UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 31, 2010
 
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from ______to______.
  
 
 MASS HYSTERIA ENTERTAINMENT 
COMPANY, INC.(Exact name of registrant as specified in Charter)
 
 Nevada

000-53739

20-3107499(State or other jurisdiction of incorporation or organization)

(Commission File No.)

(IRS Employee Identification No.)
 
 5555 Melrose Avenue, Swanson Building
 Suite 400
 Hollywood, CA 90038
 (Address of Principal Executive Offices)
 ________________________
 (323) 956-8388
 (Issuer Telephone number)
 ________________________
 
 Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
  Large Accelerated Filer
o
Accelerated Filer
oNon-Accelerated Filer
o
Smaller Reporting Company
x
 
 Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o  No x
 
 As of July 14, 2010, there were 74,251,077 shares of our common stock issued and outstanding.





MASS HYSTERIA ENTERTAINMENT COMPANY, INC.


(Formerly, Michael Lambert, Inc.)





FORM 10-Q





May 31, 2010





TABLE OF CONTENTS





PagePART I-- FINANCIAL INFORMATIONItem 1.
Financial Statements


3Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations


12Item 3.
Quantitative and Qualitative Disclosures About Market Risk


14Item 4T
Control and Procedures


14PART II-- OTHER INFORMATIONItem 1
Legal Proceedings


15Item 1A
Risk Factors


15Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds


15Item 3.
Defaults Upon Senior Securities


15Item 4.
Submission of Matters to a Vote of Security Holders


16Item 5.
Other Information


16Item 6.
Exhibits


16SIGNATURES


17





2


ITEM 1. FINANCIAL STATEMENTS





MASS HYSTERIA ENTERTAINMENT COMPANY, INC.


(Formerly, Michael Lambert, Inc.)


(A Development-Stage Company)


BALANCE SHEETS





May 31, 2010


November 30, 2009(Unaudited)


(Audited)CURRENT ASSETSCash

$
5,432


$
160Subscription receivable


-



200,000TOTAL CURRENT ASSETS


5,432



200,160Intangible assets, net


2,788



3,140Film production costs  (Note 8)


63,250



-Other assets


16,525



9,700TOTAL ASSETS

$
87,995


$
213,000LIABILITIES & STOCKHOLDERS’ DEFICITCURRENT LIABILITIESAccounts payable

$
1,521


$
5,111Accounts payable – related party


-



6,150Accrued liabilities


58,223



5,620Common stock liability (Note 6)


-



200,000TOTAL CURRENT LIABILITIES


59,744



216,88Convertible long- term debt – related party (Note 4)


413,745



305,430TOTAL LIABILITIES


473,489



522,311Commitments and contingencies (Note 5)


-



-STOCKHOLDERS’ DEFICITPreferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding


-



-Common stock, $0.001 par value, 140,000,000 shares authorized, 74,251,077 and 68,530,952shares issued and outstanding as of May 31, 2010 and November 30, 2009, respectively.


74,251



68,531Shares committed to be issued (Note 6)


200,000



-Additional paid-in capital


4,822,081



4,589,816Accumulated deficit


(5,481,826
)


(4,967,658
)TOTAL STOCKHOLDERS’ DEFICIT


(385,494
)


(309,311
)TOTAL LIABILITIES & STOCKHOLDERS’ DEFICIT

$
87,995


$
213,000





See notes to financial statements





3


MASS HYSTERIA ENTERTAINMENT COMPANY, INC.


(Formerly, Michael Lambert, Inc.)


(A Development-Stage Company)


STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended May 31,


Six Months Ended May 31,


For the Period from August 5, 2009 (Inception) to2010


2009


2010


2009


May 31, 2010Revenue

$
-


$
-


$
-



-


$
-Operating expenses:General and administrative, including share-based compensation of $92,500, $0, 174,467 and $0 for the three and six months ended May 31, 2010 and 2009, respectively, and $332,047 for the period from Inception to May 31, 2010.


215,485



-



501,838



-



896,827Selling expense


-



-



2,084



-



13,876Total operating expenses


215,485



-



503,922



-



910,703Other income (expenses):Interest expense


(5,611
)


-



(10,246
)


-



(14,244
)Net loss from continuing operations


(221,096
)


-



(514,168
)


-



(924,947
)Net loss from discontinued operations


-



(10,009
)


-



(307,582
)


-Net loss

$
(221,096
)

$
(10,009
)

$
(514,168
)

$
(307,582
)

$
(924,947
)Basic and diluted loss from continuing operations

per share

$
-
*

$
-
*

$
-
*

$
-
*Basic and diluted loss from discontinued operations per share

$
-
*

$
-
*

$
-
*

$
(0.02
)Basic and diluted weighted average shares outstanding


74,139,664



13,213,500



72,587,004



12,795,147





*Amount was less than $0.01 per share





See notes to financial statements





4


MASS HYSTERIA ENTERTAINMENT COMPANY, INC.


(Formerly, Michael Lambert, Inc.)


(A Development-Stage Company)


STATEMENT OF STOCKHOLDERS’ DEFICIT


Balances for the six months ended May 31, 2010


(Unaudited)





Common Shares

Common Stock at Par Value

Additional Paid-in Capital


Shares Committed to be Issued

Accumulated Deficit

TotalBalances at November 30, 2009

68,530,952

$
68,531

$
4,589,816


-

$
(4,967,658
)
$
(309,311
)Shares issued for services:On December 10, 2009 at $0.10 per share

152,000


152


15,048


-


-


15,200On January 10, 2010 at $0.07 per share

20,000


20


1,380


-


-


1,400On January 28, 2010 at $0.18 per share

50,000


50


8,950


-


-


9,000On February 22, 2010 at $0.11 per share

145,000


145


15,805


-


-


15,950On March 9, 2010 at $0.08 per share

375,000


375


29,625


-


-


30,000On May 27, 2010 at $0.032 per share

78,125


78


2,422


-


-


2,500Common shares issued to extinguish debtacquired from predecessors by Control Group member

5,900,000


5,900


49,368


-


-


55,268Share based compensation related to optionsissued granted during December2009.

-


-


108,667


-


-


108,667Shares returned to treasury from predecessors on

February 20, 2010

(1,000,000
)

(1,000
)

1,000


-


-


-Shares committed to be issued

-


-


-


200,000


-


200,000Net loss

-


-


-


-


(514,168
)

(514,168
)Balances at May 31, 2010
$
74,251,077

$
74,251

$
4,822,081

$
200,000

$
(5,481,826
)
$
(385,494
)








See notes to financial statements


5





MASS HYSTERIA ENTERTAINMENT COMPANY, INC.


(Formerly, Michael Lambert, Inc.)


(A Development-Stage Company)


STATEMENTS OF CASH FLOWS


(Unaudited)




Six Months Ended


For the Period from August 5, 2009 (Inception) toMay 31, 2010


May 31, 2009


May 31, 2010CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(514,168
)

$
(307,582
)

$
(924,947
)Adjustments to reconcile net loss to cash used in operating activities:Depreciation


352



-



352Share-based compensation


174,467



270,000



332,047Contributed services


-



-



7,500Gain on settlement of convertible notes


-



-



(14,000
)Imputed rent expense


-



1,800



-Imputed interest on debt


-



2,973



-Changes in operating assets and liabilitiesPrepaid expenses


(6,825
)


-



(6,825
)Inventory


-



203



-Accounts payable


(9,740
)


19,934



11,994Accrued  liabilities


27,603



(1,246)



16,722Bank credit line


-



-



(1,156
)NET CASH USED IN OPERATING ACTIVITIES


(328,311
)


(13,918
)


(578,313
)CASH FLOWS FROM INVESTING ACTIVITIESScript costs


(30,000
)


-



(30,000
)NET CASH USED IN INVESTING ACTIVITIES


(30,000
)






(30,000
)CASH FLOWS FROM FINANCING ACTIVITIESLoans from stockholders


-



13,792



-Payment on bank credit line payable


-



18



-Proceeds from sale of common stock


200,000



-



200,000Proceeds from convertible long term loans - related parties


163,583



-



413,745NET CASH PROVIDED BY FINANCING ACTIVITIES


363,583



13,810



613,745NET CHANGE IN CASH


5,272



(108
)


5,432Cash balance, beginning of period


160



186



-Cash balance, end of period

$
5,432


$
78


$
5,432Supplemental Disclosures:Cash paid for interest

$
-


$
-


$
-Cash paid for income taxes

$
-


$
-


$
-Supplemental schedule of non-cash investing and financing activities:Common stock issued in lieu of cash payment for script costs

$
8,250


$
-


$
8,250Conversion of short-term convertible notes into common stock

$
55,268


$
-


$
73,268





See notes to financial statements


6


MASS HYSTERIA ENTERTAINMENT COMPANY, INC.


(Formerly, Michael Lambert, Inc.)


(A Development-Stage Company)





NOTES TO FINANCIAL STATEMENTS


(Unaudited)




NOTE 1 – ORGANIZATION, BUSINESS AND CHANGE IN CONTROL




Mass Hysteria Entertainment Company, Inc. (the “Company” or “MHYS”), formerly 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 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. A total of 50,000,000 shares were issued to, or purchased by, Daniel Grodnik and the affiliated parties representing 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 MHYS was treated as a recapitalization with the assets contributed and liabilities assumed recorded at their historical basis. There were no assets acquired or liabilities assumed by MHYS shareholders after the change in control, which would have been recorded at fair value.  A Control Group member also acquired notes payable, from the predecessors for which the remaining balance acquired of $55,268 (after a note conversion amount of $10,000) was converted into 5,900,000 shares of our common stock in December 2009 as part of the completion of the change in control and recapitalization.




The Company is a development stage company at a time of great change in the entertainment business. Like much of corporate America, the entertainment sector is currently going through an upheaval. The motion picture business has had four significant revenue streams (theatrical, home video, cable and broadcast) since the early 1980's. Today, home video is in decline and new profit centers are opening up such as video-on-demand and internet portals that rely on micro-transactions.  The Company is endeavoring to be a company at the forefront of creating new revenue streams as they relate to the motion picture experience. Over the next twelve months, Mass Hysteria will be creating movies that will take advantage of traditional revenue streams that are still viable, and at the same time, identifying those micro-transactions that will define new media's involvement in the film business such as downloading applications to smart phones that will allow the theater-goer to "participate" with the on-screen experience. We are working with filmmakers who have realized great success such as producer Albert Ruddy (two Academy Awards for best picture, The Godfather and Million Dollar Baby), writer Pat Proft (Police Academy, Hot Shots, Naked Gun, and Scary Movie) and also with executives from the Webisode and social networking sectors. Our plan is to combine these individual entertainment experiences and destinations into an alternative theatrical experience for the youth audience.






NOTE 2 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES




The accompanying unaudited interim financial statements of MHYS have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Form 10-K filed with the SEC.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  Notes to our financial statements which substantially duplicate the disclosures contained in our Annual Report on Form 10-K for the year ended November 30, 2009 have been omitted.





Significant Accounting Policies





Development-Stage Company




On August 5, 2009, the Company entered into the development stage with its intended new business, which currently has no revenues. Management expects to sustain losses from operations until such time it can generate sufficient revenues sufficient to meet its anticipated cost structure. The Company is considered a development-stage company in accordance with Accounting Standards Codification (“ASC”) 915 – “Development Stage Entities,” formerly Statement of Financial Accounting Standards (“SFAS”) No. 7 “Accounting and Reporting by Development Stage Enterprises”. Upon distribution of the Company’s products, it will exit the development stage. The nature of our operations is highly speculative, and there is a consequent risk of loss of your investment.  The success of our plan of operation will depend to a great extent on the operations, financial condition, and management of the identified business opportunity.




7





Discontinued Operations




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




Use of Estimates




The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require the Company's most significant, difficult and subjective judgments include the valuation and recognition of share-based compensation and capitalization of script costs.




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




Fair Value of Financial Instruments




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




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




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




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




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




Film Costs




The Production Company capitalizes film production costs in accordance with Statement of Position ASC 926 – “Entertainment”, formerly ("SOP") 00-2, Accounting by Producers or Distributors of Films. Film costs include costs to develop and produce films, which primarily consist of salaries, equipment and overhead costs, as well as the cost to acquire rights to films. Film costs include amounts for completed films and films still in development.  The Company began capitalizing script costs on March 1, 2010.  Related expenses incurred during the first quarter ended February 28, 2010, totaling $30,750 were reclassified from general and administrative expense to script costs in non-current assets, as this amount was not deemed material enough for a restatement of prior quarter’s financials.  Expenses incurred during the quarter ended May 31, 2010 and capitalized were $32,500.  See Note 8 for additional disclosure.




Loss per Share




Loss per share is computed on the basis of the weighted average number of common shares outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding. There were no significant shares of common stock underlying vested stock options which were excluded from the computation of the weigted average number of shares outstanding because their effects were anti-dilutive, since the exercise price was near or above market during the periods outstanding.




8




NOTE 3 - GOING CONCERN




The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates continuation of the Company as a going concern. The Company is a development-stage company, with limited available capital and no revenues from intended operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon the Company's ability to meet its financing requirements, raise additional capital, and the success of its future operations. There is no assurance that future capital raising plans will be successful in obtaining sufficient funds to assure the eventual profitability of the Company. Management believes that actions planned and presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. The financial statements do not include any adjustments that might result from these uncertainties.




NOTE 4 - RELATED PARTY BORROWINGS




Since July 2009, a related party of the Control Group of the Company has made advances on behalf of the Company and purchased predecessor convertible debt totaling $305,430, as of November 30, 2009.  During the quarter ended February 28, 2010, $55,268 of convertible debt acquired by this related party, as part of the recapitalization and change in ownership, was converted into 5,900,000 shares of common stock for full satisfaction of the liability.  During the quarter ended February 28, 2010, the holder advanced the Company $88,199 in working capital for operations.  Cumulative advances as of February 28, 2010 were established in a convertible note totaling $338,362.  Such note is convertible into 4,229,512 common shares, based on $0.08 share price.  The convertible note bears interest at 6% per annum, and is due February 28, 2015.  During the current quarter ended May 31, 2010, the holder advanced the Company an additional $75,383. Both parties have drafted the terms of the note agreement and such note will be convertible into 1,507,660 common shares based on a fixed conversion price of $0.05, interest at 6% per annum, due May 31, 2015. The notes are to be immediately convertible; no beneficial conversion feature was deemed applicable.




NOTE 5 - COMMITMENTS AND CONTINGENCIES




Employment Agreements




In August 2009, the Company entered into an engagement agreement with successful comedy writer Pat Proft to hire him as the Senior Vice President of Comedy.  His role is to create and write our movies.  Per the terms of his engagement, Mr. Proft received 200,000 shares of our common stock (see Note 6), and an initial monthly salary of $10,000 for a minimum of one year.  During March 2010, a new agreement was negotiated which reflected that Mr. Proft would be paid half of this monthly salary in the form of stock compensation – retroactive from January 2010.  As of the quarter ended May 31, 2010, accrued stock compensation totaling $25,000 was due to Mr. Proft and included in accrued liabilities on the accompanying balance sheet.




On December 17, 2009, the Company entered into an employment agreement with our President and CEO which provides for a base salary of $360,000 per year, payable semi-monthly for a period of five years, expiring December 17, 2014.  Among other things, the employment agreement calls for periodic increases in the base salary and bonuses based upon performance.  The agreement also allows for the Company, at the discretion of the Board of Directors, to provide for medical insurance and a contribution to a retirement benefit plan.  The President and CEO was also awarded options to purchase common stock. See Note 7.




On May 20, 2010, we entered into an agreement with a law firm for legal representation pertaining to general corporate and entertainment matters.  Per this agreement, fees for services performed will be billed at 65 percent of the firm’s normal rates until November 1, 2010; then the fees revert back to normal rates.  The remainder of the firm’s fees are payable in the form of warrants to purchase up to 2.5 percent of the issued and outstanding common stock of the Company (determined on a fully diluted basis).  The exercise price has not yet been determined, but it is expected to be at or above market on the dates of vesting which is over a period of one year.  We will estmate the value of the warrants over the vesting term until such time the exercise price is determined by the parties.  The amount of compensation for the for the last ten days of the quarter is not expected to be material and no significant services were provided by counsel as of May 31, 2010.




9





NOTE 6 – STOCKHOLDERS’ DEFICIT





Capital Stock




The Company has two classes of stock:




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




2.
Common stock, $0.001 par value, 140,000,000 shares authorized, 74,251,077 and 68,530,952 shares issued and outstanding as of May 31, 2010 and November 30, 2009, respectively.




Reorganization and Settlement of Liabilities with Common Stock




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




Issuance of Common Stock Related to Employment Agreements and Services Rendered




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




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




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




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




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




On March 9, 2010, upon Board approval, a revised employment agreement (retroactive to January 1, 2010) was negotiated between the Company and Pat Proft to reflect that half of his monthly $10,000 salary would be paid in the form of stock compensation.  Thus, on the date of the agreement, for the months of January, February and March 2010, $15,000 of accrued wages due Pat would be converted into 166,667 shares of common stock based on the market price on of the Company’s common stock on the preceding day of $0.09 per share.  As of May 31, 2010, accrued wages for shares yet to be issued are $25,000. The liability is included in accrued liabilities in the accompanying balance sheet.




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




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




Sale of Common Stock




On November 30, 2009, the Company sold 1,000,000 shares to an individual pursuant to a subscription agreement at a price of $0.20 per share.  The cash was received on December 1, 2009.  The subscription agreement executed by the Company calls for an adjustment (“Ratchet”) after six months.  If, on that date, the Company’s closing bid price for the immediately preceding trading day is less than $0.20 per share, then the Company is required to issue additional shares of its common stock to the purchaser to offset the purchaser’s total investment. Initially, since the number of shares under the ratchet provision was indeterminate and based on a fixed dollar amount to the market price at the end of six months, management recorded the common stock as a liability in the accompanying balance sheet at November 30, 2009. Upon the adjustment date of May 31, 2010, the additional amount of shares required to be issued were determinable and thus were reclassified from liability to equity as the adjustment provision expired.  Based on a closing common stock price of $0.05 on the next business day, the Company is committed to issuing an additional 3,000,000 shares of common stock to the individual.




10






NOTE 7 – EMPLOYEE STOCK OPTIONS




In addition to his annual salary, the President and CEO’s Employment Agreement grants employee stock options to purchase common stock in an amount equal to 20,000,000 shares at an exercise price of $0.07 per share.  The options shall vest equally over a five-year period (4,000,000 shares per year), commencing on January 1, 2010.  Each series of options shall survive for 24 months following vesting, and may be exercised all or in part, and each series of options shall include a “cashless feature.”




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




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




Expected volatility


238
%Dividend yield


0
%Expected option life (years)


6.5Risk-free interest rate


2.24
%Market price of option

$
0.06





Under ASC 718, stock compensation expense of $1,200,000 will be recognized and expensed quarterly, beginning with the first quarter of the Company's 2010 fiscal year and equally over the five-year vesting period until the options are vested in their entirety in December 2014.  Through May 31, 2010, stock compensation of $108,667 of this had been recorded as expense.  Future compensation expense is $240,000, annually.




NOTE 8 – FILM PRODUCTION COSTS




The Company capitalizes film production costs in accordance with Statement of Position ASC 926 – “Entertainment”, formerly ("SOP") 00-2, Accounting by Producers or Distributors of Films. Film costs include costs to develop and produce films, which primarily consist of salaries, equipment and overhead costs, as well as the cost to acquire rights to films. Film costs include amounts for completed films and films still in development.   The Company began capitalizing script costs on March 1, 2010.  Related expenses incurred during the first quarter ended February 28, 2010, totaling $30,750 were adjusted from general and administrative expense to script costs in non-current assets.  This included $8,250 in previously recognized stock-based compensation.  This amount was not deemed material enough for a restatement of prior quarter’s financials and will have no further effect on the 2010 fiscal year.  Management believes this revised treatment was appropriate based on the time and effort put into the scripts, and the financial effect it had on the financial statements taken as a whole.  The effect of this correction is a reduction of $30,750 in loss from continuing operations and net loss for the three months ended February 28, 2010. There is no significant effect on earnings per share due to the change.  Costs incurred during the quarter ended May 31, 2010 and capitalized were $32,500.




NOTE 9 - DISCONTINUED OPERATIONS




The Company’s decision to discontinue the operations of its handbag business coincided with the Control Change which occurred at the beginning of June 2009.  As a result, all financial data pertaining directly to the operations relative to the handbag business was collapsed with the net amount reported separately from the continuing operations.  This collapsing effect was used to restate the financials for all periods presented.  For the three and six months ended May 31, 2010 and 2009 and the period from Inception to May 31, 2010, losses from discontinued operations were $0, $10,009, $0, $307,582 and $0, respectively.




NOTE 10 - SUBSEQUENT EVENTS




Our subsequent events review was performed through the date of filing these financial statements.  There are no subsequent events to disclose as a result of our review.


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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS




CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q"), CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF MICHAEL LAMBERT, INC. ("THE COMPANY", "MLI", "WE", "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO MAY 31, 2010.




DESCRIPTION OF BUSINESS




History




Michael Lambert, Inc. was incorporated in Nevada on November 2, 2005.  Up until August 5, 2009, the Company manufactured handbags.  We produced only 613 handbags from inception to May 31, 2009 and no other clothing accessories.  We only sold our products under the brand “Michael Lambert” and sold our products at two independently owned clothing stores in the San Antonio, Texas area.   We manufactured the handbags, which were hand-sewn by a third party, Fuerza Unida, a sewing cooperative in San Antonio, Texas consisting of minority women.




On August 5, 2009 (the "Effective Date"), pursuant to the terms of a Stock Purchase Agreement, Daniel Grodnik and affiliated parties purchased a total of 7,984,548 shares of our issued and outstanding common stock. This constituted a majority control of the Company.  In addition to the shares purchased, the Company also issued 42,015,452 shares to Daniel Grodnik and certain affiliated parties in connection with the Change of Control.  The total of 50,000,000 shares issued to Daniel Grodnik and the affiliated parties represents 74.6% of the shares of outstanding common stock of the Company at the time of transfer.




In connection with the Change of Control, the Company has changed our name to Mass Hysteria Entertainment Company, Inc. and also changed our business plan.  Mass Hysteria Entertainment Company, Inc. (“MHYS”) is an innovative motion picture studio that produces branded young adult film content for theatrical, DVD, and television distribution managed by the former Chairman/CEO of National Lampoon, Inc. MHYS’s plan is to produce a minimum of three theatrical films a year that appeal specifically to the youth market.




Plan of Operations For The Next Twelve Months




Mass Hysteria Entertainment is a development stage company at a time of great change in the entertainment business. Like much of corporate America, the entertainment sector is currently going through an upheaval. The motion picture business has had four significant revenue streams (theatrical, home video, cable and broadcast) since the early 1980's. Today, home video is in decline and new profit centers are opening up such as video-on-demand and internet portals that rely on micro-transactions.  Mass Hysteria Entertainment is endeavoring to be a company at the forefront of creating new revenue streams as they relate to the motion picture experience. Over the next twelve months, Mass Hysteria will be creating movies that will take advantage of traditional revenue streams that are still viable, and at the same time, identifying those micro-transactions 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. Mass Hysteria is working with filmmakers who have realized great success such as producer Albert Ruddy (two Academy Awards for best picture, The Godfather and Million Dollar Baby), writer Pat Proft (Police Academy, Hot Shots, Naked Gun, and Scary Movie) and also with executives from the Webisode and social networking sectors. Mass Hysteria Entertainment's plan is to combine these individual entertainment experiences and destinations into an alternative theatrical experience for the youth audience.




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COMPARISON OF OPERATING RESULTS




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




We did not have any sales revenues or related costs of sales for the three month periods ended May 31, 2010, or May 31, 2009, other than those related to the discontinued operations (handbag company).  We recognized $0 net loss from discontinued operations during the three months ended May 31, 2010 vs. $10,009 in net losses from discontinued operations during the three months ended May 31, 2009.  The lack of sales in current period is a direct reflection of the change of control and introducing a new focus and business plan.  As the new Company meets its business plan goals, we expect to generate revenue in the future.




For the three months ended May 31, 2010, we had general and administrative expenses of $215,485, selling expenses of $0, and interest expense of $5,611.  For the three months ended May 31, 2009, all expenses incurred were for the handbag business which has since been discontinued. The general and administrative, selling and interest expenses were a result of expenses incurred relative to the change in control and overall business focus to the film and entertainment industry.




We had a net loss from continuing operations of $221,096, and a net loss from discontinued operations of $0 for the three months ended May 31, 2010, compared to a net loss from continuing operations of $0, and discontinued operations of $10,009 for the three months ended May 31, 2009.  The increase in net loss from continuing operations was mainly attributable to the expenses incurred for the new business focus.






Results of Operation for the Six months Ended May 31, 2010 Compared to the Six months Ended May 31, 2009




We did not have any sales revenues or related costs of sales for the six month periods ended May 31, 2010, or May 31, 2009, other than those related to the discontinued operations (handbag company).  We recognized $0 net loss from discontinued operations during the six months ended May 31, 2010 vs. $307,582 in net losses from discontinued operations during the six months ended May 31, 2009.  The lack of sales in current period is a direct reflection of the change of control and introducing a new focus and business plan.  As the new Company meets its business plan goals, we expect to generate revenue in the future.




For the six months ended May 31, 2010, we had general and administrative expenses of $501,838, selling expenses of $2,084, and interest expense of $10,246.  For the six months ended May 31, 2009, all expenses incurred were for the handbag business which has since been discontinued. The general and administrative, selling and interest expenses were a result of expenses incurred relative to the change in control and overall business focus to the film and entertainment industry.




We had a net loss from continuing operations of $514,168, and a net loss from discontinued operations of $0 for the six months ended May 31, 2010, compared to a net loss from continuing operations of $0, and discontinued operations of $307,582 for the six months ended May 31, 2009.  The increase in net loss from continuing operations was mainly attributable to the $501,838 in general and administrative expenses incurred for the new business focus.






Liquidity and Capital Resources




We had total assets of $87,995 as of May 31, 2010, including cash on hand of $5,432; $16,525 of prepaid rent, a security deposit, and two legal retainers; $2,788 of intangible assets (website); and $63,250 in film production costs which are being capitalized.




We had total liabilities of $473,489 as of May 31, 2010, consisting of current liabilities, which included $1,521 of accounts payable; and $58,223 of accrued liabilities. Included in the accrued liabilities is approximately $14,000 of accrued interest to a related party as it relates to our long-term convertible debt of $413,745.




We had negative working capital of $54,312, a total shareholders’ deficit of $385,494 as of May 31, 2010 and an accumulated deficit as of May 31, 2010 of $5,481,826.




We had $328,311 in net cash used in operating activities for the six months ended May 31, 2010, which included $514,168 in net loss, offset by $174,467 in shares issued for services; and a $27,603 increase in accrued liabilities.




We had $363,583 of net cash provided by financing activities for the six months ended May 31, 2010, which included $163,583 in proceeds from loans payable to related party and $200,000 for sale of common stock.




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We depend to a great degree on the ability to attract external financing in order to conduct our business activities and in order that we have sufficient cash on hand to expand our operations.  We are currently funded solely by our shareholders.  We anticipate that our founders and shareholders will continue to support our operations and loan us additional funds on an as needed basis until such time as we can support our operations with revenues from our products, if ever.




If we are unable to raise additional capital from conventional sources, including increases in the related party note payable or additional sales of additional stock, we may be forced to curtail or cease our operations. Even if we are able to continue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results.




In the future, we may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when it approaches a condition of cash insufficiency. The sale of additional equity securities, if accomplished, may result in dilution to our shareholders. We cannot assure you, however, that financing will be available in amounts or on terms acceptable to us, or at all.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




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




ITEM 4. CONTROLS AND PROCEDURES




(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"), have concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. They were deemed not effective due to adjustment and disclosure omissions identified by our Independent Registered Public Accounting firm. The Company will continue to take steps to identify matters of accounting and disclosure.




(b)   Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




INHERENT LIMITATIONS OF INTERNAL CONTROLS




Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:




-
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;




-
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with the U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and




-
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.




Management does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.




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PART II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS




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




ITEM 1A. RISK FACTORS




Not required for smaller reporting companies.




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




On November 30, 2009, the Company sold 1,000,000 shares to an individual pursuant to a subscription agreement at a price of $0.20 per share.  The cash was received on December 1, 2009. 
 In December 2009, the Company issued 152,000 shares to four individuals for consulting and Board of Director services to be rendered to the Company.  These shares were expensed to share-based compensation for $15,200, based on a closing stock price per share of $0.10 on the date of issuance. As of May 31, 2010, as a result of the “Ratchet” clause contained within the subscription agreement, the Company is committed to issuing an additional 3,000,000 shares of common stock to the individual. (See Note 6 for additional information related to this transaction.)




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




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




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




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, for the months of January, February and March 2010, $15,000 accrued wages due Pat would be converted to 166,667 shares of common stock based on the current market price on that day of $0.09 per share.




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




On May 27, 2010, upon Board approval, the Company issued 78,125 shares to an individual for accounting and advisory services rendered to the Company.  These shares were fully vested and expensed by the Company at $2,500 based on a price per share of $0.032 on the date of issuance.




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






ITEM 3. DEFAULTS UPON SENIOR SECURITIES.




None.




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




None.




ITEM 5. OTHER INFORMATION




None.




ITEM 6.  EXHIBITS




(a)   Exhibits




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




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




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SIGNATURES




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




MASS HYSTERIA ENTERTAINMENT COMPANY, INC.DATED: July 15, 2010
By: /s/ Daniel GrodnikDaniel Grodnik

Chief Executive Officer and Principal Accounting Officer