Note 6 - Debt: Short-term Debt (Policies)

6 Months Ended

May. 31, 2015

Short-Term Debt

(A)

Related Parties

On August 31, 2012, the Company’s former Chief Financial Officer made an interest free demand advance of $30,000 to provide working capital, which remains outstanding at May 31, 2015. The Note was recorded at its estimated fair value of $27,778 at the acquisition date, and imputed interest was being accreted to non-cash interest expense to the maturity date, using an 8% interest rate. No demand for payment has been made and the note remains unpaid.

On July 13, 2010, March 22, 2012 and October 25, 2012, the Company borrowed $60,000, $50,000 and $10,000, respectively, from a shareholder for use as operating capital. On September 12, 2012, the Company, the shareholder and an external party entered into an Assignment Agreement whereby the external party agreed to assume $30,000 of the $60,000 July 13, 2010 debt in exchange for a 8% convertible note maturing October 24, 2013 (see Short-term Convertible Debt with Ratchet Provisions noted below). The due date on the remaining balance of $30,000 of the $60,000 advance was extended to December 31, 2013 and bears interest at the rate of 15% per annum; the due date of the $50,000 advance was March 7, 2013 and it bears interest at the rates of 15% per annum through March 7, 2013 and 18% per annum interest thereafter if the repayment date is extended; and the $10,000 advance is payable on demand at an interest rate of 15% per annum.

During the six months ended May 31, 2015, the Company incurred and accrued $6,816 in interest expense, respectively, related to this short-term debt. As of May 31, 2015, the Company has accrued a total of $60,416 of interest expense related to these notes.

(B)

Film Finance Agreements

On May 11, 2012, the Company entered into an agreement with Coral Ridge Capital Partners, LLC (“CRCP”) under which CRCP agreed to provide $300,000 in equity financing towards the production of the motion picture currently entitled “End of the Gun” (the "Picture"). The initial $100,000 under this agreement was paid on June 12, 2012. While it was the Company’s intent to commence filming of the Picture by September 1, 2012, certain casting delays postponed the commencement date. On January 25, 2013 the Company received a written notice of termination of agreement from CRCP. The termination was detrimental to the funding process. Accordingly, the Company has included the $100,000 advance within short-term debt and has accrued interest payable of $35,441 through May 31, 2015. Subsequently, the Company hired a new director, made new distribution deals for North America and international and hired Steven Seagal to star. The picture is currently in pre- production at the Castel Studios in Romania and has a start date of late August 2015. The Company is proceeding to arbitration regarding any amounts due and the arbitration proceeding originally scheduled for August 2014, has been rescheduled for late summer 2105. Through May 31, 2015, we have incurred cumulative expenses, both directly and indirectly, in excess of the initial funding in connection with the Picture, which have been recorded previously within operating expenses. As of May 31, 2015, $100,000 in principal and $35,441 interest remain outstanding.

In October, 2014, the Company entered into a film finance agreement under which a lender loaned the Company $505,000 for co-production of the film “Daughter of God”. The promissory note was in the original principal amount of $505,000, including a $5,000 legal fee to the lender’s legal counsel, and is due July 30, 2015 with interest at 8 percent per year due at maturity. The Note is convertible after 180 days at the lender’s election into shares of the Company’s common stock at a price equal to 50 percent of the average of the three lowest trading prices for the stock during the 30 day trading period prior to any conversion, with a limit of 4.99% of the total outstanding shares of common stock held by the lender at the time of any conversion.

In addition, the lender was granted a warrant to purchase up to 1,262,500,000 shares of common stock at a conversion price of $0.0003 per share for a period of five years, subject to appropriate adjustment for certain capital changes. As of May 31, 2015, the remaining principal balance and interest is $531,786.

With the funds from the above note, the Company invested in the film, "Daughter of God” which is included as a cost investment within other assets in the accompanying balance sheet. For this investment, our financiers are to receive their money back plus 20% interest prior to any profits, if any, being distributed. We will receive 6.65% of the profits thereafter from the film and the funding source, operating as Remark Pictures; will receive 6.65% of the profits.

In January 9, 2015, the Company entered into an agreement to provide $45,000 towards production of the motion picture entitled “Devil In Pew Number Seven” (the Picture). Funds were received and $14,685 have been expensed for script costs. The balance as of May 31, 2015 on the debt is $30,315.

Mass Hysteria Entertainment Company, Inc. 10-Q