Stock That Have Not Vested | | |
Daniel Grodnik | | | 15,832 | (1) | | | | 4,168 | (1) | | | | 70.00 | (1) | | 12/17/2016 | (2) | | | | — | | | | — | | |
| |
| (1) Adjusted for the 1-for-1000 reverse stock split effectuated on February 1, 2013 (2) The options vest equally (pro-rata per day) over a 5 year period until fully vested on December 17, 2014. Each option expires 24 months after vesting. Mr. Grodnik also has been awarded an option to purchase 22,500,000 shares at $0.0253 as of February, 2014. |
Option Exercises and Stock Vested
4,000 shares under Daniel Grodnik’s option to purchase 20,000 shares vested in the year ended November 30, 2013. No stock options were exercised by any named executive officer in the year ended November 30, 2013.
Employment Agreements
We have an employment agreement with Daniel Grodnik, our Chief Executive Officer. A description of the material terms of Mr. Grodnik’s agreement is set forth below.
Daniel Grodnik Employment Agreement
The agreement is for an initial term of five years and provides for an annual base salary during the term of the agreement of $360,000, which amount shall automatically be increased by 10% when and if the Company’s revenues exceed $1,000,000. Mr. Grodnik may also receive bonuses at the discretion of the board of directors and will receive a bonus equal to 2% of gross theatrical box office sales for any of our theatrically released motion pictures.
In addition to his annual salary, the agreement grants employee stock options to purchase common stock in an amount equal to 20,000 shares at an exercise price of $70.00 per share. The options vest equally (pro-rata per day) over a five-year period (until fully vested on December 17, 2014. Each series of options shall survive for 24 months following vesting, and may be exercised all or in part by shall include a “cashless feature.”
48
The agreement also contains the following material provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) four (4) weeks paid vacation leave, including payment of actual vacations not to exceed $15,000; (iii) medical, dental and life insurance benefits; (iv) an $800 per month automobile allowance; (v) a severance payment of $5,000,000 in the event that Mr. Grodnik’s duties and responsibilities are significantly changed or in the event of a “Change in Control” (as defined in the agreement).
Potential Payments upon Termination
Under the terms of Mr. Grodnik’s employment agreement, he is entitled to a severance payment of $5,000,000 in the event that Mr. Grodnik’s duties and responsibilities are significantly changed or in the event of a “Change in Control” (as defined in the agreement).
The following table sets forth quantitative information with respect to potential payments to be made to Mr. Grodnik upon termination in the circumstances described above. The potential payments are based on the terms of the Employment Agreement discussed above. For a more detailed description of the Employment Agreement, see the “Employment Agreements” section above.
| | | | |
Name | | Potential Payment upon Termination | |
Daniel Grodnik | | $ | 5,000,000 | |
Compensation of Directors
No compensation was paid to any director (other than compensation set forth under Executive Compensation) for services rendered during the fiscal year ended November 30, 2013.
All directors receive reimbursement for reasonable out-of-pocket expenses in attending Board of Directors meetings and for promoting our business.
From time to time we may engage certain members of the Board of Directors to perform services on our behalf. In such cases, we compensate the members for their services at rates no more favorable than could be obtained from unaffiliated parties. We did not engage any members of the Board of Directors to perform services on our behalf the year ended November 30, 2013.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of our common stock as of November 30, 2013 by the following persons:
| |
● | each person who is known to be the beneficial owner of more than five percent (5%) of our issued and outstanding shares of common stock; |
| |
● | each of our directors and executive officers; and |
| |
● | all of our directors and executive officers as a group. |
49
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. The number of shares and the percentage beneficially owned by each individual listed above include shares that are subject to options held by that individual that are immediately exercisable or exercisable within 60 days from November 30, 2013, and the number of shares and the percentage beneficially owned by all officers and directors as a group includes shares subject to options held by all officers and directors as a group that are immediately exercisable or exercisable within 60 days from November 30, 2013.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Address (1) | | Number of Common Shares Beneficially Owned | | | Percentage Owned (2) | | | Number of Series A Shares Beneficially Owned | | | Percentage Owned (3) | | | Percentage of Total Voting Power (4) |
5% Stockholders: | | | | | | | | | | | | | | |
Asher Enterprises (5) | | 70,948 | (6) | | 9.99 | % | | - | | | - | | | * |
Directors and Officers: | | | | | | | | | | | | | | |
Daniel Grodnik | | | 2,515,000 | (7) | | | 2.09 | % | | | 10 | ,000 | | | 100 | % | | >80% | |
All directors and officers as a group (1 person) | | | 15,000 | (7) | | | 2.09 | % | | | 10 | ,000 | | | 100 | % | | >80% | |
*Less than 1%
| |
(1) | Unless otherwise noted, the address is 13331 Valley Vista Blvd., Sherman Oaks, CA 91423. |
(2) | Based on 18, 145,165common shares issued and outstanding. |
| |
(3) | Based on 10,000 series A preferred shares issued and outstanding |
(4) | Holders of our common stock are entitled to one vote per share, for a total of 716,596 votes. Holders of our Series A preferred stock are entitled to the number of votes on such matters equal to the product of (a) the number of shares of the Series A Preferred Stock held by such holder, (b) the number of issued and outstanding shares of Mass Hysteria’s common stock, on a fully-diluted basis, as of the record date for the vote, or, if no such record date is established, as of the date such vote is taken or any written consent of stockholders is solicited, and (c) 0.0002. |
| |
(5) | The address is 1 Linden Place, Great Neck, NY 11021. |
(6) | Includes 1,000 shares related to presently exercisable warrants and 69,948 shares issuable under presently exercisable promissory notes. |
| |
(7) | Includes 2,512,000 shares under presently exercisable options. |
Securities Authorized for Issuance Under Equity Compensation Plans.
The following provides information concerning compensation plans under which our equity securities are authorized for issuance as of November 30, 2013:
50
| | | | | | | | | | | | | | | |
| | | | (a) | | | (b) | | | (c) | |
Plan Category | | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
Equity compensation plans approved by security holders | | | (1) | | | -- | | | | -- | | | | 22,977 | |
Equity compensation plans not approved by security holders | | | (2)(3) | | | -- | | | | N/A | | | | 188,738 | |
Total | | | | | | -- | | | | N/A | | | | 211,715 | |
(1) 2011 Stock Incentive Plan. On February 16, 2011, our board of directors adopted the 2011 Stock Incentive Plan. The purpose of our 2011 Stock Incentive Plan is to advance the best interests of the company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either stock options or compensation stock under the plan is 23,000 shares, subject to adjustment.
Our board of directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable an proper. Any decision made, or action taken, by our board of directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive.
The board of directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the company, and such other persons as the board of directors or compensation committee may select, and permit holders of common stock options to exercise such options prior to full vesting therein and hold the common stock issued upon exercise of the option as common stock. Stock options may also be granted by our board of directors or compensation committee to non-employee directors of the company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the company.
In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan.
Our board of directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our board of directors may deem appropriate and in our best interest.
51
(2) 2012 Stock Incentive Plan. On March 13, 2012, our board of directors adopted the 2012 Stock Incentive Plan. The purpose of our 2012 Stock Incentive Plan is to advance the best interests of the company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either stock options or compensation stock under the plan is 56,000 shares, subject to adjustment.
Our board of directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable an proper. Any decision made, or action taken, by our board of directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive.
The board of directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the company, and such other persons as the board of directors or compensation committee may select, and permit holders of common stock options to exercise such options prior to full vesting therein and hold the common stock issued upon exercise of the option as common stock. Stock options may also be granted by our board of directors or compensation committee to non-employee directors of the company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the company.
In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan.
Our board of directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our board of directors may deem appropriate and in our best interest.
(3) 2012 Stock Incentive Plan #2.On August 21, 2012, our board of directors adopted the 2012 Stock Incentive Plan #2. The purpose of our 2012 Stock Incentive Plan #2 is to advance the best interests of the company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either stock options or compensation stock under the plan is 132,800 shares, subject to adjustment.
Our board of directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable an proper. Any decision made, or action taken, by our board of directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive.
52
The board of directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the company, and such other persons as the board of directors or compensation committee may select, and permit holders of common stock options to exercise such options prior to full vesting therein and hold the common stock issued upon exercise of the option as common stock. Stock options may also be granted by our board of directors or compensation committee to non-employee directors of the company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the company.
In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan.
Our board of directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our board of directors may deem appropriate and in our best interest.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
On October 5, 2010, we entered into that Guarantee Agreement with Carjacked Entertainment LLC (“CE”) and Carjacked Entertainment Investments, LLC (“CEI”, together with CE, the “Producers”), pursuant to which we guaranteed repayment of up to $250,000 to Wet Rose Productions, LLC for funds invested by Wet Rose for the film “Carjacked.” In exchange for the guarantee, the Producers agreed to pay us $50,000. Our sole officer and director is managing member of CE.
Effective November 1, 2010, Grodfilm Corp. assigned that certain Memorandum of Agreement with Carjacked Entertainment, LLC related to producer fees on the film entitled “Carjacked” to us. Our President and Chief Executive Officer is the principal officer and controlling stockholder of Grodfilm Corp. In addition, our President and Chief Executive Officer is the managing member of Carjacked Entertainment, LLC. Neither our president and CEO nor CE owns the rights to the film “Carjacked.”
Our President and Chief Executive Officer currently has other interests in other companies in the film industry. He is currently sole officer and sole stockholder of Grodfilm Corp., a company involved in producing motion pictures. Until such time as we are better capitalized, our President and Chief Executive Office will devote the majority of his time to our company but may not devote his entire time to us. He will devote so much of his time as is, in his judgment necessary to conduct such business in the best interest of our company. Any agreements entered into between us and any affiliates shall be on terms and conditions no less favorable to us than can be obtained by independent third parties.
On April 5, 2011, we issued 10,000 shares of Series A Preferred Stock to our President in satisfaction of $10,000 of accrued but unpaid salary.
On February 28, 2012, our former Chief Financial Officer provided an interest free advance to us in the amount of $30,000.
Director Independence
For our description of director independence, see “Director Independence” under the section entitled “Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act” above.
53
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Appointment of Auditors
dbbmckennon audited our consolidated financial statements for the fiscal years ended November 30, 2013 and 2012.
Audit Fees
dbbmckennon billed us $17,500 in fees for our 2013 annual audit and $19,000 for the review of our quarterly financial statements in 2013. Dbbmckennon billed us $17,500 in fees for our 2012 annual audit and $14,000 for the review of our quarterly financial statements in 2012.
The Company paid dbbmckennon $21,500for audit related services in 2012.
Tax Fees
For the Company’s fiscal years ended November 30, 2013 and 2012, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended November 30, 2013 and 2012.
Pre-Approval Policies and Procedures
We have implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, our board of directors pre-approves all services to be provided by dbbmckennon and the estimated fees related to these services.
All audit, audit related, and tax services were pre-approved by our board of directors, which concluded that the provision of such services dbbmckennon was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. Our pre-approval policies and procedures provide for the board of directors’ pre-approval of specifically described audit, audit-related, and tax services on an annual basis, but individual engagements anticipated to exceed pre-established thresholds must be separately approved. The policies and procedures also require specific approval by our board of directors if total fees for audit-related and tax services would exceed total fees for audit services in any fiscal year. The policies and procedures authorize the audit committee to delegate to one or more of its members pre-approval authority with respect to permitted services.
54
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) We have filed the following documents as part of this Annual Report on Form 10-K:
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
Balance Sheets
Statements of Operations
Statements of Stockholders’ Deficit
Statements of Cash Flows
Notes to Financial Statements
2. Financial Statement Schedules: None
3. Exhibits: See the Exhibit index below
| | | | |
Exhibit No. | | Description |
| | |
31.1 | | Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer and Chief Financial Officer (1) |
32.1 | | Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer (1) |
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 17, 2014
| | |
By: | /s/ Daniel Grodnik | |
| Daniel Grodnik | |
| President, Chief Executive Officer, Chairman and Secretary (Principal Executive Officer and Principal Accounting Officer) | |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | |
Name | | Title | |
| |
| | | | | |
/s/ Daniel Grodnik | | | | | |
Daniel Grodnik | | President, Chief Executive Officer, Chairman and Secretary | | | |
March 17, 2014 | | (Principal Executive Officer and Principal Accounting Officer) |
|
|
55
