ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of August 31, 2007 and the results of its operations and cash flows for the three months ended August 31, 2007 and 2006 have been made. Operating results for the three months ended August 31, 2007 are not necessarily indicative of the results that may be expected for the year ended May 31, 2008.
These condensed financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Form 10-KSB for the year ended May 31, 2007.
Fuego Entertainment, Inc. (the “Company”,”Fuego”.”we”,”our” or “us”) was formed on December 30, 2004 as a Florida corporation and is primarily engaged in the directing, production, marketing, and distribution of entertainment products, including feature and short films, documentaries, television shows, music, and tour productions. We also provide management, marketing, and public relations services to the entertainment industry. During the three months ended August 31, 2007 the majority of revenues were earned from the sale of musical tracks.
3. | SIGNIFICANT ACCOUNTING POLICIES |
GOING CONCERN
The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has an accumulated deficit, continued losses and a working capital deficit. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
Our financial position is of great concern to us and our investors, however, management's plan is to obtain additional capital and to develop, market and distribute musical tracks, and to pursue the multi-media releases of a popular film produced in Cuba. Additionally, since launching FEMI, we expanded our music and video catalog, by signing new artists, and acquiring music masters containing over 890 music tracks. We have also expanded our marketing and distribution capabilities and enhanced sales in the process. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
4. | RELATED PARTY TRANSACTIONS |
| | · | Ciocan is an entertainment company owned by our President/CEO, that creates products for the Latino Market worldwide and anticipates using us to market, promote and commercialize some of its products (music, films, documentaries, artist, etc) for the Anglo and international markets. During the three months ended August 31, 2007, Ciocan did not advance any funds leaving a balance owing as of August 31, 2007, of $24,800, and accrued interest of $3,249. In addition Ciocan was owed a total of $40,798 for music royalties earned during the current three months ended. |
FUEGO ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
4. | RELATED PARTY TRANSACTIONS - continued |
| | · | Our President/CEO is owed $268,840 as of August 31, 2007 for cash advances to the company for a variety of general and administrative expenses and the development of TV station programming. During the current quarter he advanced $32,911 and was repaid $3,164. No interest was paid on this date which accrues at 15 percent per annum and is payable on June 1, 2008. Accrued interest totaled $25,181 as of August 31, 2007. |
The following is an analysis of income taxes .
The provision for current income taxes is as follows:
| | | For the three months ended August 31, 2007 | | | For the three months ended August 31, 2006 | |
| | | | | | | |
| Current tax expense (benefit): | | | | | | |
| Federal tax at 34% statutory rate | | $ | (41,354 | ) | | $ | (48,267 | ) |
| Benefit of surtax exemptions | | | -0- | | | | 25,296 | |
| Valuation allowance | | | 34,525 | | | | (98 | ) |
| Permanent differences | | | 6,829 | | | | 3,643 | |
| Income tax expense | | $ | -0- | | | $ | (19,426 | ) |
The analysis of income tax expense is as follows:
| | | For the three months ended August 31, 2007 | | | For the three months ended August 31, 2006 | |
| | | | | | | |
| Current | | $ | -0- | | | $ | (19,426 | ) |
| Deferred | | | - 0- | | | | -0- | |
| Income tax expense | | $ | -0- | | | $ | (19,426 | ) |
A deferred tax asset was recognized of $34,525 for the $31,028 of net operating loss carry forward which expires in 2028 if unused, and $3,497 of temporary timing differences during the three months ended August 31, 2007. A valuation allowance for $34,525 was recorded as of August 31, 2007, as the Company believes it is more likely than not that this future tax benefit of this deferred tax asset will not be realized at this time.
FUEGO ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
5. | INCOME TAXES - continued |
The following is an analysis of the change in the deferred tax asset:
| | | For the three months ended August 31, 2007 | | | For the three months ended August 31, 2006 | |
| Deferred tax asset, beginning of year | | $ | -0- | | | $ | -0- | |
| | | | | | | | | |
| Net operating loss carryforward | | | 31,028 | | | | | |
| | | | | | | | | |
| Allowance for doubtful accounts | | | -0- | | | | -0- | |
| | | | | | | | | |
| Interest Expense related party | | | 3,667 | | | | -0- | |
| | | | | | | | | |
| Depreciation | | | (170 | ) | | | (98 | ) |
| | | | | | | | | |
| State income taxes | | | -0- | | | | -0- | |
| | | | | | | | | |
| Valuation allowance | | | (34,525 | ) | | | 98 | |
| | | | | | | | | |
| Deferred tax asset, end of year | | $ | -0- | | | $ | -0- | |
For the three months ended August 31, 2007, the President contributed a total of $20,675 consisting of $13,500 for the value of services, $2,375 for the prorata share of auto expenses, and $4,800 for the rent of corporate office facilities.
On May 9, 2007, we entered into a contract with Var Growth Corporation (D.B.A. Ice Cold Stocks) and issued 875,000 shares of restricted common stock at $.15 in exchange for consulting services to be performed over a 12 month period from the date of the contract. For the three months ended August 31, 2007, $50,312 of this cost was expensed. The remaining balance is treated as a deferred charge, a contra equity account, as all of the shares were issued for services but not yet fully rendered.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion is intended to provide an analysis of the Company’s financial condition and Plan of Operation and should be read in conjunction with the Company’s financial statements and the notes thereto set forth herein. The matters discussed in this section that are not historical or current facts deal with potential future circumstances and developments. The Company’s actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below.
Plan of Operation
We have been in operation for thirty-two months as of August 31, 2007. Our efforts during that period have largely been to generate cash flows from operations and cash flow from the sales of our common shares. The majority of these cash flows were applied towards, production costs, and the investment in a series of shows, including Havana Nights.
Since inception, we have sold music CD’s representing the majority of our music revenue. In the prior fiscal year we created a music business segment named Fuego Entertainment Music International (FEMI) the purpose of which is to sell our music content under this name.
Since launching FEMI, we expanded our music and video catalog, by signing new artists, and acquiring music masters containing over 890 music tracks. We have also expanded our marketing and distribution capabilities and enhanced sales in the process. We executed an agreement with Digital Music Group, Inc, one of the leaders in the digital distribution of entertainment product, we also executed an agreement with UK digital distributor Vidzone. Fuego will soon launch it new website that will include music, video and television content downloads. Most recently we executed a publishing agreement with Ediciones Musicales Clippers. On March 1, 2007 we retained the services of Adolfo Fernandez, a prestigious publicist from F&F Media Group. Mr. Fernandez's firm represents companies such as WEA Music, Sony BMG, Televisa Group, Univision Music Group, EMI US Latin, EMI Music Colombia, Venemusic, Fonosound, Grupo Origin, Warner Music Latina, and others. Mr. Fernandez has worked with many artists such as Andrea Bocelli, Ricky Martin, Alejandro Sanz, Mark Anthony, Shakira, Gilberto Santarosa, Jennifer Lopez, and others.
Secondly, we have focused on the creation and development of our four filming projects. Three of the four projects are documentaries titled One Million Millionaires, Gold in Ecuador and Counterfeit Conspiracy. The fourth project is a reality television series titled The Trader. Our four filming projects, all in the development stage, cost $95,941 as of August 31, 2007. The work in progress includes script development, principal photography, sound engineering, personnel, such as a cameraman, producer and assistant producer, location permits, filming insurance, equipment rental travel and hotel accommodations and crew meals. No general and administrative costs were capitalized. Lastly, we initially incurred stock registration costs of $63,382, consisting largely of professional fees, to enable us to pursue a registration statement on Form SB-2 with the Securities and Exchange Commission.
Operating expenses for the three months ended August 31, 2007 were principally for selling, general and administrative expenses, the major components of which was stock based compensation costs of $120,312, development costs of $97,146, and audit and accounting fees of $74,162.
We do not anticipate incurring more than $10,000 in additional costs with respect to our four filming projects prior to their completion. In general, our filming projects are in final stages of development. We have no plans to engage in any more in house productions until we have completed the four current projects that we have undertaken to complete, thereby reducing the possibility of incurring further significant costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. - continued
Until our in process production filming projects are completed, we believe we can sustain our cash flows through sales of our music, television and film content, publishing revenues and work for hire such as the sale of corporate videos, from consulting services, and from the sale of our common stock should our expected cash flows in the next 12 months require it. However, there is no guarantee that our cash flow requirements will exceed the amount of funds received from the sale of securities or the cash flow generated from our current operation activities.
Our minimum expected cash flows to continue our current level of operations during the next 12 months is approximately $225,000, however up to $450,000 would be needed to pursue our goals during that period. These additional funds would be needed to license products from other parties and properly market, promote and distribute them, including our own projects presently in process. To date our revenues have been largely generated from sales of our music content. If the additional $225,000 is not raised, we may be unable to continue operations.
We recently entered into a 10-year licensing agreement with Ciocan for their music library catalogue. This library consists of 33 finished albums (over 300 tracks) by 8 different artists who are exclusively recording with Ciocan for the release of other future projects. Ciocan has marketed the catalogue to the Latin market, but we plan to penetrate the non-Hispanic markets and develop the current marketing efforts within the Latin base. We plan to develop live productions for artists we intend to sign. The agreement to license Ciocan's music requires us to pay a royalty of 25% of the net sales proceeds quarterly from sales.
The President and CEO of the Company own 100% of the rights to a popular film he owns and produced in Cuba called Zafiros Lucura Azul (Sapphire Blue Maddness). This film has never been distributed or commercialized. We acquired from Mr. Hugo Cancio the right to market, promote, and distribute the film in all formats: Theatrical release, Television, cable, DVD. This is part of a 10 year licensing agreement in which Fuego Entertainment will keep 75% of the net revenues generated. There was no payment of any kind involved in the transaction. We will account for all sales and costs on a gross basis for the above agreements in accordance with the criteria set forth in Emerging Issues Task Force Abstract Issue No. 99-19, since we will be responsible for all production and distribution costs and expenses, and have full discretion in selecting suppliers and product specifications. If there are no net proceeds after one year, all rights revert to the producer.
Additional sources of income may include projects where we will also act as an agent and contract organization for certain entertainment projects that are fully developed by others. These services may include marketing, distribution, principal photography, development, pre- and post-production, introductory services, and many others that are within our realm of expertise. To date, we currently do not have any agreements or projects whereby we act as an agent.
For the past twelve months, we have continued to generate revenues by engaging in work for hire projects and though the sales of our music CD’s. Although we continued to work on our television projects, our main focus was shifted to our music business divisions FEMI and FPG.
Fuego executed a letter of intent with Tota Productions, a music and video production company located in Torino, Italy, that produces Spanish Hip Hop and Pop artists from Europe. Upon completion of this arrangement we will obtain the ownership of over 300 CD masters and supporting data with which to market the library. Subsequent to May 31, 2007, we did in-fact acquire ownership of over 300 CD masters and supporting data.
We have generated revenues from sales of our music, television and film content, publishing revenues and work for hire such as the production of corporate videos and consulting services. It is our intention to continue offering these services as they incur no material costs or expenses by the Company, as they are mostly borne by the clients. Our efforts are provided by Mr. Cancio whose compensation has been and will continue to be contributed to the Company until we reach profitable ongoing operations. We have also generated revenues by providing consulting services to companies that are in need of reaching the US Hispanic/ Latino Markets with their products or services. Consulting services do not incur material costs or expenses since such services are provided solely by Mr. Cancio. We will continue seeking these consulting activities in order to generate revenues.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. - continued
Results of Operations for the three months ended August 31, 2007, Compared to three months ended August 31, 2006
Revenues and Cost of Filming
The Company's prior major revenue source, the filming of corporate videos, decreased $ 30,550 compared to the prior year’s quarter , but was curtailed in the current year for the reasons previously mentioned. Music revenue also decreased by $10,618. Related costs of filming, as a percentage of revenue, was 14% for both and would be much higher if the costs and associated with the President/CEO's efforts in producing all of these films were included.
Operating Expenses
Radio/T.V. Development expenses decreased by $50,310 and stock based compensation decreased by $75,258. The Company’s consulting expense increased by 53,312 when compared to the prior year’s quarter because on May 9, 2007, we entered into a contract with Var Growth Corporation (D.B.A. Ice Cold Stocks) and issued 875,000 shares of restricted common stock at $.15 in exchange for consulting services to be performed over a 12 month period from the date of the contract. For the three months ended August 31, 2007, $50,312 of this cost was expensed. The remaining balance is treated as a deferred charge, a contra equity account, as all of the shares were issued for services but not yet fully rendered. The Company’s interest expense increased $10,820 because of an increase in the amount owed to our President/CEO and his related company Ciocan. Other selling, general and administrative expenses of the current year were in line with the level of expenses incurred in the previousyear’s quarter.
Income Tax Benefit
The current quarter reports no income tax expense or benefit. However the prior year’s quarter reflected a $19,426 income tax benefit as a result of carrying back net operating losses to periods when the Company had taxable income sufficient to generate that recovery.
Liquidity and Capital Resources
The Company has a deficit in working capital at the end of the quarter, is delinquent in the payment of its federal and state income taxes , and is past due on the majority of its accounts payable. It has no line of credit or other outside financing sources presently to enable it to finance exist operations, and is dependent on its music sales and the private placement of its common stock for current cash flows. Accordingly, it is presently seeking financing to continue in existence. The Company is dependent solely on its President/CEO for all revenue generating and cash flow opportunities.
Material Commitments
We have no material commitments as at the date of this registration statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. - continued
Purchase of Significant Equipment
We do not intend to purchase any significant equipment during the next twelve (12) months.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R, Share Based Payments. SFAS 123R is applicable to transactions in which an entity exchanges its equity instruments for goods and services. It focuses primarily on transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R supersedes the intrinsic value method prescribed by APB No. 25, requiring that the fair value of such equity instruments be recorded as an expense as services are performed. Prior to SFAS 123R, only certain pro forma disclosures of accounting for these transactions at fair value were required. SFAS 123R will be effective for the first quarter 2006 financial statements, and permits varying transition methods including retroactive adjustment of prior periods or prospective application beginning in 2006. The Company adopted SFAS 123R using the modified prospective method effective January 1, 2006. Under this transition method the Company will begin recording stock option expense prospectively, beginning with that date.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act of 1934 are recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Principal Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Within the 90 days prior to the filing date of this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the participation of our Principal Executive Officer/Principal Accounting Officer. Based upon that evaluation, we have concluded that our disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Exchange Act.
Changes in Internal Controls
There were no significant changes in our internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certificate of Principal Executive Officer
31.2 Certificate of Principal Accounting Officer
32.1 Certification Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8K filed with the SEC July 3, 2007
Form 8K filed with the SEC October 9, 2007
Form 8K filed with the SEC October 10, 2007
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FUEGO ENTERTAINMENT, INC.
(Registrant)
| | | |
| | |
| Date: November 13, 2007 | By: | /s/ Hugo M. Cancio |
| | Hugo M. Cancio |
| | Title: Principal Executive Officer |
| | | |
| | |
| Date: November 13, 2007 | By: | /s/ Hugo M. Cancio |
| | Hugo M. Cancio |
| | Title: Principal Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | |
| | |
| Date: November 13, 2007 | By: | /s/ Hugo M. Cancio |
| | Hugo M. Cancio |
| | Title: Director |
