UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 31,November 30, 2008
 
 
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to ________________
 
 
Commission file number: 000-52054
 
FUEGO ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
 
Nevada20-2078925
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
8010 NW 156 Terrace  Miami, FL
33018
(Address of pricipal executive offices)(Zip Code)
 
(305) 829-9999
(Registrant's telephone number, including area code)
 
 
 (Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.
 
x Yes     o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filero Accelerated filero
     
Non-accelerated filero(Do not check if a smaller reporting company)Smaller reporting companyx
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
o Yes     x No
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
o Yes     o No
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date.
 
The number of outstanding shares of the Registrant's common stock, $0.001 par value, as of August 31,November 30, 2008 was 39,638,045.40,055,186.
 
 
1
 
 
TABLE OF CONTENTS
 
 
  Page
   
PART I:FINANCIAL INFORMATION3
   
Item 1.Financial Statements3
   
 Balance Sheet as of August 31,November 30, 2008 (unaudited) and May 31, 20083
   
 Statements of Operations (unaudited) for the three and six months ended August 31,November 30, 2008 and for the three months ended August 31, 20074
   
 Statements of Cash Flows (unaudited) for the threesix months ended August 31,November 30, 2008 and for the three months ended August 31, 20075
   
 Statements of Stockholders' Equity (Deficit) for the period from May 31, 2006 to August 31,November 30, 2008 (unaudited)6
   
 Notes to Financial Statements8
   
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations12
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk 15
 
  
Item 4T.Controls and Procedures15
   
   
PART II:OTHER INFORMATION 16
   
Item 1.Legal Proceedings 16
   
Item 1A.Risk Factors 16
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 16
   
Item 3.Defaults Upon Senior Securities 16
   
Item 4.Submission of Matters to a Vote of Security Holders 17
   
Item 5.15.Other Information 17
   
Item 6.Exhibits 17
   
Signatures17
 
 
 
2
 
PART I - - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
FUEGO ENTERTAINMENT, INC. AND AFFILIATE 
CONSOLIDATED BALANCE SHEETS 
August 31, 2008 
       
  August 31,  May 31, 
  2008  2008 
  (Unaudited)    
ASSETS
       
CURRENT ASSETS      
Cash $-   7,754 
Account receivable-trade, less allowance        
for doubtful accounts of $90,000  64,925   100,323 
         
Total Current Assets  64,925   108,077 
         
         
EQUIPMENT, less accumulated depreciation        
of $29,815 and $27,172 respectively  27,859   31,666 
         
OTHER ASSETS        
Music Albums (Echo-Fuego)  480,000   480,000 
Beverage Plus AG  425,000   425,000 
Production costs-Video  45,509   45,509 
Production costs-Music  55,747   50,047 
Deposit on music library  14,500   14,500 
Web portal  11,329   11,329 
Logo, less accumulated amortization        
of $1,845  855   990 
         
Total Other Assets  1,032,940   1,027,375 
         
TOTAL ASSETS $1,125,724  $1,167,118 
         
LIABILITIES AND STOCKHOLDERS' EQUITY
         
CURRENT LIABILITIES        
         
Accounts payable $123,026  $38,222 
Accounts payable - related parties  99,586   99,586 
Accrued interest - related parties  75,298   63,953 
Income taxes payable  3,870   3,870 
Payroll tax liabilities  5,538   5,193 
Other liabilities  18,626   6,347 
         
Total Current Liabilities  325,944   217,171 
         
Long-Term Debt        
Notes payable - related parties  268,212   281,549 
         
Total Liabilities $594,156  $498,720 
         
COMMITMENTS AND CONTINGENCIES        
         
STOCKHOLDERS' EQUITY (DEFICIT)        
         
Common stock, par value $.001, 75,000,000        
shares authorized, 39,638,045 and 39,476,020 shares  39,079   39,477 
issued and outstanding, respectively        
Additional Paid in capital  1,005,666   1,032,968 
Paid in capital-stock options  112,527   233,027 
Subscriptions payable  45,000   45,000 
Noncontrolling interest in affiliate  296,583   354,243 
Accumulated deficit  (967,287)  (1,036,317)
         
Total Stockholders' Equity  531,568   668,398 
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,125,724  $1,167,118 
         
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
FUEGO ENTERTAINMENT, INC. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
  
       
  November 30,  May 31, 
  2008  2008 
  (Unaudited)    
ASSETS
       
CURRENT ASSETS      
Cash $2,449   7,754 
Account receivable-trade, less allowance        
for doubtful accounts of $90,000  52,306   100,323 
         
Total Current Assets  54,755   108,077 
         
         
EQUIPMENT, less accumulated depreciation        
of $32,872 and $27,172 respectively  24,802   31,666 
         
OTHER ASSETS        
Music Albums (Echo-Fuego)  480,000   480,000 
Beverage Plus AG  425,000   425,000 
Production costs-Video  45,509   45,509 
Production costs-Music  55,747   50,047 
Deposit on music library  14,500   14,500 
Web portal  11,329   11,329 
Logo, less accumulated amortization        
of $1,980  720   990 
         
Total Other Assets  1,032,805   1,027,375 
         
TOTAL ASSETS $1,112,362  $1,167,118 
         
LIABILITIES AND STOCKHOLDERS' EQUITY
         
CURRENT LIABILITIES        
         
Accounts payable $143,308  $38,222 
Accounts payable - related parties  92,840   99,586 
Accrued interest - related parties  86,665   63,953 
Income taxes payable  3,870   3,870 
Payroll tax liabilities  5,538   5,193 
Other liabilities  14,722   6,347 
         
Total Current Liabilities  346,943   217,171 
         
Long-Term Debt        
Notes payable - related parties  234,799   281,549 
         
Total Liabilities $581,742  $498,720 
         
COMMITMENTS AND CONTINGENCIES        
         
STOCKHOLDERS' EQUITY (DEFICIT)        
         
Common stock, par value $.001, 75,000,000        
shares authorized, 40,055,186 and 39,476,020 shares  40,056   39,477 
issued and outstanding, respectively        
Additional Paid in capital  1,115,205   1,032,968 
Paid in capital-stock options  112,527   233,027 
Subscriptions payable  45,000   45,000 
Noncontrolling interest in affiliate  294,533   354,243 
Accumulated deficit  (1,076,701)  (1,036,317)
         
Total Stockholders' Equity  530,620   668,398 
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,112,362  $1,167,118 
         
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

 
3
 

FUEGO ENTERTAINMENT, INC AND AFFILIATE 
CONSOLIDATED STATEMENT OF OPERATIONS 
(Unaudited) 
       
       
  For the Three Months Ended 
  August 31, 2008  August 31, 2007 
       
       
REVENUES      
Music sales, net $(10,810) $11,376 
Advertising, web site  -     
Filming  -     
Consulting  -     
         
         
Total Revenues  (10,810)  11,376 
         
COSTS AND EXPENSES        
Cost of music        
Royalties - related party  -   2,844 
Production costs  12,958   300 
Cost of filming  -     
Affiliation agreements  -     
Selling, general and administrative:        
Provision for bad debts  -     
Compensation - stock based and contributed  28,550   63,812 
Other  130,941   51,543 
TV development  -     
Web site Cost        
Impairment of investment  -     
Interest expense - related parties  11,344   10,784 
Interest expense - other  -   393 
Depreciation and amortization  2,824   3,329 
         
Total costs and expenses  186,617   133,005 
         
Other Income  47     
Gain on Cancellation of Compensation Options  137,500     
Gain on Cancellation of Shares for Services-Settlement  71,250     
         
Income (Loss) before income taxes  11,370   (121,629)
         
Income tax expense (benefit)  -   - 
         
Income (Loss) Before Minority Interest  11,370   (121,629)
         
Less Minority Interest in Affiliates' losses  57,660     
         
NET INCOME (LOSS) $69,030  $(121,629)
         
EARNINGS (LOSS) PER SHARE - BASIC *  -   - 
         
WEIGHTED AVERAGE NUMBER OF        
COMMON SHARES OUTSTANDING - BASIC  39,617,528   35,625,161 
         
         
*  less than $.01 per share        
         
         
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
FUEGO ENTERTAINMENT, INC AND AFFILIATE 
CONSOLIDATED STATEMENTS OF OPERATIONS 
(Unaudited) 
             
             
  For the Three Months Ended  For the Six Months Ended 
  November 30, 2008  November 30, 2007  November 30, 2008  November 30, 2007 
             
             
REVENUES            
Music sales, net  3,720   575  $(7,090) $11,951 
Advertising, web site  1,500   -   1,500     
                 
                 
Total Revenues  5,220   575   (5,590)  11,951 
                 
COSTS AND EXPENSES                
Cost of music                
Royalties - related party  -   -   -   2,844 
Production costs  1,816   336   14,774   636 
Selling, general and administrative:                
Compensation - stock based and contributed  59,816   93,863   88,366   157,675 
Paid Compensation and Payroll Taxes      16,393       16,393 
Other  39,912   103,241   170,853   154,784 
Interest expense - related parties  11,948   17,824   23,292   28,608 
Interest expense - other  -   330   -   723 
Depreciation and amortization  3,192   3,192   6,016   6,521 
                 
Total costs and expenses  116,684   235,179   303,301   368,184 
                 
Other Income          47     
Gain on Cancellation of Compensation Options          137,500     
Gain on Cancellation of Shares for Services-Settlement          71,250     
                 
Income (Loss) before income taxes  (111,464)  (234,604)  (100,094)  (356,233)
                 
Income tax expense (benefit)  -   -   -   - 
                 
Income (Loss) Before Minority Interest  (111,464)  (234,604)  (100,094)  (356,233)
                 
Less Minority Interest in Affiliates' losses  2,050       59,710     
                 
NET INCOME (LOSS) $(109,414) $(234,604) $(40,384) $(356,233)
                 
EARNINGS (LOSS) PER SHARE - BASIC  *   *   *   * 
                 
WEIGHTED AVERAGE NUMBER OF                
COMMON SHARES OUTSTANDING - BASIC  39,779,631   35,579,774   39,698,580   35,450,758 
                 
                 
*  less than $.01 per share                
                 
                 
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


 
4
 


FUEGO ENTERTAINMENT, INC. AND AFFILIATE 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Unaudited) 
       
       
  For the Six Months Ended 
  November 30, 2008  November 30, 2007 
       
OPERATING ACTIVITIES      
    Net income (loss) $(40,384) $(356,233)
    Adjustments to reconcile net income (loss) to net cash used by        
       operating activities        
           Contributed services  39,600   41,350 
           Depreciation and amortization  5,969   6,521 
           Stock based compensation  50,166   131,675 
    Changes in operating assets and liabilities        
           Accounts receivable  48,017   9,849 
           Accrued federal Income tax refund receivable  -   - 
           Accounts payable  98,340   (30,293)
           Accrued interest - related parties  22,712   23,472 
           Payroll tax liabilities  345   5,193 
           Other current liabilities  8,375   1,597 
           Production costs-music  (5,700)    
NET CASH (USED BY) OPERATING ACTIVITIES  227,440   (166,869)
         
INVESTING ACTIVITIES        
           Noncontrolling interest in affiliate  (59,710)    
           Web portal
  -   (3,882)
           Deposit on music library
  -   (42,500)
           Purchase of equipment  1,164     
NET CASH (USED BY) INVESTING ACTIVITIES  (58,546)  (46,382)
         
FINANCING ACTIVITIES        
          Proceeds from sale of common stock  6,800   12,450 
          Stock options issued for debt reduction  17,000     
          Cancellation of compensation options  (137,500)    
          Cancellation of shares for services  (7,000)    
          Cancellation of shares for services-settlement  (71,250)    
          Common stock subscription payable  -   65,000 
          Common stock issued for debt reduction  64,500   78,750 
          Proceeds from notes payable - related parties  31,602   74,733 
          Repayments of notes payable - related parties  (78,351)  (17,682)
NET CASH PROVIDED BY FINANCING ACTIVITIES  (174,199)  213,251 
         
NET INCREASE (DECREASE) IN CASH  (5,305)  - 
         
CASH, BEGINNING OF YEAR  7,754   - 
         
CASH, END OF YEAR $2,449  $- 
         
         
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
FUEGO ENTERTAINMENT, INC. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  
  
  For the Three Months Ended 
  August 31, 2008  August 31, 2007 
       
OPERATING ACTIVITIES      
    Net income (loss) $69,030  $(121,629)
    Adjustments to reconcile net income (loss) to net cash used by        
       operating activities        
           Contributed services  19,800   20,675 
           Impairment loss on investment  -     
           Depreciation and amortization  2,777   3,329 
           Stock based compensation  8,750   50,312 
    Changes in operating assets and liabilities        
           Accounts receivable  35,398   5,596 
           Accrued federal Income tax refund receivable  -     
           Deferred tax asset  -     
           Other current asset  -     
           Accounts payable  84,804   1,941 
           Accrued interest - related parties  11,345   10,784 
           Income taxes payable  -     
           Payroll tax liabilities  345     
           Other current liabilities  12,279   302 
           Production costs-music  (5,700)    
           Deferred revenue  -     
NET CASH (USED BY) OPERATING ACTIVITIES  238,828   (28,690)
         
INVESTING ACTIVITIES        
           Investment in Echo-Fuego Music Group, LLC  -     
           Investment in Beverage Plus AG  -     
           Investment in Music Albums (Echo-Fuego)  -     
           Noncontrolling interest in affiliate  (57,660)    
           Web portal
  -     
           Deposit on music library
  -     
           Purchase of equipment  1,164     
NET CASH (USED BY) INVESTING ACTIVITIES  (56,496)  - 
         
FINANCING ACTIVITIES        
          Proceeds from sale of common stock  -     
          Stock options issued for debt reduction  17,000     
          Cancellation of compensation options  (137,500)    
          Cancellation of shares for services-settlement  (71,250)    
          Common stock subscription payable  -     
          Common stock issued for debt reduction  15,000     
          Proceeds from notes payable - related parties  11,549   32,912 
          Repayments of notes payable - related parties  (24,885)  (3,164)
NET CASH PROVIDED BY FINANCING ACTIVITIES  (190,086)  29,748 
         
NET INCREASE (DECREASE) IN CASH  (7,754)  1,058 
         
CASH, BEGINNING OF YEAR  7,754   - 
         
CASH, END OF YEAR $-  $1,058 
         
         
         
         
         
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

 
5
 
 
FUEGO ENTERTAINMENT, INC. AND AFFILIATE 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 
  
                            
                            
           Paid-in capital     Noncontrolling          
  Common Stock  Paid-in  Stock  Subscriptions  Interest in  Deferred  Accumulated    
  Shares  Amount  Capital  Options  Payable  Affiliate  Charge  (Deficit)  Total 
                            
Balance, May 31,  2006  34,959,562   34,960   118,398            -   (86,166)  67,192 
                                  
Proceeds from sale of common stock for                                 
$.18 per share  102,778   103   18,397                    18,500 
                                  
Stock based compensation                                 
$.12 per share  25,000   25   2,975                    3,000 
$.15 per share  60,000   60   8,940                    9,000 
$.18 per share  488,013   488   87,354                    87,842 
$.23 per share  89,000   89   20,381                    20,470 
                                  
Stock Issued for debt reduction                                 
$.18 per share  40,000   40   7,160                    7,200 
                                  
Stock Issued for future services                                 
$.15 per share  875,000   875   130,375            (122,979)      8,271 
                                  
Contributed services          60,925                    60,925 
                                  
Net (loss) for the year                           (505,558)  (505,558)
                                  
Balance, May 31,  2007  36,639,353  $36,640  $454,905  $-  $-  $-  $(122,979) $(591,724) $(223,158)
                                     
Proceeds from sale of common stock for                                    
$.15 per share  83,000   83   12,367                       12,450 
$.12 per share  541,667   542   64,458                       65,000 
$.212 per share  1,300,000   1,300   274,300                       275,600 
                                     
Stock based compensation                                    
$.28 per share  100,000   100   27,900                       28,000 
$.15 per share  207,000   207   30,843                       31,050 
$.17 per share  5,000   5   845                       850 
$.12 per share  100,000   100   11,900                       12,000 
                                     
Stock Issued for debt reduction                                    
$.15 per share  525,000   525   78,225                       78,750 
                                     
Stock based compensation canceled  (25,000)  (25)  (3,725)                      (3,750)
                                     
Stock options              233,027                   233,027 
                                     
Amortization of deferred charges                          122,979       122,979 
                                     
Contributed services          80,950                       80,950 
                                     
Subscriptions payable                  45,000               45,000 
                                     
Noncontrolling interest in affiliate                      354,243           354,243 
                                     
Net (loss) for the year                              (444,593)  (444,593)
 
FUEGO ENTERTAINMENT, INC. AND AFFILIATE
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
  
                            
                            
           Paid-in capital     Noncontrolling          
  Common Stock  Paid-in  Stock  Subscriptions  Interest in  Deferred  Accumulated    
  Shares  Amount  Capital  Options  Payable  Affiliate  Charge  (Deficit)  Total 
                            
Balance, May 31,  2006  34,959,562   34,960   118,398            -   (86,166)  67,192 
                                  
Proceeds from sale of common stock for                                 
$.18 per share  102,778   103   18,397                    18,500 
                                  
Stock based compensation                                 
$.12 per share  25,000   25   2,975                    3,000 
$.15 per share  60,000   60   8,940                    9,000 
$.18 per share  488,013   488   87,354                    87,842 
$.23 per share  89,000   89   20,381                    20,470 
                                  
Stock Issued for debt reduction                                 
$.18 per share  40,000   40   7,160                    7,200 
                                  
Stock Issued for future services                                 
$.15 per share  875,000   875   130,375            (122,979)      8,271 
                                  
Contributed services          60,925                    60,925 
                                  
Net (loss) for the year                           (505,558)  (505,558)
                                  
Balance, May 31,  2007  36,639,353  $36,640  $454,905  $-  $-  $-  $(122,979) $(591,724) $(223,158)
                                     
Proceeds from sale of common stock for                                    
$.15 per share  83,000   83   12,367                       12,450 
$.12 per share  541,667   542   64,458                       65,000 
$.212 per share  1,300,000   1,300   274,300                       275,600 
                                     
Stock based compensation                                    
$.28 per share  100,000   100   27,900                       28,000 
$.15 per share  207,000   207   30,843                       31,050 
$.17 per share  5,000   5   845                       850 
$.12 per share  100,000   100   11,900                       12,000 
                                     
Stock Issued for debt reduction                                    
$.15 per share  525,000   525   78,225                       78,750 
                                     
Stock based compensation canceled  (25,000)  (25)  (3,725)                      (3,750)
                                     
Stock options              233,027                   233,027 
                                     
Amortization of deferred charges                          122,979       122,979 
                                     
Contributed services          80,950                       80,950 
                                     
Subscriptions payable                  45,000               45,000 
                                     
Noncontrolling interest in affiliate                      354,243           354,243 
                                     
Net (loss) for the year                              (444,593)  (444,593)
6
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - continued
 
Balance, May 31,  2008  39,476,020  $39,477  $1,032,968  $233,027  $45,000  $354,243  $-  $(1,036,317) $668,398 
                                     
(Unaudited)                                    
Proceeds from sale of common stock for                                  - 
                                     
Stock based compensation                                    
$.14 per share  62,500   62   8,688                       8,750 
                                     
Stock Issued for debt reduction                                    
$.15 per share  100,000   15   14,985                       15,000 
                                     
Amortization of deferred charges                                  - 
                                     
Stock options issued for debt reduction              17,000                   17,000 
                                     
Cancellation of shares for services-settlement  (475)  (475)  (70,775)                      (71,250)
                                     
Cancellation of compensation options              (137,500)                  (137,500)
                                     
Contributed services          19,800                       19,800 
                                     
Noncontrolling interest in affiliate                      (57,660)          (57,660)
                                     
Net income for the period                              69,030   69,030 
                                     
Balance, Aug 31,  2008 (Unaudited)  39,638,045  $39,079  $1,005,666  $112,527  $45,000  $296,583  $-  $(967,287) $531,568 
                                     
                                     
                                     
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Balance, May 31,  2008  39,476,020  $39,477  $1,032,968  $233,027  $45,000  $354,243  $-  $(1,036,317) $668,398 
                                     
                                     
(Unaudited)                                    
Proceeds from sale of common stock for                                    
$.085 per share  80,000   80   6,720                       6,800 
                                     
Stock based compensation                                    
$.14 per share  62,500   62   8,687                       8,749 
$.10 per share  316,666   317   31,350                       31,667 
$.15 per share  65,000   65   9,685                       9,750 
                                     
                                     
Stock Issued for debt reduction                                    
$.15 per share  180,000   180   26,820                       27,000 
$.10 per share  375,000   375   37,125                       37,500 
                                     
Stock options issued for debt reduction              17,000                   17,000 
                                     
Cancellation of shares for services-settlement  (475,000)  (475)  (70,775)                      (71,250)
                                     
Cancellation of shares for services  (25,000)  (25)  (6,975)                      (7,000)
                                     
Cancellation of compensation options              (137,500)                  (137,500)
                                     
Contributed services          39,600                       39,600 
                                     
Noncontrolling interest in affiliate                      (59,710)          (59,710)
                                     
Net income for the period                              (40,384)  (40,384)
                                     
Balance, November 30,  2008 (Unaudited)  40,055,186  $40,056  $1,115,205  $112,527  $45,000  $294,533  $-  $(1,076,701) $530,620 
                                     
                                     
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

 
7
 
FUEGO ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the six months ended November 30, 2008 and 2007


1.BASIS OF PRESENTATION

Our consolidated financial statements include the accounts of Fuego Entertainment, Inc. and its majority-owned limited liability company, Echo-Fuego Music Group, LLC.  All significant intercompany accounts and transactions have been eliminated in the consolidation.

Minority interest represents the minority partner’s, Jeffrey Collins (Echo-Vista, Inc.)  49% ownership interest in Echo-Fuego Music Group, LLC.

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.10-Q.  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,November 30, 2008 and the results of  its operations and cash flows for the threesix months ended August 31,November 30, 2008 and 2007 have been made.  Operating results for the threesix months ended August 31,November 30, 2008 are not necessarily indicative of the results that may be expected for the year ended May 31, 2009.

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, 2008.

 
2.NATURE OF BUSINESS
 
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.  In January, 2008 Fuego announced it formed a new music division, Echo-Fuego Music Group, LLC, in a joint venture with legendary music producer and promoter Jeffrey Collins. His music catalog of more than 2,000 tracks and 15 artists previously under the Echo-Vista label will be merged into the new joint venture, with a majority stake owned by Fuego. During the year ended May 31, 2008 the majority of revenues earned were earned from the sale of musical tracks and advertising revenue on our website www.fuegoentertainment.net.

 
3.SIGNIFICANT ACCOUNTING POLICIES
 
GOING CONCERN

Our financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue in existence is dependent on its ability to develop additional sources of capital, or achieve profitable operations. We sustained significant losses in the last two years and we have deficits in working capital, however we were profitable in current period. Our financial position at that date and presently is of great concern to us and our investors, however, management’s plan is to obtain additional capital and to to continue to develop, market and distribute musical tracks through Fuego and its new joint venture, Echo-Fuego Music Group, LLC. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
8
FUEGO ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the six months ended November 30, 2008 and 2007
 
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 current period, Ciocan did not advance any funds. In addition, Ciocan did not earn any music royalties in the current period. The amount owed for royalties to Ciocan as of August 31,November 30, 2008 was $40,798.
 
 ·Our President/CEO is owed $240,093$214,979 on a net consolidated basis as of August 31,November 30, 2008 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 $29,549$48,988 and was repaid $24,885.$69,339. No interest was paid on this date which accrues at 15 percent per annum and is payable on June 1, 2009. Accrued interest totaled $11,344$22,711 as of August 31,November 30, 2008.  In January 2009 the Company reached an agreement with our President and CEO to cancel indebtedness to him in the amount of $110,000 in exchange for the transfer of 110,000 Beverage Plus AG shares held by us.
   
 ·Fees incurred in the threesix month period ended August 31,November 30, 2008 for a related party accounting firm totaled $15,204. The accounting firm received 100,000 options in payment of certain outstanding invoices for accounting, tax and financial statement preparation services.  The amount owed to the firm as of August 31,November 30, 2008 was $34,145.
  
 ·As part of the Echo-Fuego Music Group, LLC joint venture with music producer and promoter Jeffrey Collins, there was an initial amount owed in January 2008 was $100,000. Jeffrey Collins received 100,000 shares as a partial payment on the outstanding balance.  The amount owed to the Jeffrey Collins as of August 31,November 30, 2008 was $28,119.
 
5.INCOME TAXES
The following is an analysis of income taxes. 

The provision for current income taxes is as follows:
  For the three months ended August 31, 2008  For the three months ended August 31, 2007 
       
Current tax expense (benefit):      
Federal tax at 34% statutory rate $24,470  $(41,354)
Benefit of surtax exemptions  -0-   -0- 
Valuation allowance  (30,606)  34,525 
Permanent differences  7,136   6,829 
Income tax expense $-0-  $-0- 

The analysis of income tax expense is as follows:
  
For the three
 months ended August 31, 2008
  
For the three
months ended August 31, 2007
 
       
Current $-0-  $-0- 
Deferred  - 0-   -0- 
Income tax expense $-0-  $-0- 


9
FUEGO ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
5.
INCOME TAXES - continued

A decrease in the deferred tax asset was recognized of $30,606 for the $11,947 deferred tax benefit related to the net operating loss carry forward which expires in 2029 if unused, and $(42,553) of temporary timing differences during the three months ended August 31, 2008.  The valuation allowance was adjusted for $30,606, as well, at August 31, 2008. The Company believes it is more likely than not that the future tax benefit of the 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 three
 months ended August 31, 2008
  
For the three
months ended August 31, 2007
 
Deferred tax asset, beginning of year $-0-  $-0- 
         
Net operating loss carryforward  11,947   31,028 
         
 Allowance for doubtful accounts  -0-   -0- 
         
Interest Expense related party  3,857   3,667 
         
 Depreciation  340   (170)
         
Cancellation of Compensation Options  (46,750)  -0- 
         
 Valuation allowance  30,606   (34,525)
         
 Deferred tax asset, end of year $-0-  $-0- 

 
6.CONTRIBUTED CAPITAL

For the three months ended August 31,November 30, 2008, the President contributed a total of $19,800 consisting of $13,500 for the value of services, $1,500 for the prorata share of auto expenses, and $4,800 for the rent of corporate office facilities.


7.ISSUANCE OF RESTRICTED COMMON STOCK

In the current quarter, principally in connection with our efforts to obtain additional capital to sustain our business, the following restricted stock was issued. Restricted shares of stock consisted of 62,500444,166 issued to an individualvarious individuals for services rendered. In addition, Jeffrey Collins, was issued 100,000 shares in partial payment of an outstanding balance.

8.OTHER
Var Growth Corporation
On July 27,During the quarter ended November 30, 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 commonissued 80,000 shares of our equities.  The naturecommon stock for cash at $0.085 per share. These shares were purchased by our related party Securities attorney.

In addition to the shares issued above, we also issued our President 275,000 shares of this disagreement relatesour common stock in partial payment of our debt owed to him. We also issued 180,000 shares of our common stock to vendors in satisfaction of their outstanding balances.

We also cancelled 25,000 shares of our common stock that was issued originally 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.director that could not serve their entire term of office.
 

109
FUEGO ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the six months ended November 30, 2008 and 2007
 
8.
OTHER - continued

“Havana Night Club” ShowThe Beatles
On August 14,January 10, 2008 we filed a lawsuit against ViaShow,Fuego and Jeffrey Collins (Echo Vista, Inc., a Nevada corporation) through Echo-Fuego Music Group, LLC announced plans to sell the eight “lost” Beatles’ club recordings. Apple Corps Limited, representing the Beatles, was seeking to have Fuego remove any information about the planned release from Fuego’s website, was requiring Fuego to cease any use of the trademark, The Beatles, for commercial purposes, and Nicole Durr in reference to the “Havana Night Club” show.  We sued the above-named partieswas also seeking compensatory damages, punitive damages, costs and reasonable attorney fees and enjoining them from selling or disposing.  The nature of this disagreement relates to a contract entered into between the Company and the Defendant corporation ViaShow, Inc. to pay us royalties relating to the Havana Night Club show to be presented in five different cities$15 million in the Springlawsuit filed against Fuego, Echo-Fuego Music Group, LLC, Hugo Cancio and Summer of 2005.
We allege that ViaShow, Inc. was to pay us royalties computed at the rate of 20% of all tour revenue in exchange for an investment by us and two other investors of a total of $1,500,000 to be paid to ViaShow, Inc.  It is further alleged that we were guaranteed a return of our investment and that ViaShow, Inc. and Nicole Durr failed to make any payments to us in reference to this agreement.   Jeffrey Collins.

On April 4, 2008, Apple Corps Limited and Fuego struck an injunction agreement approved by a Miami U.S. District Judge that requires Fuego to halt plans to release the eight song recordings. On May 16, 2008, Fuego Entertainment filed a motion to dismiss the lawsuit brought by Apple Corps Limited and Apple Records, Inc. as a matter of law.  In the Complaint, we outlined our causesmotion to dismiss Fuego Entertainment asserted that as a matter of actionlaw Fuego has the right to commercially exploit the 15 “Lost” 1962 Beatles recordings.

On October 15, 2008 Fuego Entertainment entered into a private settlement agreement with Apple Corps Limited and Apple Records, Inc. (representing The Beatles) which resolves the lawsuit against Defendant ViaShow, Inc.includingFuego Entertainment and others to the following: (1) failureparties' mutual satisfaction.  Fuego has agreed not to provide an accounting as to show revenues, (2) breach of contract, (3) unjust enrichment, (4) fraudulent inducement, (5)  conversion, and (6) negligent misrepresentation. As to Defendant Nichole Durr, we outlined our causes of action as follows: (1) fraudulent inducement, (2) conversion, and (3) negligent misrepresentation.release, distribute, sell or otherwise exploit any recordings containing The Beatles performances from the Star Club in Hamburg, Germany in 1962.

Stock Option Plan
We have issued restricted shares of common stock and stock options to compensate non-employees who were principally key personnel.  Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, Share-Based Payments ("SFAS No. 123(R)"), which is a revision of SFAS No. 123 which requires that stock awards granted to directors, consultants and other non-employees be recorded at the fair value of the award at grant date .

On February 5, 2008, we registered the “2008 Stock Option Plan of Fuego Entertainment, Inc.” The purpose of this Plan is to strengthen Fuego Entertainment, Inc. (hereinafter the “Company”) by providing incentive stock options as a means to attract, retain and motivate key corporate personnel, through ownership of stock of the Company, and to attract individuals of outstanding ability to render services to and enter the employment of the Company or its subsidiaries. There shall be two types of Stock Options that may be granted under this Plan: (1) Options intended to qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code (“Qualified Stock Options”), and 2) Options not specifically authorized or qualified for favorable income tax treatment under the Internal Revenue Code (“Non-Qualified Stock Options”).

During the year ended May 31, 2008, the estimated value of the compensatory common stock purchase options granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions: expected term of 3 years, a risk free interest rate of 3.30%, a dividend yield of 0% and volatility of 137%. The amount of the expense charged to operations for compensatory options and warrants granted in exchange for services was $226,727.

For three months ended August 31, 2008, various stock option agreements have been 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.
 
10
FUEGO ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the six months ended November 30, 2008 and 2007
 
9.SUBSEQUENT EVENTS

The Beatles
On
Related Party Transactions

In January 10, 2008 Fuego2009, the Company reached an agreement with our President and Jeffrey Collins (Echo Vista, Inc.) through Echo-Fuego Music Group, LLC announced plansCEO to sellcancel indebtedness to him in the eight “lost” Beatles’ club recordings. Apple Corps Limited, representingamount of $110,000 in exchange for the Beatles, was seeking to have Fuego remove any information abouttransfer of 110,000 Beverage Plus AG shares held by us.

Settlement Negotiations

As the planned release from Fuego’s website, was requiring Fuego to cease any useresult of the trademark, The Beatles,unexpected litigation with Apple Corporation (as referenced in Note 8, Beatles) the music catalog acquired by Fuego from Echo-Fuego, our affiliate, we have decided to revoke Jeffrey Collins’ rights to the one hundred thousand shares issued to him as partial payment of the debt owed by us. We are also in negotiations to cancel the remaining debt to Mr. Collins. As per our agreement, Mr. Collins is liable for commercial purposes, and wasany third party claims as a result of the acquisition of his music catalog by us. We are therefore negotiating a settlement that Mr. Collins will also seeking $15 million in the lawsuit filed against Fuego,assume responsibility for all legal fees incurred by Echo-Fuego Music Group, LLC, Hugo Cancio and Jeffrey Collins.

On April 4, 2008, Apple Corps Limited and Fuego struck an injunction agreement approved by a Miami U.S. District Judge that requires Fuego to halt plans to releaseEntertainment as the eight song recordings. On May 16, 2008, Fuego Entertainment filed a motion to dismiss the lawsuit brought by Apple Corps Limited and Apple Records, Inc. as a matterresult of law.  In the motion to dismiss Fuego Entertainment asserted that as a matter of law Fuego has the right to commercially exploit the 15 “Lost” 1962 Beatles recordings.this litigation.


On October 15, 2008 Fuego Entertainment entered into a private settlement agreement with Apple Corps Limited and Apple Records, Inc. (representing The Beatles) which resolves the lawsuit against Fuego Entertainment and others to the parties' mutual satisfaction.  Fuego has agreed not to release, distribute, sell or otherwise exploit any recordings containing The Beatles performances from the Star Club in Hamburg, Germany in 1962.

 
11
 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 is 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 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.

12

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.
12

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.

13
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.

13
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.
14

Income Tax BenefitItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

The current quarter and the previous year’s quarter reports no income tax expense or benefit.

Liquidity and Capital Resources

The Company has a deficit in working capital at theyear 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 placementoccasional planned sales of its common stockinvestment in securities in Beverage Plus AG for current cash flows. Accordingly, it is presently seeking financing to continue in existence. TheUp to the date of this report, the Company is primarily dependent solely on its President/CEO for all revenue generating andopportunities as well as on-going cash flow opportunities.requirements.

Material Commitments

We have no material commitments as at the date of this registration statement.

Purchase of Significant Equipment

We do not intend to purchase any significant equipment during the next twelve (12) months.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
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. Quantitative and Qualitative Disclosures About Market Risk
 
Not required.
 
 
Item 4T. 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 is 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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
As of the end of the period covered by 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 and Principal Financial Officer. Based upon that evaluation, he concluded that our disclosure controls and procedures were ineffective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Exchange Act.
 
There were no changes in internal controls over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.  We also note the incorrect characterization of production costs in our statement of cash flows that resulted in a material change to cash flows from operating and investing activities.
 
In connection with the development of a leased TV channel in Puerto Rico, the Company shared in paying for certain expenses including travel, lodging and meals for its President, in connection with the pursuit of available TV programming in that area. There was inadequate documentation to support the allocation of such expenses between the Company and the TV station owned by the Company’s president. In addition there were no signed agreements between the Company and the personnel retained to perform services in connection with obtaining TV programming which should disclose as a minimum, the nature of the services to be rendered, the amount of periodic compensation being paid and the term of the services.
 
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Item 4T. Controls and Procedures - continued
The lack of support concerning the above matters was considered to be a material weakness in internal control, which weakness commenced during the entire period from inception of the Company as to the first matter and the last quarter of the fiscal year ended May 31, 2008, as to the second matter.
 
The President of the Company has since required documentation for all disbursements, has recorded in a journal the information necessary to allocate amounts among entities, and will obtain written agreements for all services to be provided to the Company.
 
Changes in Internal Controls
 
There were no changes in our internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls.


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PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings
 
Other than what is disclosed in this section, we were not a party to any legal proceedings during the reporting period, and we know of no legal proceedings pending or threatened or judgments entered against any director or officer of the Company in their capacity as such.
 
In the matter of the Miami case of Apple Corp Vs. Hugo Cancio and Fuego Entertainment, We entered into a private settlement agreement with Apple Corps Limited and Apple Records, Inc. (representing The Beatles) which resolves the lawsuit against Fuego Entertainment and others to the parties' mutual satisfaction.  Fuego has agreed not to release, distribute, sell or otherwise exploit any recordings containing The Beatles performances from the Star Club in Hamburg, Germany in 1962.

Subsequent EventsIn the matter of the lawsuit filed by, Genovesse, Joblove and Battista as the result of a billing dispute over the final legal bill. We are yet to file an answer to plaintiff complaint. We have requested several extensiond to file our response while working with plaintiff to resolve this legal dispute in private.
 
In the matter of Fuego Entertainment, Inc Vs. Var Growth Corporation and Barry Davis and Ice Cold Stocks, Fuego filed a lawsuit against this individuals for money damages and for injunctive relief as to shares issued to the Defendants but allegedly not earned. In July, 2008, the case was settled out of court via private agreement and the lawsuit dismissed. Fuego agreed to drop all legal action against Var Growth. Var Growth retained 400,000 shares of Fuego stock and Var Growth returned 475,000 shares of Fuego stock.
 
In the Nevada case in the matter of Fuego Entertainment, Inc Vs. Nicole Durr and Viashow Inc., Fuego filed a lawsuit against these organizations and individuals associated with an allegation that the Defendants failed to pay necessary royalties to Fuego and that the Defendants failed to conduct a full five-city schedule of the Havana Night Club show. The show originally appeared in Miami, FL and was scheduled to appear in New York, New Jersey, Chicago, Dallas, Houston and or California. The Defendants failed to run any of these shows. The case is not yet set for a hearing. The parties entered into initial settlement negotiations. There is no resolution of the case as of the date of this filing.
 
 
Item 1A. Risk Factors.
 
Not required.
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
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.None
Principally in connection with our efforts to obtain additional capital to sustain our business, the following restricted stock was issued in the current quarter: 100,000 shares issued to several board members at $0.28 per share for services rendered and the sale of 1,841,667 common shares for cash as discussed above.
 
 
Item 3. Defaults Upon Senior Securities
 
None
 
 
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Item 4. Submission of Matters to a Vote of Security Holders
 
None.
 
 
Item 5. Other Information
 
None.
 
 
Item 6. Exhibits
 
Exhibit NumberDescription 
31.1
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 Fuego Entertainment, Inc. 
    
Date: OctoberJanuary 20, 20082009By:/s/  Hugo M. Cancio 
  Hugo M. Cancio 
  Title: Principal Executive Officer 
    
 
Date: OctoberJanuary 20, 20082009By:/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: OctoberJanuary 20, 20082009By:/s/  Hugo M. Cancio 
  Hugo M. Cancio 
  Title: Director 
    
 
 
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