Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Plan of Operation
We have been in operation since December 30, 2004. Our efforts 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. Our current main priority is the marketing, distribution and sale of our music catalog.
Since launching FEMI, and lauching our joint venture Echo-Fuego we expanded our music and video catalog, by signing new artists, and acquiring music masters containing over 8903,800 music tracks. We have also expanded our marketing and distribution capabilities and enhanced sales in the process.
We executed a new deal with The Orchard (ORCD - News), a global leader in digital music and entertainment, to add more than 1.1 million tracks from The Orchard's catalog to the digital download store www.FuegoMio.com. The addition of The Orchard music catalog, which includes one of the largest and best Latin music offerings available, will increase the total tracks available for sale on the Fuego music store to about 2.5 million tracks. In addition to the hundreds of thousands of songs spanning nearly every genre, The Orchard will deliver a diverse offering of Latin artist tracks by the likes of Daddy Yankee, Joan Sebastian, Hector Lavoe, Antonio Aguilar, Willie Colon, Cuisillos, Ivy Queen.
We executed an agreement with Digital Music Group, Inc,IODA, the global leader in digital distribution, marketing, and technology solutions for the independent music and film industry, the Company will be adding more than one million music tracks and over two thousand video and film titles to our FuegoMio.com music and video retail store. The addition of more than one million music tracks and over two thousand video and film titles from IODA is an important step in Fuego Entertainment's commitment to becoming one of the leaders inlargest music and video digital retail stores. Through Fuego's new digital retail music store, www.FuegoMio.com, the Company will be providing high quality digital distribution of entertainment product; weaudio content. As IODA continues to grow its music, film and video catalogs, it is expected that Fuego will continue to receive new releases.
We also executed an agreement with UK digital distributor Vidzone. 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, weSales Strategy
We leverage our relationships in traditional channels of distribution for retail and other media outlets to sell its content. Additionally, the Company is actively developing new media distribution outlets by launching digital distribution of music and video content through agreements with The Orchard, IODA, Koch Entertainment and VidZone. Various radio stations, television producers, newspaper editors, and other traditional media is regularly informed on Fuego’s activities to push other avenues for sales growth.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
Digital distribution has become the focus of Fuego’s sales strategy, utilizing the Internet instead of bricks and mortars to compete for music sales. In aggregating content, Fuego currently has agreements with three major distributors, Koch Entertainment LP (“Koch”), The Orchard Enterprises, Inc. (“The Orchard”), and Independent Online Distribution Alliance, Inc. (“IODA”). The Orchard (NASDAQ: ORCD) currently distributes to the iTunes Store, which as of April 3, 2008, surpassed Wal-Mart to become the number one music retailer in the US based on the latest data from the NPD Group. With over 50 million customers, iTunes has sold over four billion songs and features the world’s largest music catalog of over six million songs. Fuego intends to follow the same operating model of the iTunes Store by focusing on Latin customer demographics.
Target Markets
We offer our media and entertainment products with a Latin flair in the English language, gaining a crossover into English-speaking markets with a focus on the Hispanic/Latin market.
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 $12,958$ 45,509 as of August 31,November 30, 2008. 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..capitalized.
Operating expenses for the three months ended August 31,November 30, 2008 were principally for selling, general and administrative expenses, the major components of which were stock based compensation costs of $28,550, $ 59,816, and audit and accounting fees of $15,204.$ 30,479.
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. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
Our minimum expected cash flows to continue our current level of operations during the next 12 months is approximately $225,000,$375,000 , however up to $450,000$750,000 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$375,000 , is not raised, we may be unable to continue operations.
We previously 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
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 through 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.
In the past few month we have brached out into the production of live music events. Our goal is utilize our relationships our recording artist to also produce our live music events. We believe have access to the artist recordings, marketing, distributing their recording and producing their live acts will be a great opportunity to expose our products and create a new source of revenues. We have scheduled over 12 live music events during the next coming months. These events will include some of Cuba’s most popular artist which we hope to optain visas and working permits permissable. In order to fully achieve our plans, we require additional capital of$ 475,000.
Fuego has an arrangement with Tota Productions, a music and video production company located in Torino, Italy, that produces Spanish Hip Hop and Pop artists from Europe. Under the arrangement we obtained the ownership of over 300 CD masters and supporting data with which to market the library.
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 of Financial Condition and Results of Operations - continued
Results of Operations for the three monthsThree Month and Six Month Periods ended August 31,November 30, 2008, Compared to three monthsprior year periods ended August 31,November 30, 2007
Revenues & Other Incomeand Cost of Filming and Music
MusicThe Company's major revenue decreased substantially this quartersource has shifted from filming based to music based. As a result, in the prior year ended May 31, 2007, filming revenue represented 80% of all revenues generated and due to high returns on CDs previously sold through Echo-Fuego we have negative salesmusic revenue producing projects had not yet been entered into. In the current year ended May 31, 2008 and six month ended November 30, 2008, filming revenues represented 0% of $ 10,810. However,total revenues. We earned $5,220 for the three months ended August 31,November 30, 2008 other income increased as a result of various stock option agreements that were canceled for various reasons, mainly that the recipients did not serve a full year as members of our Board of Directors, thereby as stipulated in our stock option agreement management at its own discretion canceled those stock option agreements and recorded as other income, Gain on Cancellation of Compensation Options for $ 137,500. Also, other income increase because on July 27, 2008 we settled a lawsuit against Var Growth Corporation (D.B.A. Ice Cold Stocks) and Barry Davis regarding a consulting agreement executed May 9, 2007. On or about April 8, 2008, we sued the above-named parties seeking damages, interest, costs and reasonable attorney fees and enjoining them from selling or disposing or otherwise transferring 875,000 common shares of our equities. The nature of this disagreement relatescompared to a contract entered into between the Company and Var Growth Corporation to provide independent consulting services associated with our marketing plan and business goals and other related services.
Expenses
Stock based compensation decreased significantly because$575 for the three months ended August 31, 2007, $50,312November 30, 2007. We earned a net negative revenue of VAR Growth cost was expensed$5,590 for the six months ended November 30, 2008 as compare to $11,951 for the six months ended November 30, 2008. The current direction of the Company is towards generating revenues from music sales and there are no such cost inlive concert events.
Operating Expenses
The current year's operating activities were more involved since they included the currentstock based compensation. For the three month period. Professional feesperiod ended November 30, 2008 we incurred $59,816 of stock-based compensation as compared to $93,863 for the current quarter increased significantly overthree month period ended November 30, 2007. We incurred $88,366 in stock-based compensation for the samesix month period inended November 30, 2008 and $157,675 for the six month period ended November 30, 2007. However it should be noted that the stock based compensation of $137,500 reported for 2007 was later recaptured as income for services not rendered by certain directors. Other selling, general and administrative expenses were $39,912 for the three month period ended November 30, 2008 as compared to $119,634 for the three month period ended November 30, 2007. We incurred $170,853 for the six month period ended November 30, 2008 as compared to $154,784 for the six month period ended November 30, 2008. In the prior fiscal year, becausedevelopment expenses incurred towards the effort to determine the viability of a Puerto Rico television station of $97,146 and the legal fees incurred by Echo-Fuego regarding the Beatles litigation.
non recoverability of an Affiliation Agreement of $50,000 were incurred. Other selling, general and administrative expenses of the current year were in line with the level of expenses incurred in the previous year’s quarter.prior year.
We have no material commitments as at the date of this registration statement.
We do not intend to purchase any significant equipment during the next twelve (12) months.
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. Quantitative and Qualitative Disclosures About Market Risk
Not required.