$PMCM Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCERTAIN 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-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 DECEMBER 31, 2014.

Since our incorporation on October 14, 2010, in Delaware, we have been a development stage company. We began by offering a general array of real estate management services, which continued until January 31, 2013. We then redirected our real estate focus to seeking out properties which had obtained the necessary building permits but which needed finance to start construction. In addition, as of January 31, 2013 with our acquisition of ESMG Inc. we added an entertainment related business segment. Our performance can be significantly affected by changes in general economic conditions and, specifically, shifts in consumer confidence and spending. Additionally, our performance can be affected by competition. Management believes that, as both industries continue to consolidate, competition with respect to pricing will intensify. Such a heightened competitive pricing environment will make it increasingly important for us to successfully distinguish ourselves from competitors based on quality and superior service and content and on our operating efficiency. We are currently not aware of any other known material trends, demands, commitments, events or uncertainties that will have, or are reasonable likely to have, a material impact on our financial condition, operating performance, revenues and/or income, or results in our liquidity decreasing or increasing in any material way.

The Company was incorporated on October 14, 2010, under the laws of the State of Delaware. The Company is a real estate management and property development company and, through its wholly-owned subsidiaries, Top Sail Productions, LLC and ESMG, Inc., produces and distributes recorded music and intends to co-produce for distribution lower-budget motion pictures.

In February, 2014 the Company expanded its operations to include the leasing and property management of facilities for the legal cultivation of medical cannabis, and the acquisition of and/or entering into joint ventures with third parties involving the planning, staffing, management and operation of legalized medical marijuana dispensing and cultivation.

Going Concern

Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our current and future liabilities when they become due until such time, if ever, that we are able to generate sufficient revenues to attain profitable operations. We have experienced losses and negative cash flows from operations since inception and, at December 31, 2014, we had a working capital deficit of $9,779,354 and an accumulated deficit of $12,761,821. The report of our independent registered public accounting firm on our financial statements for fiscal 2014 and 2013 contained an explanatory paragraph regarding our ability to continue as a going concern. There can be no assurance that acceptable financing to fund our ongoing operations can be obtained on suitable terms, if at all. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. In that event, we may be forced to cease operations and our stockholders could lose their entire investment in our company.

Results of operations for the years ended December 31, 2014 and 2013

For the year ended December 31, 2014, we generated gross revenues of $103,403 compared with revenues of $72,116 for the year ended December 31, 2013, which was an increase of $31,287. In the years ended in December 31, 2014 and 2013, the Company earned the majority of its revenues through its subsidiary Top Sail Production, LLC’s music rights.

Our operating expenses for the year ended December 31, 2014, were $1,317,381, compared to $934,905 for the year ended December 31, 2013, which was an increase of $336,699.

For the year ended December 31, 2014, we had consulting fees of $466,345, compared to $239,500 for the year ended December 31, 2013, which was an increase of $226,845. The increase was due to additional consultants needed to facilitate our planned marijuana operations. We also paid consultants to manage our music distribution operations. Currently, we have 7 consultants who work regularly with the Company. They are all engaged on a month-to-month basis and provide various consulting services ranging from, but not limited to, bookkeeping, promotions and marketing, sales and distribution, general management of ESMG, Inc., social media and real estate development.

For the year ended December 31, 2014, we had general and administrative expenses of $292,002, compared to $277,333 for the year ended December 31, 2013, which was an increase of $14,669. The increase was minimal as the Company’s general and administrative costs stay fairly consistent. They include employee payroll expense, rent, marketing, meals and entertainment, travel, supplies and other operating costs.

For the year ended December 31, 2014, we had wages and officer compensation of $366,268, compared to $374,212 for the year ended December 31, 2013, which was a decrease of $7,944. The decrease was due to our CFO resigning in February 2014. Our President and CEO, David Michery, has an employment agreement with the Company, which is detailed in Note 13 in our footnotes to our financial statements.

For the year ended December 31, 2014, we had professional fees of $192,766 compared to $43,860 for the year ended December 31, 2013, which was an increase of $148,906. The increase was due to additional professional fees needed to execute our planned marijuana operations as well as to execute our convertible notes payable.

For the year ended December 31, 2014, we incurred non-operating expenses totaling $7,666,969 compared to $2,779,401 for the year ended December 31, 2013, which was an increase of $5,065,499.

For the year ended December 31, 2014, we had interest expense of $145,519 compared to $177,931 for the year ended December 31, 2013, which was a decrease of $32,412. The decrease was due to reduced outstanding notes payable balances throughout fiscal 2014.

For the year ended December 31, 2014, we had derivative interest expense of $7,666,969 compared to $2,601,470 for the year ended December 31, 2013, which was an increase of $5,065,499. The increase was due to additional derivative liability being recorded in the year ended December 31, 2014. We calculate our derivative liability using the Black Scholes Model which takes into account variable features in our outstanding convertible debt as well as our ever changing stock price. Our stock price decreased dramatically in the year ended December 31, 2014, which was the major factor in the increased Black Scholes Model calculations of derivative liability.

Liquidity and Capital Resources

Our cash resources totaled $196,993 at December 31, 2014, compared to $64,771 as of December 31, 2013. We have a working capital deficit of $9,786,854 at December 31, 2014. Our working capital deficit is mainly due to the outstanding derivative liability of $7,811,895. Without factoring in the derivative liability, we have a working capital deficit of $1,975,486. We believe we will need an infusion of capital from third-party sources as our operations are not profitable.

In the year ended December 31, 2014, we had net cash used in operating activities of $1,472,141, compared to $1,478,481 in the year ended December 31, 2013.

In the year ended December 31, 2014, we had net cash used in investing activities of $32,500, which consisted of a $12,500 investment in Seattle Green Care and $20,000 in Suzie Q’s NPO. In the year ended December 31, 2013, we had net cash used in investing activities of $9,412, which consisted of purchased of furniture and equipment.

In the year ended December 31, 2014, we had net cash used in financing activities of $1,636,863, which consisted of $1,262,500 of proceeds from convertible notes payable and $374,363 in proceeds from the issuance of our stock. In the year ended December 31, 2013, we had net cash used in financing activities of $1,552,664, which was entirely from proceeds from convertible notes payable.

We have had no off balance sheet arrangements since inception through December 31, 2013.

The Company has not generated sufficient revenue from its operations and needs to raise capital to meet the operating requirements over the next twelve months. The Company’s financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. The report from the Company’s independent registered public accounting firm states that there is substantial doubt about the Company’s ability to continue as a going concern.

Plan of Operation for the Next 12 Months

To help improve our current limited financial position, we plan to carefully seek out and secure third-party equity financing, both short-term and long-term, to both replace our current convertible debt financing and to provide a new and more stable source of capital. Our convertible debt financing to date has been expensive and highly dilutive and detrimental to our stock and needs to be replaced with less costly equity investment.

We intend to more carefully review investment in any future music artist so that we can more effectively manage our risk and downside. We view investment in a well packaged, well cast lower budget motion picture to be preferable than and investment in a higher risk one-off/unproven music artist.

We have redirected our real estate focus to acquiring properties specifically for lease to legalized medical marijuana cultivation growers and to investment, potentially with joint ventures, in business associated with the legalized growing of medical marijuana.

We also intend to include potential strategic business partners and alliances as possible sources of financing, as well as traditional institutional and venture capital sources.