SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Check whether the Registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
The number of outstanding shares of the Registrant's common stock, $0.001 par value, as of November 30, 2007 was 37,454,353.
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 November 30, 2007 and the results of its operations and cash flows for the six months ended November 30, 2007 and 2006 have been made. Operating results for the six months ended November 30, 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 six months ended November 30, 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 six months ended November 30, 2007, Ciocan did not advance any funds leaving a balance owing as of November 30, 2007, of $24,800, and accrued interest of $4,314. In addition Ciocan was owed a total of $40,798 for music royalties as of November 30, 2007. There were no music royalties accrued to Ciocan during the current three month period, and there were $2,844 of music royalties accrued for the six months ended November 30, 2007. |
FUEGO ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
4. | RELATED PARTY TRANSACTIONS - continued |
| | · | Our President/CEO is owed $296,143 as of November 30, 2007 for cash advances to the company for a variety of general and administrative expenses and the development of TV station programming. During the six months ended November 30, 2007 he advanced $74,733 and was repaid $17,682. No interest was paid on this date which accrues at 15 percent per annum and is payable on June 1, 2008. Accrued interest totaled $36,804 as of November 30, 2007. |
| · | Fees incurred in the six month period ended November 30, 2007 for a related party accounting firm totaled $38,199. The accounting firm received 525,000 shares in full payment of outstanding invoices for accounting, tax and financial statement preparation services since September, 2006. There was no amount owed to the firm as of November 30, 2007. |
The following is an analysis of income taxes.
The provision for current income taxes is as follows:
| | | For the six months ended November 30, 2007 | | | For the six months ended November 30, 2006 | |
| | | | | | | |
| Current tax expense (benefit): | | | | | | |
| Federal tax at 34% statutory rate | | $ | (121,119 | ) | | $ | (85,286 | ) |
| Benefit of surtax exemptions | | | -0- | | | | 59,139 | |
| Valuation allowance | | | 107,060 | | | | (1,571 | ) |
| Permanent differences | | | 14,059 | | | | 8,292 | |
| Income tax expense | | $ | -0- | | | $ | (19,426 | ) |
The analysis of income tax expense is as follows:
| | | For the six months ended November 30, 2007 | | | For the six months ended November 30, 2006 | |
| | | | | | | |
| Current | | $ | -0- | | | $ | (19,426 | ) |
| Deferred | | | -0- | | | | -0- | |
| Income tax expense | | $ | -0- | | | $ | (19,426 | ) |
FUEGO ENTERTAINMENT, INC.NOTES TO FINANCIAL STATEMENTS
5. | INCOME TAXES - continued |
A deferred tax asset was recognized of $107,060 for the $98,806 deferred tax benefit related to the net operating loss carry forward which expires in 2028 if unused, and $8,254 deferred tax benefit related to temporary timing differences during the six months ended November 30, 2007. A valuation allowance for $107,060 was recorded as of November 30, 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.
The following is an analysis of the change in the deferred tax asset:
| | | For the six months ended November 30, 2007 | | | For the six months ended November 30, 2006 | |
| Deferred tax asset, beginning of year | | $ | -0- | | | $ | -0- | |
| | | | | | | | | |
| Net operating loss carryforward | | | 98,806 | | | | | |
| | | | | | | | | |
| Allowance for doubtful accounts | | | -0- | | | | -0- | |
| | | | | | | | | |
| Interest Expense related party | | | 7,980 | | | | -0- | |
| | | | | | | | | |
| Depreciation | | | (274 | ) | | | 1,571 | |
| | | | | | | | | |
| State income taxes | | | -0- | | | | -0- | |
| | | | | | | | | |
| Valuation allowance | | | (107,060 | ) | | | (1,571 | ) |
| | | | | | | | | |
| Deferred tax asset, end of year | | $ | -0- | | | $ | -0- | |
For the six months ended November 30, 2007, the President contributed a total of $41,350 consisting of $27,000 for the value of services, $4,750 for the prorata share of auto expenses, and $9,600 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 six months ended November 30, 2007, $100,625 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.
8. | ISSUANCE OF RESTRICTED COMMON STOCK |
We authorized the issuance of 157,000 shares of restricted common stock at $.15 per share on September 18, 2007, 83,000 shares of restricted common stock at $.15 per share on September 30, 2007, and 575,000 shares of restricted common stock at $.15 per share on October 15, 2007.
Principally in connection with our efforts to obtain additional capital to sustain our business, the following restricted stock was issued at $.15. Restricted shares of stock consisted of 525,000 issued to the accounting firm in payment for outstanding invoices regarding their accounting, tax and financial statement preparation services, 75,000 shares issued to 3 board members, the sale of 83,000 shares for cash and 132,000 shares were issued to various individuals for services rendered.
On December 7, 2007 we issued 1,841,667 restricted shares of stock to AES Capital Partners, LP regarding two separate Private Placement Memorandums. The first one was signed on October 15, 2007 for 541,667 restricted shares at $.12 for a total subscription amount of $65,000 and the funds deposited on October 17, 2007. The second one was signed on December 5, 2007 for 1,300,000 restricted shares at $.212 for a total subscription amount of $275,600, half the funds were deposited on December 10, 2007 and the other deposited on January 11, 2008. We paid our delinquent taxes, paid Ciocan in full, reduced related party debt and make certain acquisitions of new content.
The company acquired 51% ownership of the entire music and video catalog from Echo-Vista Music Group, LLC and formed a joint venture with EV President Mr. Jeffrey Collins.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS 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 these sections 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-five months as of November 30, 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, productions of the Luny Tunes new CD soon to be release, the acquisition of over 2,000 music tracks, the formation of Echo-Fuego Music Group joint venture in which we owned 51 % and the development of our new website.
Since inception, we have sold music CD’s representing the majority of our music revenue. Although the company will continue to sale music CD’s we have made a full transition into the digital sales and distribution of music and video content. 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. We have now created a new music division with our recent acquisition of over 2,000 music tracks from legendary music producer Jeffrey Collins.
Recently one of our Board Members resigned from our Board in order to pursue other opportunities. However, we have added three key individuals to our Board of Directors that in management opinions will play a significant role in the overall success of the company, these directors are Marc Bodin, Bernardo Maurovich and Rene Lavandera. Also, we hired two corporate executive to our team, Ernesto Hernandez as sales manager and marketing and promotion coordinator and legendary music producer Jeffrey Collins as Head of our music divisions.
We expanded our music and video catalog, by signing new artists, and acquiring music masters containing over 890 music tracks. We recently acquired over 2,000 music tacks creating a diverse catalog of music and videos. We executed a production deal with the award-winning producing duo Luny Tunes: Francisco Saldaña (Luny) and Victor Cabrera (Tunes).Under this five-year agreement, the popular and successful Latin urban music producers will co-produce two albums per year that will be released under Fuego Entertainment's music division FEMI (Fuego Entertainment Music International).Over the past three and a half years, Luny Tunes have produced several albums generating over $16.5 million dollars in sales for Universal Music Group. Luny Tunes have produced albums, music tracks, and remixes for top Latin Reggaeton, Pop and R&B recording artists such as Janet Jackson, Paris Hilton, The Black Eye Peas, Lenny Kravitz, R Kelly, Ricky Martin, Shakira, Alejandro Sanz, Fat Joe, Daddy Yankee's "Gasolina," Wisin y Yandel's "Rakata," Don Omar's "Dale Don Dale," Tego Calderon's "Métele Sazón," Ivy Queen, Hector y Tito, and many others. The Luny Tunes have a successful track record as the architects of the most significant crossover in Latin music in the last few years. This co-production agreement comes at a time where our music division is rapidly growing and expanding. This collaboration should generate substantial financial benefits to our company.
Item 2. Management's Discussion and Analysis or Plan of Operation- continued
As successful music producers in the Reggaeton genre, the Luny Tunes have managed to earn an abundance of fans and awards while on the road to international stardom. Some awards include:
| -- | Latin Billboard Awards 2004: Más Flow -- "Tropical Album of the Year / Duo or Group;" |
| -- | Latin Billboard Awards 2004: Más Flow -- "Tropical Album of the Year / New Generation;" |
| -- | Reggaeton People's Choice Awards 2004: Luny Tunes -- "Producer of the Year"; |
| -- | Latin Grammy Awards 2005: Barrio Fino -- "Best Album of the Year / Urban" (as producers); |
| -- | Reggaeton People's Choice Awards 2005: Luny Tunes -- "Producer of the Year;" |
| -- | Reggaeton People's Choice Awards 2005: Mayor Que Yo -- "Best Song of the Year;" |
| -- | Reggaeton People's Choice Awards 2005: Mas Flow 2 -- Best Album of the Year;" |
| -- | Latin Billboard Awards 2006: Luny Tunes -- "Producer of the Year;" |
| -- | Premios Lo Nuestro Awards 2006: Mas Flow 2 -- "Best Album of the Year / Urban Category;" and, |
| -- | Musica Furia 2007: Luny Tunes -- "Reggaeton Producers of the Year |
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. Our music and video content is now available in more than 100 retailers. 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.
QUARTER ENDED NOVEMBER 30, 2007
There was a net loss for the current quarter of $234,604. There was only $575 of revenues this quarter resulting in a gross profit of approximately $238. There were 234,843 of expenses this quarter; there were three major expenses which contributed to the loss for the quarter. First there was $80,363 of stock based compensation to board member for their services, to various other individuals for services rendered and the amortization of three months of the Var Growth Corporation consulting agreement. Second, there were audit and accounting fees of $50,024 relating to the preparation of financial statements for the first quarter of the current fiscal year along with auditing, accounting and financial statement preparation fees for the year end audit and 10K of the prior fiscal year. Third, for the first time, there was a $15,000 bonus paid to Hugo Cancio for services rendered. Hugo has provided contributed his services to the company, but has never been paid.
Revenues for the current quarter-
Revenues in the current quarter were minimum due to the transition from the regular distribution of CDs to digital downloads sales and distribution of our entertainment content. In October of 2007, we released 70 CD’s, approximately 900 music tracks to major online retailers such as ITunes, Yahoo Music, Wal-Mart Music, Virgen Mobile, Vodaphone, Movistar, YouTube, MySpace, CD Baby and others. At the closing of this quarter we had not received a sales report from our distributors as to our must recent sales of music and video downloads.
Selling, General and Administrative Expenses-
This category has routinely consisted of all of the recurring and/or normal corporate overhead expenses not separately identified such as depreciation and amortization. This category has increased, as in the current quarter, for such items as Stock Based Compensation, Bonus to Officer and Accounting & Auditing Fees. If it were not for these large items, selling, general and administrative expense for the quarter would be indicative of the level of such expenses for this time period of approximately $66,000.
Income Tax Liability / Benefit-
There was no income tax liability or benefit earned in this quarter.
Item 2. Management's Discussion and Analysis or Plan of Operation- continued
QUARTER ENDED NOVEMBER 30, 2007 COMPARED TO THE QUARTER ENDED NOVEMBER 30, 2006
The loss for the current quarter exceeded the loss for the same quarter a year ago by approximately $126,000 due to a decrease in sales and increase in various expenses.
Revenues-
Revenues in comparison to a year ago on a quarterly basis decreased significantly due to the transition from the regular distribution of CDs to digital downloads sales and distribution of our entertainment content. In October of 2007, we released 70 CD’s, approximately 900 music tracks to major online retailers such as ITunes, Yahoo Music, Wal-Mart Music, Virgen Mobile, Vodaphone, Movistar, YouTube, MySpace, CD Baby and others. At the closing of this quarter we had not received a sales report from our distributors as to our must recent sales of music and video downloads. As the results of the recent acquisition of over 2,000 music tracks, and the formation of our new music division Echo-Fuego Music Group, the company plans to release 2 CD’s per months for the next 5 years. The first CD’s scheduled to be released in the coming months have contributed to 37,983 advance sales of (preorders) of CD’s which translates into approximately $322,000 in revenues This does not includes the anticipated release of the first Luny Tunes production soon to be released. Management expects music revenues to increase significantly as more music titles will be released in the coming months and our valuable and diverse library of music and video continues to be distributed to all major online music downloads retailers.. As of the day of this filling the company has not received a sales report from our digital distributors. The launching of our new website has given us a new revenue stream opportunity, from music and video downloads, membership subscriptions and now advertising. We are aggressively pursuing other corporate advertisers who recognize the impact their ad dollars can have via advertising on our website. We are currently negotiating several advertising deals.
Cost of Revenues-
Due to the focus on other revenue generating opportunities, there was less emphasis on Filming business. There were no Filming productions that occurred in this quarter therefore no costs were incurred or associated with this service.
Selling, General and Administrative Expenses-
The current quarter’s selling, general and administrative expenses exceeded the comparable quarter’s expenses by approximately $142,000 due largely to the stock based compensation of $81,000. The balance of the increase was due mainly to the increase in legal, auditing and accounting expenses which together were approximately $22,000 for the current quarter and there was the first cash payment of $15,000 paid to Hugo Cancio as a bonus for services rendered. Hugo has contributed his services to the company, but has never been paid.
Income Tax Liability / Benefit-
There was no income tax liability or benefit earned in this quarter.
Item 2. Management's Discussion and Analysis or Plan of Operation- continued
SIX MONTHS ENDED NOVEMBER 30, 2007 COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 2006
Compared to the previous six month period a year ago, the current six month’s loss was approximately $125,000 higher due to a decrease in revenues of approximately $53,000, a decrease of an income tax benefit reported of approximately $19,000 and an increase in overall expenses of approximately $53,000. Though there was a significant decrease of $97,000 in Radio/TV Development Start-up Costs, the most influential of expense increases were related to Stock Based Compensation of $55,000, Interest Expense-Related Party of $29,000, Auditing & Accounting Fees of $21,000, Marketing & Corporate Expenses of $14,000 and Compensation of Officers-Bonus of $15,000. Hugo has contributed his services to the company, but has never been paid.
Revenues-
Please refer to the three months ended November 30, 2007 comparison for a detail explanation for the decrease in revenue.
In addition, no Filming revenues or work for hire occurred as a result of the president of the company spending considerable time developing the music division of Fuego.
Selling, General and Administrative Expenses-
This category resulted in approximately $120,000 more in expenses than last year’s six month period. The items that accounted for the majority of the increase included Stock Based & Contributed Compensation of approximately $82,000, Paid Compensation & Payroll Taxes of approximately $16,000 and Professional fees increased by approximately $20,000.
Income Tax Liability / Benefit-
There was no income tax liability or tax benefit in the current six month period. There was an income tax benefit in the prior six month period of approximately $19,500 as a result of carrying back losses to prior periods in which the company reported income.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
MATERIAL COMMITMENTS
Fuego Entertainment entered into a commitment to make reimbursement payments to Hugo Cancio for amounts owed to be paid in full by December 1, 2007.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve (12) months.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a deficit in working capital at the end of the six months ended November 30, 2007. However, on December 7, 2007 we issued 1,841,667 restricted shares of stock to AES Capital Partners, LP regarding two separate Private Placement Memorandums. The first one was signed on October 15, 2007 for 541,667 restricted shares at $.12 for a total subscription amount of $65,000 and the funds deposited on October 17, 2007. The second one was signed on December 5, 2007 for 1,300,000 restricted shares at $.212 for a total subscription amount of $275,600, half the funds were deposited on December 10, 2007 and the other deposited on January 11, 2008.
The funds were used to pay the delinquent income taxes, the outstanding balance due Ciocan, make a partial payment to reduce the amount outstanding to the majority shareholder and make certain acquisitions of new content.
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 October 9, 2007
Form 8K filed with the SEC October 10, 2007
Form 8K filed with the SEC October 31, 2007
Form 8K filed with the SEC December 12, 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: January 22, 2008 | By: | /s/ Hugo M. Cancio |
| | Hugo M. Cancio |
| | Title: Principal Executive Officer |
| | | |
| | |
| Date: January 22, 2008 | 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: January 22, 2008 | By: | /s/ Hugo M. Cancio |
| | Hugo M. Cancio |
| | Title: Director |
