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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the quarterly period ended September 30, 2012
 
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the transition period from  _________ to ______________     
 
Commission File No. 001-33902
 
Circle Entertainment Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
36-4612924
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
650 Madison Avenue New York, New York 10022
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (212) 838-3100
 
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. Yes  þ  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No  o
 
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. (Check one):
 
Large accelerated filer 
o
Accelerated filer 
o
       
Non-accelerated filer 
o
Smaller reporting company 
þ
(Do not check if a smaller reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ
 
As of November 8, 2012, there were 65,076,161 shares of the registrant’s common stock outstanding.
 


 
 

 
TABLE OF CONTENTS [REFORMAT DOCUMENT, INSERT PAGE NUMBERS AND INSERT PAGE NUMBERS IN TABLE OF CONTENTS]
 
PART I. FINANCIAL INFORMATION
       
 
Explanatory Note
    3  
           
Item 1.
Financial Statements
    4  
           
 
Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011
    4  
           
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (Unaudited)
    5  
           
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (Unaudited)
    7  
           
 
Notes to Unaudited Consolidated Financial Statements
    8  
           
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    17  
           
Item 4.
Controls and Procedures
    23  
         
PART II. OTHER INFORMATION
         
Item 1.
Legal Proceedings
    24  
           
Item 3.
Defaults Upon Senior Securities
    24  
           
Item 6.
Exhibits
    24  
 
 
2

 
 
EXPLANATORY NOTE
 
As has been previously reported, on January 11, 2011, we changed our corporate name to “Circle Entertainment Inc.” from “FX Real Estate and Entertainment Inc.”  In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, the words “we,” “us,” “our,” “Circle Entertainment,” and the “Company” collectively refer to Circle Entertainment Inc. (formerly known as FX Real Estate and Entertainment Inc.) and its consolidated subsidiaries, Circle Entertainment SV-I, LLC, FXL, Inc. and FX Luxury, LLC.

We have been pursuing the development and commercialization of our new location-based entertainment line of business since September 10, 2010, which has and will continue to require significant capital and financing.  We do not currently generate any revenues from this new line of business.  We have no long-term financing in place or commitments for such financing to develop and commercialize our new location-based entertainment line of business. Certain of our directors, officers and greater than 10% stockholders have been financing substantially all of our short-term liquidity requirements since 2010, and there is no assurance they will continue to do so.

We are in severe financial distress and may not be able to continue as a going concern. We have no current cash flow and cash on hand as of November 8, 2012 is not sufficient to fund our short-term liquidity requirements, including our ordinary course obligations as they come due.  Our ability to continue as a going concern will depend on whether or not we can successfully capitalize and finance, implement and operate our new location-based entertainment line of business.   Investors should read all of the information set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011  in order to better understand the financial condition of, and risks of investing in, the Company.
 
 
3

 
 
PART I. FINANCIAL INFORMATION

ITEM 1. 
FINANCIAL STATEMENTS

Circle Entertainment Inc. 
   (F/K/A FX Real Estate and Entertainment Inc.)

CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)

  
 
September 30, 2012
   
December 31,
 
   
Unaudited
   
2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
175
   
$
577
 
                 
Prepaid expenses and other current assets
   
64
     
98
 
                 
Total current assets
   
239
     
675
 
Investment in real estate:
               
Furniture, fixtures and equipment
   
20
     
18
 
Capitalized development costs
   
2,847
     
3,977
 
Less: accumulated depreciation
   
(14
)
   
(11
)
                 
Net investment in real estate
   
2,853
     
3,984
 
Other assets, net
   
2
     
1,545
 
                 
Total assets
 
$
3,094
   
$
6,204
 
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
 
$
11,237
   
$
4,701
 
Due to related parties
   
736
     
329
 
Other current liabilities
   
---
     
---
 
Loans payable to related parties
   
10,745
     
7,050
 
Total current liabilities
   
22,718
     
12,080
 
Other long-term liabilities
   
---
     
---
 
                 
Total liabilities
   
22,718
     
12,080
 
Commitments and contingencies
   
---
     
---
 
Stockholders’ deficit:
               
Preferred stock, $0.01 par value: authorized 75,000,000 shares, 1 share of Non-Voting Designated Preferred Stock issued and outstanding at September 30, 2012 and December 31, 2011, respectively, 1,500 shares of Series A Convertible Preferred Stock issued and outstanding at September 30, 2012 and December 31, 2011, respectively, and 2,500 shares of Series B Convertible Preferred Stock issued and outstanding at September 30, 2012 and December 31, 2011, respectively
   
---
     
---
 
Common stock, $0.01 par value: authorized 300,000,000 shares, 65,076,161 shares  issued and outstanding at September 30, 2012 and December 31, 2011, respectively
   
651
     
651
 
Additional paid-in-capital
   
90,939
     
90,939
 
Accumulated deficit
   
(111,214
)
   
(97,466
)
                 
Total stockholders’ deficit
   
(19,624
)
   
(5,876
)
                 
Total liabilities and stockholders’ deficit
 
$
3,094
   
$
6,204
 
 
See accompanying notes to consolidated financial statements.
 
4

 
 
 Circle Entertainment Inc.
(F/K/A FX Real Estate and Entertainment Inc.)

 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
September 30, 2012
   
September 30, 2011
 
                 
Revenue
 
$
---
   
$
---
 
                 
Operating expenses:
               
Selling, general and administrative expenses
   
891
     
1,133
 
Depreciation and amortization
   
1
     
1
 
Real estate taxes
   
67
     
5
 
Write down of capitalized development costs
   
2,589
     
---
 
Write down of advanced royalty fees
   
1,375
     
---
 
Write down of capitalized license fees
   
922
     
---
 
                 
Total operating expenses
   
5,845
     
1,139
 
                 
Loss from operations
   
(5,845
)
   
(1,139
Interest income
   
---
     
---
 
Interest expense
   
(282
)
   
(210
Settlement expense
   
(4,000
   
---
 
                 
Net loss
 
 $
(10,127
)
 
 $
(1,349
)
Basic and diluted loss per share
 
$
(0.16
)
 
$
(0.02
)
Basic and diluted average number of common shares outstanding
   
65,076,161
     
65,127,139
 
 
See accompanying notes to consolidated financial statements.
 
 
5

 

Circle Entertainment Inc.
(F/K/A FX Real Estate and Entertainment Inc.)

 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
   
Nine Months
   
Nine Months
 
   
Ended
   
Ended
 
   
September 30, 2012
   
September 30, 2011
 
                 
Revenue
 
$
---
   
$
---
 
                 
Operating expenses:
               
Selling, general and administrative expenses
   
2,809
     
3,664
 
Depreciation and amortization
   
3
     
10
 
Real estate taxes
   
313
     
171
 
Write down of capitalized development costs
   
2,589
     
---
 
Write down of advanced royalty fees
   
1,375
     
---
 
Write down of capitalized license fees
   
922
     
---
 
                 
Total operating expenses
   
8,011
     
3,845
 
                 
Loss from operations
   
(8,011
)
   
(3,845
Interest income
   
---
     
---
 
Interest expense
   
(787
)
   
(300
Settlement expense
   
(4,950
)
   
---
 
Net loss
 
 $
(13,748
)
 
 $
(4,145
)
Basic and diluted loss per share
 
$
(0.21
)
 
$
(0.06
)
Basic and diluted average number of common shares outstanding
   
65,076,161
     
65,092,967
 
 
See accompanying notes to consolidated financial statements.
 
 
6

 
 
Circle Entertainment Inc
(F/K/A FX Real Estate and Entertainment Inc.)

  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
   
Nine Months
   
Nine Months
 
   
Ended
   
Ended
 
   
September 30, 2012
   
September 30, 2011
 
                 
Cash flows from operating activities:
               
Net loss
 
$
(13,748
)
 
$
(4,145
)
Adjustments to reconcile net loss to cash used in operating activities:
               
Write down of capitalized development costs
   
2,589
     
---
 
Write down of advanced royalty fees
   
1,375
     
---
 
Write down of capitalized license fees
   
922
     
---
 
Depreciation and amortization
   
3
     
10
 
Changes in operating assets and liabilities:
               
Receivables
               
Other current and non-current assets
   
(830
)
   
(686
)
Accounts payable and accrued expenses
   
6,755
     
2,176
 
                 
Due to related parties
   
407
     
78
 
                 
Net cash (used in) operating activities
   
(2,527
)
   
(2,567
)
                 
Cash flows from investing activities:
               
Purchase of property and equipment
   
(2
)
   
(10
)
Capitalized development costs
   
(1,568
)
   
(2,612
)
                 
Net cash (used in) provided by investing activities
   
(1,570
)
   
(2,622
)
                 
Cash flows from financing activities:
               
Proceeds from private placement of stock units
   
---
     
415
 
Proceeds from loans payable to related parties
   
3,695
     
4,650
 
                 
Net cash provided by financing activities
   
3,695
     
5,065
 
                 
Net (decrease) / increase in cash and equivalents
   
(402
)
   
(124
)
Cash and cash equivalents — beginning of period
   
577
     
372
 
                 
Cash and cash equivalents — end of period
 
$
175
   
$
248
 
                 
Supplemental cash flow data:
               
Cash paid for interest
 
$
143
   
$
176
 

See accompanying notes to consolidated financial statements.
 
 
7

 
  
Circle Entertainment Inc.
(F/K/A FX Real Estate and Entertainment Inc. )
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1. 
Basis of Presentation
 
General
 
The consolidated financial statements as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 reflect the results of operations of Circle Entertainment Inc. (“Circle” or the “Company”), a Delaware corporation, and its consolidated subsidiaries.

On January 11, 2011, the Company changed its corporate name to “Circle Entertainment Inc.” from “FX Real Estate and Entertainment Inc.”

 The financial information in this report for the three and nine months ended September 30, 2012 and 2011 have not been audited, but in the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation have been made. The operating results for the three and nine months ended September 30, 2012 and 2011 are not necessarily indicative of the results for the full year.

The consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
2. 
Business of the Company
 
The Company has been pursuing the development and commercialization of its new location-based entertainment line of business since September 10, 2010, which has and will continue to require significant capital and financing.  The Company does not currently generate any revenues from this new line of business.  The Company has no long-term financing in place or commitments for such financing to develop and commercialize its new location-based entertainment line of business.  
 
On September 10, 2010, the Company, through its wholly-owned subsidiary, Circle Entertainment SV-I, LLC (“Circle SV-1”), entered into an Exclusive License Agreement (the “License Agreement”) with William J. Kitchen ("Kitchen") and US ThrillRides, LLC (Kitchen’s wholly-owned corporate affiliate, ThrillRides" and together with Kitchen, the "ThrillRides Parties"), pursuant to which the ThrillRides Parties have granted a worldwide exclusive license to the Company to use and commercially exploit all of Kitchen’s patents, ThrillRides’ trademark and Kitchen’s other intellectual property, trade secrets and know-how pertaining to all aspects of the adaptation of an observation wheel legally known as a SkyView™ including, without limitation, its engineering, design, development, construction, operation and maintenance.  Concurrently with their entry into the License Agreement, the parties also entered into a related Development Agreement (the "Development Agreement") pursuant to which the ThrillRides Parties are responsible for the supervision and management of the construction, development, and installation of SkyView observation wheels on behalf of the Company.

As described below, on August 23, 2012, the Company, Circle SV-1 and the ThrillRide Parties entered into a Termination and Settlement Agreement terminating the License Agreement and the Development Agreement.

On February 28, 2011, in furtherance of its new location-based entertainment line of business, the Company, through its  wholly-owned subsidiary Circle Entertainment Property-Orlando, LLC (the “Circle Subsidiary”), entered into a Transaction Agreement with The Square, LLC, Orlando Hotel International SPE, LLC, and Orlando Hotel International SPE Holdings, LLC (The Square, LLC, Orlando Hotel International SPE, LLC, and Orlando Hotel International SPE Holdings, LLC are collectively the “Whittall Parties”) to co-develop a project in Orlando, Florida on which the Company’s observation wheel will be placed beside retail, restaurant and bar and entertainment facilities.
 
 
8

 

A brief description of the terms and conditions of the Transaction Agreement follows. Such description of the Transaction Agreement is not complete and qualified in its entirety by reference to the full text of the Transaction Agreement, a copy of which is listed and incorporated by reference as Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and is incorporated by reference herein.

Under the Transaction Agreement, the Circle Subsidiary will acquire a 65% interest in the ownership of two adjacent properties, the “OHI Parcel” of 10 acres and the “Square Parcel” of 18 acres (collectively, the “Property”), currently owned by certain of the Whittall Parties, and located on International Drive in Orlando, Florida.  The closing of the transaction, which was initially estimated to occur in the second half of 2011 and is currently estimated to occur in the second half of 2012, will be subject to the satisfaction of a number of conditions, including (a) the rearrangement of the existing first mortgage loans on the Property with CIBC (the “CIBC Loan”) to extend their existing maturity dates for five years and increase the principal balances thereof by approximately $11 million in the aggregate (the proceeds of which are to be used to improve the Property and for tenant installations); (b) acquiring good title to the Property; and (c) the new property owner entering into a 99-year lease for property upon which the Company’s observation wheel and a 25,000 square foot retail, service and maintenance building will be located.  The Circle Subsidiary is responsible for funding certain obligations between execution of the Transaction Agreement and the closing as follows:  (a) $65,000 for reimbursement of real estate tax escrow payments for November and December 2010; (b) approximately $20,000 per month for real estate tax obligations after December 2010; (c) $50,000, representing approximately 65% of the monthly interest payments required (prepayment of a portion may be required to maintain CIBC interest reserves); (d) up to $45,000 per month for architectural and engineering services relating to the site design; and (e) 65% of ongoing property expenses, estimated at $2,000 per month.  The Whittall Parties will be responsible for funding 35% of the obligations specified in clauses (b)-(e) in the previous sentence.  The Property will be developed in two phases, each constituting approximately 102,000 square feet.  The closing of the CIBC Loan will be contingent on pre-leasing of approximately 102,000 square feet at the Property, of which the Company’s observation wheel will be approximately 25,000 square feet.   As part of the closing, the Circle Subsidiary will be required to fund $5 million in the aggregate towards the development of the Property (but amounts advanced as set forth above will be offset against the funding required at closing.).  In addition to the required equity contributions, under the terms of the CIBC Loan, the Company will be responsible for building and installing the observation wheel and terminal building at an approximate cost of $50 million and will need to arrange the financing necessary to do so.   The Company does not currently have any financing commitments in place.

As a result of the closing of the transaction being delayed due to, among other reasons, the Company’s inability to date to secure financing, the parties are reconsidering the above closing conditions for the transaction, the closing conditions for the CIBC Loan and the development plan for the Property, as initially contemplated.

On August 23, 2012, the Company, Circe SV-1 and the ThrillRides Parties entered into a Termination and Settlement Agreement terminating the License Agreement and the Development Agreement.  The principal terms of the Termination and Settlement Agreement are as follows:

1.  
The parties to the License Agreement and the Development Agreement have released each other from all obligations thereunder.
2.  
Circle SV-1 (including, among others, its affiliates, sublicensees and assigns) will have the right, but not the obligation, to use the SkyView™ escape technology in as many as four (4) wheel amusement rides:  one in Orlando, Florida and three (3) others at sites to be designated within 36 months.  Each designated site will be protected by a 100 mile geographic radius against competing wheel amusement rides affiliated with the ThrillRides Parties(as wells as their affiliates, successors, assigns and other specified persons).
3.  
To the extent that there are any improvements made in the escape system (which may be used exclusively for that purpose), Kitchen will be the owner of such improvements.
4.  
Circle SV-1 has paid $440,000 towards legal fees purportedly due under the License and Development Agreements in connection with protecting Kitchen’s intellectual property through patent filings and certain pending third party litigation.  Circle has also paid $40,000 to reimburse the ThrillRides Parties for expenses incurred by them under the License Agreement.
5.  
Circle SV-1 will pay Kitchen a one-time $4 million royalty upon the earlier of (x) the closing of a loan or financing for Circle’s pending Orlando, Florida project described above or (y) December 31, 2012, and will continue paying $55,000 per month to the ThrillRides Parties under the License Agreement until the $4 million royalty is paid.  Fifty percent (50%) of each $55,000 monthly payment will be credited against the $4 million royalty, as long as the $4 million royalty is paid timely.  Because no loan or financing for the Orlando, Florida project was closed by September 30, 2012, Circle advanced $250,000 against the $4 million royalty.

The foregoing description of the Termination and Settlement Agreement is not complete and is qualified in its entirety by reference to the full text of the form of Termination and Settlement Agreement which is listed and incorporated by reference as Exhibit 10.2 to this report, and is incorporated herein by reference.
 
 
9

 
 
 3. 
Going Concern
 
The accompanying consolidated financial statements are prepared assuming that the Company will continue as a going concern and contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business.
 
The Company has been pursuing the development and commercialization of its new location-based entertainment line of business since September 10, 2010, which has and will continue to require significant capital and financing.  The Company does not currently generate any revenues from this new line of business.  The Company has no long-term financing in place or commitments for such financing to develop and commercialize its new location-based entertainment line of business. Certain of the Company’s directors, officers and greater than 10% stockholders have been financing substantially all of its short-term liquidity requirements since 2010, and there is no assurance they will continue to do so.

The Company has received an opinion from its auditor expressing substantial doubt as to its ability to continue as a going concern. Investors are encouraged to read the information set forth herein and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 in order to better understand the financial condition of, and risks of investing in, the Company.

4. 
 Accounting Policies
 
Significant Accounting Policies

During the three months ended September 30, 2012, there has been no significant change in the Company’s significant accounting policies and estimates as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements that impacted the quarterly periods ended September 30, 2012 and 2011, or which are expected to impact future periods, which were not previously disclosed in prior periods.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications
 
Certain prior period amounts presented have been reclassified to conform to the current year presentation.
 
 
10

 
 
5. 
Earnings (Loss) Per Share

Earnings/(loss) per share is computed in accordance with Financial Accounting Standards concerning Earnings Per Share . Basic earnings/(loss) per share is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of shares outstanding during the period.  Diluted earnings/(loss) per share includes the determinants of basic earnings (loss) per share and, in addition, gives effect to potentially dilutive common shares. The diluted earnings (loss) per share calculations exclude the impact of all share-based stock plan awards because the effect would be anti-dilutive. For the nine months ended September 30, 2012 and 2011, 5,563,350 and 5,563,350 shares, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
 
6. 
Debt and Notes Payable
 
On March 3 through March 8, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $900,000, bearing interest at the rate of 6% per annum.

On April 27 through May 4, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $500,000, bearing interest at the rate of 6% per annum.

On June 8 through June 9, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $600,000, bearing interest at the rate of 6% per annum.

On July 7 through July 12, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $900,000, bearing interest at the rate of 6% per annum.

On August 5 through August 10, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $1,000,000, bearing interest at the rate of 6% per annum.

On September 15 through September 20, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $750,000, bearing interest at the rate of 6% per annum.

On October 14 through October 18, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $1,500,000, bearing interest at the rate of 6% per annum.

On December 15 through December 16, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $900,000, bearing interest at the rate of 6% per annum.

On January 30 through January 31, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $750,000, bearing interest at the rate of 6% per annum.

On March 8 through March 13, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $600,000, bearing interest at the rate of 6% per annum.
 
 
11

 
 
On April 10 through April 16, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $750,000, bearing interest at the rate of 6% per annum.

On June 7 through June 11, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $450,000, bearing interest at the rate of 6% per annum.

On July 20 through July 25, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $450,000, bearing interest at the rate of 6% per annum.

On August 16 through August 17, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $400,000, bearing interest at the rate of 6% per annum.

On August 29, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $200,000, bearing interest at the rate of 6% per annum.

The Company used the loan proceeds to fund working capital requirements and for general corporate purposes.  Because certain of the directors, executive officers and greater than 10% stockholders of the Company made the loans, a majority of the Company’s disinterested directors approved the loans.

7. 
Share-Based Payments
 
 Compensation expense for stock option grants included in the accompanying consolidated statements of operations in selling, general and administrative expenses is being recognized ratably over the vesting periods of the grants and was $0.0 million and $0.0 million for the three and nine months ended September 30, 2012 and 2011, respectively.
 
8. 
Income Taxes
 
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at the time. The Company’s effective tax rate is based on expected income, statutory rates and permanent differences applicable to the Company in the various jurisdictions in which the Company operates.
 
For the three and nine months ended September 30, 2012 and 2011, respectively, the Company did not record a provision for income taxes because the Company has incurred taxable losses since its formation in 2007. As it has no history of generating taxable income, the Company reduces any deferred tax assets by a full valuation allowance.
 
The Company does not have any uncertain tax positions and does not expect any reasonably possible material changes to the estimated amount of liability associated with its uncertain tax positions through September 30, 2012.

In August, 2011, the Company was notified by the Internal Revenue Service of its intent to examine the Company’s federal income tax return for the fiscal year ended December 31, 2009.  The examination has been concluded with no change to the filed tax return.
 
 
12

 
 
   9. 
Commitments and Contingencies
 
Litigation

As has been previously reported, on July 12, 2012, the Company’s then directors Harvey Silverman, Michael J. Meyer, John D. Miller, Robert Sudack, Paul C. Kanavos and Robert F.X. Sillerman, as defendants, Mitchell J. Nelson, an officer of the Company, as a defendant, Brett Torino, a stockholder and former officer of the Company, as a defendant, and certain entities owned and controlled by Messrs. Sillerman, Kanavos and Torino, as defendants, and The Huff Alternative Fund, L.P. and The Huff Alternative Parallel Fund, L.P., stockholders of the Company, as plaintiffs (collectively, "Huff"), entered into a Stipulation and Settlement Agreement (the "Settlement Agreement") to settle the derivative lawsuit filed on April 28, 2010 by Huff on behalf of the Company in the Supreme Court of the State of New York, County of New York (Index No. 650338/2010E) subject to final approval by such Court.

Under the terms of the Settlement Agreement:

The Company has agreed to elect to its board of directors an additional independent director, who shall also serve as a member of all committees of the board of directors. The Company is required to elect such additional independent director within sixty (60) days after the Effective Date (as such term is defined in the Settlement Agreement) and is not permitted to decrease the number of independent directors for a period of at least three (3) years from the Effective Date;

The Company and the other defendants have agreed to pay the sum of $950,000 to Huff as payment for part of the costs and expenses (including attorneys’ fees) incurred by Huff in connection with the lawsuit and the results achieved in the lawsuit. Such payment is due and payable in full within fifteen (15) days of the Effective Date; and

The Company and the other defendants and Huff have agreed to release the other (including their respective affiliates) from claims related to the lawsuit or any other lawsuit, provided that Huff has preserved certain claims against Mr. Torino and his affiliates (except the Company and the other defendants).

On September 10, 2012, the Settlement Agreement was preliminarily approved by the Supreme Court of the State of New York, County of New York (the "Preliminary Approval") as being fair, reasonable and adequate.

Under the Court’s order for the Preliminary Approval, the Company is required to publish no later than 10 business days from September 10, 2012, the Notice Of Pendency And Proposed Settlement Of Shareholder Derivative Litigation (i) as an exhibit to a Current Report on Form 8-K and (ii) on its website along with the Settlement Agreement.  The Company satisfied in a timely manner the publication requirements cited in the preceding sentence. The Company also is required to publish no later than 10 business days from September 10, 2012 a Summary Notice Of Pendency And Proposed Settlement Of Shareholder Derivative Litigation once in each of the national editions of The Wall Street Journal and USA Today.  The Company satisfied in a timely manner the foregoing publications requirements in the national editions of The Wall Street Journal and USA Today.

The Court approved entry of the final order which is in administrative processing. There is a 30-day period to appeal after entry of the order, after which (assuming no appeal is taken) the terms will be effective upon the payment of $950,000 to Huff.

The foregoing description of the Settlement Agreement is not complete and is qualified in its entirety by reference to the full text of the Settlement Agreement which is listed and incorporated by reference as Exhibit 10.1 to this report, and is incorporated herein by reference.
 
 
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Termination of License Agreement

As described in note 2 above, on August 23, 2012, the Company, Circe SV-1 and the ThrillRides Parties entered into a Termination and Settlement Agreement terminating the License Agreement and the Development.

Preferred Dividends in Arrears

As of September 30, 2012, there were total dividend arrearages on the Company’s outstanding Series A Convertible Preferred Stock and Series B Convertible Preferred Stock of approximately $300,208 and $384,018, respectively.  These dividend arrearages constitute $200.14 and $153.61 per share of Series A Convertible Stock and Series B Convertible Preferred Stock, respectively

10. 
Related Party Transactions
 
Shared Services Agreement and Arrangement
 
Certain employees of Flag Luxury Properties, LLC (“Flag”), from time to time, provide services for the Company. Flag is owned and controlled by Paul C. Kanavos, Robert F.X. Sillerman and Brett Torino.  The Company is required to reimburse Flag for these services provided by such employees and other overhead costs in an amount equal to the fair value of the services as agreed between the parties and approved by the audit committee. For the three and nine months ended September 30, 2012, Flag incurred and billed the Company $0.1 and $0.4 million, respectively. For the three and nine months ended September 30, 2011, Flag incurred and billed the Company $0.1 and $0.2 million, respectively. The services provided for the three months ended September 30, 2012 and 2011 were approved by the Company’s audit committee. The services provided consisted primarily of support for accounting and legal services provided by Flag on behalf of Circle.  Paul Kanavos, the Company’s President, and Mitchell Nelson, the Company’s General Counsel, under their respective employment agreements, as amended, are required to devote working time required to satisfy the provisions of their employment agreements and perform their functions for the Company, provided that they are each entitled to devote additional working time to such business or other affairs as each deems appropriate.  This arrangement was approved by the Company’s independent directors.  To the extent that they use Company employees and/or services for such purposes, they are required to reimburse the Company therefor.  Such arrangement is reviewed by the Company’s audit committee quarterly and appropriate adjustments or reimbursements are made thereunder.

In late 2010, the Company entered into a shared services agreement with BPS Parent, LLC (“BPS”), a company substantially owned and controlled by Paul Kanavos and Brett Torino, pursuant to which the Company reimburses BPS for the services of management and related executive personnel in the field of real estate business development with respect to location-based entertainment businesses, advice in connection with specific development or construction projects, the preparation of financial projections, and construction administration and planning for the Company’s location-based entertainment business, and more particularly, development of the SkyView Technology.  Reimbursement is based on the allocation of time spent with respect to Company matters and the allocable overhead pertaining thereto.  The Company’s chief financial officer reviews and, if appropriate, approves reimbursement, subject to further review and approval by the audit committee.  A true-up will be made if there are any adjustments.  The term of the shared services agreement initially ran until December 31, 2011 and was extended by the parties until December 31, 2012 subject to further extension or termination by either party upon 180 days’ prior written notice (or upon 90 days’ prior written notice if there is a determination in good faith that the provisions of the shared services agreement are not fair and consistent with those reasonably expected to apply in arm’s length agreements between affiliated parties).  Payments under the agreement are made on a quarterly basis and are determined taking into account a number of factors, including but not limited to, the overall type and volume of services provided, the individuals involved, the amount of time spent by such individuals and their current compensation rate with the company with which they are employed. Each quarter, representatives determine the net payment due from one party to the other for provided services performed by the parties during the prior calendar quarter, and prepare a report in reasonable detail with respect to the provided services so performed, including the value of such services and the net payment due.   For the three and nine months ended September 30, 2012, BPS incurred and billed the Company less than $0.0 and $0.1 million, respectively. For the three and nine months ended September 30, 2011, BPS incurred and billed the Company $0.05 and $0.2 million, respectively.  Effective July 30, 2012, the BPS shared services agreement was terminated.

As of February 15, 2011, the Company entered into a shared services agreement with Viggle Inc. (formerly known as Function (x) Inc., “Viggle”), pursuant to which it shares costs for legal and administrative services in support of Mitchell J. Nelson, its General Counsel and General Counsel to Viggle. The shared services agreement provides, in general, for sharing on a 50/50 basis of the applicable support provided by either company to Mr. Nelson in connection with his capacity as General Counsel, and an allocation generally based on the services provided by Mr. Nelson, which are initially estimated to be divided evenly between the companies. Viggle will initially be responsible for advancing the salary to Mr. Nelson for both companies and will be reimbursed by Circle for such salary and benefits (but not for any bonus, option or restricted share grant made by either company, which will be the responsibility of the company making such bonus, option or restricted share grant). The agreement provides for the president of each company to meet periodically to assess whether the services have been satisfactorily performed and to discuss whether the allocation has been fair. The audit committees of each company’s board of directors will then review and, if appropriate, approve the allocations made and whether payments need to be adjusted or reimbursed, depending on the circumstances. For the three and nine months ended September 30, 2012, Viggle incurred and billed the Company $0.1 and $0.2 million, respectively. For the three and nine months ended September 30, 2011, Viggle incurred and billed the Company $0.1 and $0.2 million, respectively.
 
 
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2011 Private Placements of Series B Preferred Stock Units
 
On February 8 through February 14, 2011, the Company entered into subscription agreements with accredited investors, pursuant to which the purchasers purchased from the Company an aggregate of 330 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly issued Series B Convertible Preferred Stock, and (y) a warrant to purchase up to a specified number of shares of the Company’s common stock (determined based on the product of (i) the initial stated value of $1,000 per share of Series B Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the applicable closing date and (ii) 200%) at a specified exercise price per share (such exercise price representing 150% of the applicable closing price referred to in preceding clause (i)).  The number of shares of the Company’s common stock underlying each warrant ranges from 3,175.61 shares to 5,538.62 shares and the exercise price per share at which each warrant is exercisable ranges from $0.3149 to $0.5417 due to variances in the closing prices referenced in clause (y) of the preceding sentence. The warrants are exercisable for a period of 5 years.   The Company generated aggregate proceeds of $330,000 from the sale of the units.  The Company also issued 35,000 shares of Series B Convertible Preferred Stock in satisfaction of a $35,000 sales commission owed to an individual in connection with previous sales of the Company’s securities in the offering.

On February 15 through March 8, 2011, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders and other accredited investors, pursuant to which the purchasers purchased from the Company an aggregate of 85 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s Series B Convertible Preferred Stock, $0.01 par value per share, and (y) a warrant to purchase up to a specified number of shares of the Company’s common stock (determined based on the product of (i) the initial stated value of $1,000 per share of Series B Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the applicable closing date and (ii) 200%) at a specified exercise price per share (such exercise price representing 150% of the applicable closing price referred to in preceding clause (i))  The number of shares of the Company’s common stock underlying each warrant ranges from 2,676 shares to 2,820 shares and the exercise price per share at which each warrant is exercisable ranges from $0.5319 to $0.5606 due to variances in the closing prices referenced in clause (y) of the preceding sentence. The warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $85,000 from the sales of the units.

Because the foregoing private placements involved certain of the Company’s directors, executive officers, greater than 10% stockholders and their affiliates, such private placements were approved by a majority of the Company’s disinterested directors, to the extent applicable.  The Company used the aggregate proceeds from these private placements for working capital requirements and for general corporate purposes.

2011 Unsecured Demand Loans

On March 3 through March 8, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $900,000, bearing interest at the rate of 6% per annum.

On April 27 through May 4, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $500,000, bearing interest at the rate of 6% per annum.

On June 8 through June 9, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $600,000, bearing interest at the rate of 6% per annum.

On July 7 through July 12, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $900,000, bearing interest at the rate of 6% per annum.

On August 5 through August 10, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $1,000,000, bearing interest at the rate of 6% per annum.

On September 15 through September 20, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $750,000, bearing interest at the rate of 6% per annum.
 
 
15

 

On October 14 through October 18, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $1,500,000, bearing interest at the rate of 6% per annum.

On December 15 through December 16, 2011, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $900,000, bearing interest at the rate of 6% per annum.

2012 Unsecured Demand Loans

On January 30 through January 31, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $750,000, bearing interest at the rate of 6% per annum.

On March 8 through March 13, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $600,000, bearing interest at the rate of 6% per annum.

On April 10 through April 16, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $750,000, bearing interest at the rate of 6% per annum.

On June 7 through June 11, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $450,000, bearing interest at the rate of 6% per annum.

On July 20 through July 25, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $450,000, bearing interest at the rate of 6% per annum.

On August 16 through August 17, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $400,000, bearing interest at the rate of 6% per annum.

On August 29, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $200,000, bearing interest at the rate of 6% per annum.

The Company used the loan proceeds to fund working capital requirements and for general corporate purposes.  Because certain of the directors, executive officers and greater than 10% stockholders of the Company made the loans, a majority of the Company’s disinterested directors approved the loans.
 
11. 
Subsequent Events

2012 Unsecured Demand Loans
 
On October 1, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $285,000, bearing interest at the rate of 6% per annum.

On October 17, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $75,000, bearing interest at the rate of 6% per annum.

On November 7, 2012, certain of the Company's directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $75,000, bearing interest at the rate of 6% per annum.
 
The Company intends to use the loan proceeds to fund working capital requirements and for general corporate purposes.  Because certain of the directors, executive officers and greater than 10% stockholders of the Company made the loans, a majority of the Company’s disinterested directors approved the loans.
 
 
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FORWARD LOOKING STATEMENTS
 
 In addition to historical information, this Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. All statements in this Quarterly Report regarding our future strategy, future operations, projected financial position, estimated future revenue, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this Quarterly Report is filed with the Securities and Exchange Commission. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the audited consolidated financial statements and related notes of the Company included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and the consolidated financial statements and related notes of the Company included elsewhere in this Quarterly Report.
 
Executive Summary

We have been pursuing the development and commercialization of our new location-based entertainment line of business since September 10, 2010, which has and will continue to require significant capital and financing.  We have no long-term financing in place or commitments for such financing to develop and commercialize our new location-based entertainment line of business. Certain of our directors, officers and greater than 10% stockholders have been financing substantially all of our short-term liquidity requirements since 2010, and there is no assurance they will continue to do so.

We do not currently generate any revenues from this new line of business.  For a further discussion of this new line of business,  refer to note 2 to our consolidated financial statements included elsewhere in this report.

We are in severe financial distress and may not be able to continue as a going concern. We have no current cash flow, and cash on hand as of November 8, 2012 is not sufficient to fund our past due obligations and short-term liquidity needs, including our ordinary course obligations as they come due.  We have received an opinion from our auditor expressing substantial doubt as to our ability to continue as a going concern. Our ability to continue as a going concern will depend on whether or not we can successfully capitalize and finance, implement and operate our new line of business.
 
 
Consolidated Operating Results for the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011
 
Revenue
 
No revenue was generated for the three months ended September 30, 2012 and 2011.
 
 
17

 
 
Operating Expenses
 
Operating expenses for the three months ended September 30, 2012 and 2011 were approximately $5.8 million and $1.1 million, respectively.  Actual operating expenses, excluding depreciation, increased in the third quarter of 2012 as compared to the third quarter of 2011 by $4.7 million. This increase includes an increase of approximately $0.05 million in real estate taxes, an increase in the write down of capitalized development costs of $2.6 million, an increase in the write down of advanced royalty fees of $1.4 million and an increase in the write down of capitalized license fees of $1.0 million, offset by a decrease of $0.24 million in selling, general and administrative expenses due to a decrease in legal fees.  Included in corporate overhead expenses for the three months ended September 30, 2012 is a charge of less than $0.1 million in shared services charges provided by Flag pursuant to its arrangement with the Company.
 
Depreciation and Amortization
 
Depreciation and amortization was the same in the third quarter of 2012 as the third quarter of 2011 remaining at $0.1 million due primarily to the decision of the Company to make no investments in capitalized property and equipment.
 
Interest Expense
 
Interest expense, net, increased by approximately $0.1 million in the third quarter of 2012 as compared to the third quarter of 2011 due to the increase in debt service incurred on the Orlando property pursuant to the Transaction Agreement and an increase in the debt service on loans from related parties.

Settlement Expenses
 
Huff

Under the Settlement Agreement described in note 9 of the consolidated financial statements included elsewhere herein, the Company and the other defendants in the pending shareholder derivate lawsuit have agreed to pay the sum of $950,000 to Huff as payment for part of the costs and expenses (including attorneys’ fees) incurred by Huff in connection with the lawsuit and the results achieved in the lawsuit. The Court issued a Preliminary Order of Approval on September and, pursuant to the Court Order, the Company satisfied certain publication requirements for the Settlement Agreement as described in such note 9.  The Court approved entry of the final order which is in administrative processing. There is a 30-day period to appeal after entry of the order, after which (assuming no appeal is taken) the terms will be effective upon the payment of $950,000 to Huff.
 
Kitchen Parties

Under the Termination and Settlement Agreement described in note 2 of the consolidated financial statements included elsewhere herein, the Company paid $440,000 towards legal fees purportedly due under the License and Development Agreements in connection with protecting Kitchen’s intellectual property through patent filings and certain pending third party litigation.  The Company also paid $40,000 to reimburse the ThrillRides Parties for expenses incurred by them under the License Agreement. The Company advanced $250,000 against a $4,000,000 royalty due to the Kitchen Parties under the Termination and Settlement Agreement.
 
Income Taxes
 
For the three months ended September 30, 2012 and 2011, the Company did not record a provision for income taxes because the Company has incurred taxable losses since its formation in 2007.  As it has no history of generating taxable income, the Company reduces any deferred tax assets by a full valuation allowance.
 
 
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Consolidated Operating Results for the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011
 
Revenue
 
No revenue was generated for the nine months ended September 30, 2012 and 2011.
 
Operating Expenses
 
Operating expenses for the nine months ended September 30, 2012 were approximately $8.0 million compared to approximately $3.8 million for the same period last year. Actual operating expenses, excluding depreciation, increased in the nine months ended September 30, 2012 as compared to the same period last year by approximately $4.2 million. This increase includes a decrease of approximately $0.9 million in selling, general and administrative expenses due to a decrease in salaries and wages of approximately $0.35 million, a decrease in legal fees of approximately $0.5 million, a decrease in other costs of approximately 0.15 million, offset by an increase of approximately $0.1 million in real estate taxes. The balance of the increase in operating expenses consists of an increase in the write down of capitalized development costs of $2.6 million, an increase in the write down of advanced royalty fees of $1.4 million and an increase in the write down of capitalized license fees of $1.0 million. Included in corporate overhead expenses for the nine months ended September 30, 2012 is a charge of less than $0.4 million in shared services charges provided by Flag and less than $0.1 million in shared services charges provided by BPS Partners pursuant to their arrangements with the Company.  The Company incurred shared services charges in approximately the same amounts with Flag and BPS Partners for the same period last year.
 
Depreciation and Amortization
 
Depreciation and amortization decreased in the nine months ended September 30, 2012 as compared to the same period last year by less than $0.1 million due primarily to the minimal investment in capitalized property and equipment.
 
Interest Expense
 
Interest expense, net, increased by approximately$0.5 million in the first nine months of 2012 as compared to the first nine months of 2011 due to the increase in debt service incurred on the Orlando property pursuant to the Transaction Agreement and an increase in the debt service on loans from related parties.

 Settlement Expenses
 
Huff

Under the Settlement Agreement described in note 9 of the consolidated financial statements included elsewhere herein, the Company and the other defendants in the pending shareholder derivate lawsuit have agreed to pay the sum of $950,000 to Huff as payment for part of the costs and expenses (including attorneys’ fees) incurred by Huff in connection with the lawsuit and the results achieved in the lawsuit. The Court issued a Preliminary Order of Approval on September and, pursuant to the Court Order, the Company satisfied certain publication requirements for the Settlement Agreement as described in such note 9.  The Court approved entry of the final order which is in administrative processing. There is a 30-day period to appeal after entry of the order, after which (assuming no appeal is taken) the terms will be effective upon the payment of $950,000 to Huff.  
 
 
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Kitchen Parties

Under the Termination and Settlement Agreement described in note 2 of the consolidated financial statements included elsewhere herein, the Company paid $440,000 towards legal fees purportedly due under the License and Development Agreements in connection with protecting Kitchen’s intellectual property through patent filings and certain pending third party litigation.  The Company also paid $40,000 to reimburse the ThrillRides Parties for expenses incurred by them under the License Agreement. The Company advanced $250,000 against a $4,000,000 royalty due to the Kitchen Parties under the Termination and Settlement Agreement.

Income Taxes
 
For the nine months ended September 30, 2012 and 2011, the Company did not record a provision for income taxes because the Company has incurred taxable losses since its formation in 2007.  As it has no history of generating taxable income, the Company reduces any deferred tax assets by a full valuation allowance.
 
Liquidity and Capital Resources
 
We have no current cash flow and cash on hand is not sufficient to fund our short-term liquidity needs during 2012, including our ordinary course obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
 
We have received an opinion from our auditor expressing substantial doubt as to our ability to continue as a going concern. Our ability to continue as a going concern will depend on whether or not we can successfully capitalize and finance, implement and operate our new line of business.  We have no long-term financing in place or commitments for such financing to develop and commercialize our new location-based entertainment line of business.  As described below, certain of our directors, officers and greater than 10% stockholders have been financing all of our short-term liquidity requirements during 2012, and there is no assurance they will continue to do so.

During the three and nine months ended September 30, 2012, we have funded our short-term capital requirements through borrowings under the following unsecured demand loans:

On January 30 and January 31, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $750,000, bearing interest at the rate of 6% per annum.

On March 8 through March 13, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $600,000, bearing interest at the rate of 6% per annum.

On April 10 through April 16, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $750,000, bearing interest at the rate of 6% per annum.

On June 7 through June 11, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $450,000, bearing interest at the rate of 6% per annum.
 
 
20

 

On July 20 through July 25, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $450,000, bearing interest at the rate of 6% per annum.

On August 16 through August 17, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders of made unsecured demand loans to the Company totaling $400,000, bearing interest at the rate of 6% per annum.

On August 29, 2012, certain of the Company’s directors, executive officers and greater than 10% stockholders made unsecured demand loans to the Company totaling $200,000, bearing interest at the rate of 6% per annum.

Because the foregoing demand loans involved certain of the Company’s directors, executive officers and greater than 10% stockholders, such demand loans were approved by a majority of the Company’s disinterested directors.

We intend to fund our new line of business and satisfy our liquidity requirements for the next twelve months through equity and/or debt financings.   There is no assurance we will be able to do so on terms acceptable to us or at all.
 
Cash Flow for the Nine Months Ended September 30, 2012 and 2011

Operating Activities

Cash used in operating activities of approximately $2.5 million for the nine months ended September 30, 2012 consisted primarily of the net loss for the period of approximately $13.7 million, which includes depreciation and amortization costs of less than $0.1 million, an increase in the write down of capitalized development costs of $2.7 million, an increase in the write down of capitalized advanced royalty fees of $1.5 million, an increase in the write down of capitalized license fees of $1.0 million and an increase in accounts payable of approximately $4.4 million, offset by a decrease in other assets of approximately $0.1.  There was an increase in working capital levels during the quarter of less than $0.1 million for the nine months ended September 30, 2012.

Investing Activities

Cash used in investing activities of approximately $$1.6 million for the nine months ended September 30, 2012 primarily reflects the addition to capitalized development costs.

Financing Activities
 
Cash provided by financing activities of approximately $3.7 million for the nine months ended September 30, 2012 reflects proceeds from the unsecured demand loans from related parties.

Uses of Capital
 
At September 30, 2012, we had $10.7 million of principal amount of debt outstanding and approximately $0.2 million in cash and cash equivalents. Our current cash on hand is not sufficient to fund our current needs.  
 
 
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Capital Expenditures

Our business plan is to develop a new location-based entertainment line of business featuring, among other attractions, observation wheels.   Complete development of our new location-based entertainment line of business will require significant capital and financing. Based on preliminary budgets, management estimates total construction costs of the current plan to be approximately [$25 million] (exclusive of land cost and related financing and other pre-opening costs) and estimates it will capitalize development costs of approximately [$5 million] during 2012. Although we expect that development of and construction of the observation wheels will require very substantial expenditures over a period of several years, it is too early in the planning stages of such project to accurately estimate the potential costs of such project.
 
Dividends
 
We currently intend to retain any future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Furthermore, our Series A Convertible Preferred Stock and Series B Convertible Preferred Stock are senior to our Common Stock as to the right to receive cash dividends.  There are current dividend arrearages on our Series A Convertible Preferred Stock and Series B Convertible Preferred Stock and unless and until such arrearages are satisfied in full, we may not pay cash dividends on our Common Stock.  In addition, the terms of any future debt agreements we may enter into are likely to prohibit or restrict, the payment of cash dividends on our common stock.
 
Commitments and Contingencies
 
There are various lawsuits and claims pending against us and which we have initiated against others. We believe that any ultimate liability resulting from these actions or claims will not have a material adverse effect on our results of operations, financial condition or liquidity.

As of September 30, 2012, there were total dividend arrearages on the Company’s outstanding Series A Convertible Preferred Stock and Series B Convertible Preferred Stock of approximately $300,208 and $384,018, respectively.  These dividend arrearages constitute $200.14 and $153.61 per share of Series A Convertible Stock and Series B Convertible Preferred Stock, respectively.

Inflation

Inflation is not expected to have an immediate impact on our new location-based entertainment line of business.
 
Application of Critical Accounting Policies
 
During the quarter ended September 30, 2012, there were no significant changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
Off Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements.
 
 Seasonality
 
We do not consider our business to be seasonal.
 
 
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ITEM 4.  
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Management, with the participation of the Company’s chief executive officer, Robert F.X. Sillerman, and its principal financial  officer, Gary McHenry, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of September 30, 2012.  Based on this evaluation, the chief executive officer and principal financial officer have concluded that, as of that date, disclosure controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, were effective.
 
Changes in Internal Control over Financial Reporting
 
The loss of certain key accounting and finance personnel, coupled with our limited financial and human resources, has materially affected our internal controls over financial reporting, including internal controls over accounting for stock based compensation, accounting for long-lived assets and the financial statement close process. Due to the impact of these events on our internal control over financial reporting in these areas, significant adjustments have been and continue to be necessary to present our consolidated financial statements in accordance with generally accepted accounting principles. As a result, material weaknesses in internal controls over financial reporting, as previously determined since before December 31, 2010, continue to persist.
 
We have initiated a process which would allow our company to remediate the internal control weaknesses. This process will include, but is not limited to, the following: (1) increasing staff to properly segregate duties; (2) expanding managerial oversight on projects focusing on safeguarding assets; and (3) modifying our processes to conform with our current line of business.

While we began the process in the third quarter of 2011, there is no assurance we will complete the process or even if we do that the process will remediate the foregoing internal control weaknesses or prevent the occurrence of additional material weaknesses in our internal control over financial reporting.
 
 
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ITEM 1.
LEGAL PROCEEDINGS
 
Reference is made to note 9 (Litigation) to the Company’s consolidated financial statements included elsewhere in this report for the information required by this Item.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
Reference is made to note 9 (Preferred Dividends in Arrears) to the Company’s consolidated financial statements included elsewhere in this report for the information required by this Item.

ITEM 6 .
EXHIBITS
 
The documents set forth below are filed herewith or incorporated by reference as indicated.

Exhibit Number
 
Description
 
     
10.1
 
Stipulation and Settlement Agreement dated July 12, 2012 (1)
     
10.2
 
Termination and Settlement Agreement (2)
     
31.1
 
Certification of Principal Executive Officer
     
31.2
 
Certification of  Principal Financial Officer
     
32.1
 
Section 1350 Certification of Principal Executive Officer
     
32.2
 
Section 1350 Certification of Principal Financial Officer
     
101.INS*   XBRL Instance Document
     
 101.DEF*   XBRL Definition Linkbase Document
     
 101.CAL*   XBRL Extension Calculation Linkbase Document
     
 101.LAB*   XBRL Extension Label Linkbase Document
     
 101.PRE*   XBRL Presentation Linkbase Document
     
 101.SCH*   XBRL Extension Schema Document
 
(1) Incorporated by reference from the Company’s Current Report on Form 8-K dated July 12, 2012.
(2) Incorporated by reference from the Company’s Current Report on Form 8-K dated August 17, 2012
+ Filed herewith
* Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under these sections.
 
 
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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf of the undersigned thereunto duly authorized.
 
 
 
Circle Entertainment Inc.
 
       
November 9, 2012
By: 
/s/ Robert F.X. Sillerman
 
   
Robert F.X. Sillerman
Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
 
 
       
November 9, 2012
By:
/s/ Gary McHenry
 
   
Gary McHenry
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
 
 
 
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 INDEX TO EXHIBITS
 
The documents set forth below are filed herewith.
 
Exhibit Number
 
Description
 
     
 
Certification of Principal Executive Officer
     
 
Certification of Principal Financial Officer
     
 
Section 1350 Certification of Principal Executive Officer
     
 
Section 1350 Certification of Principal Financial Officer
 
 
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