UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form  10-Q/A





þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2014ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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)





70 East 55th Street, New York, New York 10022


(Address of Principal Executive Offices and Zip Code)





Registrant’s Telephone Number, Including Area Code: (212) 796-8199





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
oNon-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 August [__], 2014, there were 65,076,162 shares of the registrant’s common stock outstanding.













TABLE OF CONTENTS





PART I. FINANCIAL INFORMATIONExplanatory Note


3Item 1.
Financial Statements


4Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013


4Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013 (Unaudited)


5Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (Unaudited)


6Notes to Unaudited Consolidated Financial Statements


8Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations


14Item 4.
Controls and Procedures


18PART II. OTHER INFORMATIONItem 1.
Legal Proceedings


18Item 3.
Defaults Upon Senior Securities


18Item 6.
Exhibits


19











EXPLANATORY NOTE





On August 7, 2014, Circle Entertainment Inc. (the “Company”) filed with the Securities and Exchange Commission (the “SEC”) its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 (the “Original Quarterly Report”).  The Original Quarterly Report was filed with an undated  signature page and undated Exhibits 31.1, 31.2, 32.1, and 32.2..  The Company is filing this Amendment No. 1 (the “Amendment”) to date the signature page and Exhibits 31.1, 31.2, 32.1, and 32.2 of the Original Quarterly Report.  Except for the foregoing change to the signature page and Exhibits 31.1, 31.2, 32.1, and 32.2 of the Original Quarterly Report, no other information included in the Original Quarterly Report is amended by this Amendment.  This Amendment speaks as of the original filing date of the Original Quarterly Report and does not reflect events occurring after the filing date of the Original Quarterly Report, or modify or update the disclosures therein in any way other than as required to reflect the foregoing change to the signature page and Exhibits 31.1, 31.2, 32.1, and 32.2 of the Original Quarterly Report described herein.


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. and its consolidated subsidiaries, Circle Entertainment SV-I, LLC, Circle Entertainment SV-Orlando, LLC, Circle Entertainment Orlando-Property LLC, FXL, Inc., Circle Heron LLC, FX Luxury, LLC, and Circle I Drive LLC.





As has been previously reported, on December 30, 2013, the independent members of the Board of Directors (the “Board”) of the Company received a letter (the “Letter”) from Paul C. Kanavos, the President and a greater than 10% stockholder of the Company, Robert F. X. Sillerman, a non-independent member of the Board and a greater than 10% stockholder of the Company, and Brett Torino, a greater than 10% stockholder of the Company, in which Kanavos, Sillerman and Torino have proposed to acquire all of the shares of common stock of the Company that they do not beneficially own for a purchase price of $0.03 per share pursuant to a short-form merger and related transactions (the ‘Proposal”).





Messrs. Kanavos, Sillerman and Torino beneficially own more than 50% of the outstanding shares of the Company’s common stock.





The Letter acknowledges that the Board will establish a special committee composed solely of independent and disinterested members of the Board to negotiate the terms of the transactions contemplated by the Proposal.





No binding obligation on the part of Messrs. Kanavos, Sillerman and Torino or the Company will arise with respect to the Letter or Proposal (other than as indicated below) unless and until a definitive agreement with the Company is executed and delivered.





Pursuant to the terms of the Letter, Kanavos, Sillerman and Torino have agreed to pay certain of the professional fees of the Company (including those of the special committee of the Board) incurred in connection with the transactions contemplated by the Proposal whether or not completed.





The Board will review and evaluate the Letter and the Proposal in due course, consistent with its fiduciary duties. Accordingly, in February 2014, the Board formed a Special Committee of independent directors to evaluate the Proposal. The members of the Special Committee are Michael J. Meyer and David Ledy, both of whom the Board believes are independent and disinterested in respect of the Proposal.  The Special Committee has retained independent counsel and a financial advisor to evaluate whether any transaction arising out of the Proposal is fair, from a financial point of view, to the Company’s non-participating and unaffiliated shareholders.  The Special Committee, with the assistance of its advisors, is in the process of evaluating the Proposal.





In March 2014, Harvey Silverman, a member of our Board, Mitchell J. Nelson, our Executive Vice President and General Counsel, and Maple Hill Companies, LLC or an affiliate thereof, a consultant to the Company, among others, indicated that they intend to participate with Messrs. Kanavos, Sillerman and Torino in the transactions contemplated by the Proposal.





While evaluating the Proposal, the Company has ceased pursuing the development and commercialization of its location-based entertainment line of business, which it had been doing since September 10, 2010.





We do not currently generate any revenue from our location-based entertainment line of business, which requires significant capital and financing. Our expenses are currently being funded by proceeds from a development loan for the Orlando, Florida project in which we have a minority ownership interest and under a Funding Agreement between the project owner (which is controlled by Messrs. Sillerman, Kanavos and Torino) and the Company. However, the funding by the project owner under the Funding Agreement, which began during the fourth quarter of 2012, has exceeded the Funding Agreement’s limit and is continuing at the project owner’s discretion and, thus, may cease at any time, whereupon the Company’s ability to continue as a going concern will depend on its ability to complete equity and/or debt financings until such time, if ever, as it commercializes and generates significant revenue from its location-based line of business.  During the three months ended June 30, 2014, Messrs. Kanavos, Sillerman and Torino provided us with $645,565 of funding to pay certain of our expenses. We have classified that funding as capital contributions in our consolidated financial statements included elsewhere in this report.  There is no assurance that Messrs. Kanavos, Sillerman and Torino will provide any additional funding to us as capital contributions or otherwise. Messrs. Kanavos, Sillerman and Torino financed substantially all of the Company’s short-term liquidity requirements from 2010 through most of 2012. Investors should read all of the information set forth in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 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.





CONSOLIDATED BALANCE SHEETS





June 30,


December 31,2014


2013ASSETS

UnauditedCurrent assets:Cash and cash equivalents

$
195,116


$
271,549Prepaid expenses and other current assets


33,587



21,481Total current assets


228,703



293,030Investment in real estate:Furniture, fixtures and equipment


158,269



122,523Leasehold improvements


213,765



213,765Capitalized development costs


---



---Less: accumulated depreciation


(58,903
)


(30,458
)Net investment in real estate


313,131



305,830Other assets, net


---



378,538Total assets

$
541,834


$
977,398LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts payable and accrued expenses

$
4,845,391


$
4,573,290Due to related parties


1,990,581



1,623,380Loans payable to related parties


11,083,000



11,083,000Total current liabilities


17,918,972



17,279,670Other long-term liabilities


---



---Total liabilities


17,918,972



17,279,670Commitments and contingencies


---



---Stockholders’ deficit:Preferred stock, $0.01 par value: authorized 75,000,000 shares, 1,500 shares of Series A Convertible Preferred Stock issued and outstanding at June 30, 2014 and December 31, 2013, respectively, and 2,500 shares of Series B Convertible Preferred Stock issued and outstanding at June 30, 2014 and December 31, 2013, respectively


40



40Common stock, $0.01 par value: authorized 300,000,000 shares, 65,076,162shares  issued and outstanding at June 30, 2014 and December 31, 2013, respectively


650,762



650,762Additional paid-in-capital


96,858,458



96,212,893Accumulated deficit


(114,886,398
)


(113,165,967
)Total stockholders’ deficit


(17,377,138
)


(16,302,272
)Total liabilities and stockholders’ deficit

$
541,834


$
977,398





See accompanying unaudited notes to consolidated financial statements.





4





Circle Entertainment Inc.





CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)





Three Months


Three MonthsEnded


EndedJune 30, 2014


June 30, 2013Revenue

$
---


$
---Operating expenses:Selling, general and administrative expenses


701,931



279,456Depreciation and amortization


14,825



1,041---



---Total operating expenses


716,756



280,497Loss from operations


(716,756
)


(280,497
)Interest income


1



---Interest expense


(185,849
)


(166,696
)---



---Net loss


(902,604
)


(447,193
)Basic and diluted loss per share

$
(0.01
)

$
(0.01
)Basic and diluted average number of common shares outstanding


65,076,162



65,076,161





See accompanying unaudited notes to consolidated financial statements.





5




Circle Entertainment Inc.





CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)





Six Months


Six MonthsEnded


EndedJune 30, 2014


June 30, 2013Revenue

$
---


$
---Operating expenses:Selling, general and administrative expenses


1,324,786



526,008Depreciation and amortization


28,445



2,083---



---Total operating expenses


1,353,231



528,091Loss from operations


(1,353,231
)


(528,091
)Interest income


1



1Interest expense


(367,201
)


(364,367
)----



---Net loss


(1,720,431
)


(892,457
)Basic and diluted loss per share

$
(0.03
)

$
(0.01
)Basic and diluted average number of common shares outstanding


65,076,162



65,076,161





See accompanying unaudited notes to consolidated financial statements.





6




Circle Entertainment Inc.





CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)





Six Months


Six MonthsEnded


EndedJune 30, 2014


June 30, 2013Cash flows from operating activities:Net loss

$
(1,720,431
)

$
(892,457
)Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization


28,445



2,083Changes in operating assets and liabilities:Other current and non-current assets


366,432



(105,577
)Accounts payable and accrued expenses


272,101



(272,076
)Due to related parties


367,201



364,367Net cash used in operating activities


(686,252
)


(903,660
)Cash flows from investing activities:Purchase of property and equipment


(35,746
)


(24,000
)Capitalized development costs


---



(4,772
)Net cash used in investing activities


(35,746
)


(28,772
)Cash flows from financing activities:Capital contributions


645,565



---Net contribution from funding agreement


---



249,179Net cash provided by financing activities


645,565



249,179Net decrease in cash and equivalents


(76,433
)


(683,253
)Cash and cash equivalents — beginning of period


271,549



1,023,674Cash and cash equivalents — end of period

$
195,116


$
340,421Supplemental cash flow data:Cash paid for interest

$
---


$
---





See accompanying unaudited notes to consolidated financial statements.





7




Circle Entertainment Inc.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1.
Basis of Presentation








The accompanying consolidated financial statements as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013 reflect the results of operations of Circle Entertainment Inc., a Delaware corporation (hereinafter, “Circle” or the “Company”), and its consolidated subsidiaries, Circle Entertainment SV-I, LLC, Circle Entertainment SV-Orlando, LLC, Circle Entertainment Orlando-Property LLC, FXL, Inc., Circle Heron LLC, FX Luxury, LLC, and Circle I Drive LLC.





The consolidated financial statements for the three and six months ended June 30, 2014 and 2013 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 consolidated balance sheet at December 31, 2013 has been derived from the Company’s audited consolidated financial statements as of that date. These unaudited consolidated financial statements for the three and six months ended June 30, 2014 and 2013 should be read in conjunction with such audited consolidated financial statements and related notes thereto as of and for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K for such year (the “2013 Form 10-K”) as filed with the Securities and Exchange Commission on March 25, 2014.





The operating results for the three and six months ended June 30, 2014 and 2013 are not necessarily indicative of the results for the full year.


2.
Business of the Company


As has been previously reported, on December 30, 2013, the independent members of the Board of Directors (the “Board”) of the Company received a letter (the “Letter”) from Paul C. Kanavos, the President and a greater than 10% stockholder of the Company, Robert F. X. Sillerman, a non-independent member of the Board and a greater than 10% stockholder of the Company, and Brett Torino, a greater than 10% stockholder of the Company, in which Kanavos, Sillerman and Torino have proposed to acquire all of the shares of common stock of the Company that they do not beneficially own for a purchase price of $0.03 per share pursuant to a short-form merger and related transactions (the ‘Proposal”).





Messrs. Kanavos, Sillerman and Torino beneficially own more than 50% of the outstanding shares of the Company’s common stock.





The Letter acknowledges that the Board will establish a special committee composed solely of independent and disinterested members of the Board to negotiate the terms of the transactions contemplated by the Proposal.





No binding obligation on the part of Messrs. Kanavos, Sillerman and Torino or the Company will arise with respect to the Letter or Proposal (other than as indicated below) unless and until a definitive agreement with the Company is executed and delivered.





Pursuant to the terms of the Letter, Kanavos, Sillerman and Torino have agreed to pay certain of the professional fees of the Company (including those of the special committee of the Board) incurred in connection with the transactions contemplated by the Proposal whether or not completed.





The Board will review and evaluate the Letter and the Proposal in due course, consistent with its fiduciary duties. Accordingly, in February 2014, the Board formed a Special Committee of independent directors to evaluate the Proposal. The members of the Special Committee are Michael J. Meyer and David Ledy, both of whom the Board believes are independent and disinterested in respect of the proposal.  The Special Committee has retained independent counsel and a financial advisor to evaluate whether any proposed transaction arising out of the Proposal is fair, from a financial point of view, to the Company’s non-participating and unaffiliated stockholders.  The Special Committee, with the assistance of its advisors, is in the process of evaluating the Proposal.




In March 2014, Harvey Silverman, a member of our Board, Mitchell J. Nelson, our Executive Vice President and General Counsel, and Maple Hill Companies, LLC or an affiliate thereof, a consultant to the Company, among others, indicated that they intend to participate with Messrs. Kanavos, Sillerman and Torino in the transactions contemplated by the Proposal.





While evaluating the Proposal, the Company has ceased pursuing the development and commercialization of its location-based entertainment line of business.





8





The Company has been pursuing the development and commercialization of its 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 revenue from its location-based entertainment line of business and, as described below, its expenses are currently being funded by proceeds from a development loan for the Orlando, Florida project in which the Company has a minority ownership interest and under a Funding Agreement between the project owner (which is controlled by Messrs. Sillerman, Kanavos and Torino) and the Company. However, the funding by the project owner under the Funding Agreement, which began during the fourth quarter of 2012, has exceeded the Funding Agreement’s limit and is continuing at the project owners’ discretion and, thus, may cease at any time, whereupon the Company’s ability to continue as a going concern will depend on its ability to complete equity and/or debt financings until such time, if ever, as it commercializes and generates significant revenue from its location-based entertainment line of business. During the three months ended June 30, 2014, Messrs. Kanavos, Sillerman and Torino provided the Company with $645,565 of funding to pay certain of its expenses. The Company has classified such funding as capital contributions in its consolidated financial statements included herewith.  There is no assurance that Messrs. Kanavos, Sillerman and Torino will provide any additional funding to the Company as capital contributions or otherwise.  Messrs. Kanavos, Sillerman and Torino financed substantially all of the Company’s short-term liquidity requirements from 2010 through most of 2012.





As has been previously reported, in November 2012, the Company restructured its position in the proposed co-development of an entertainment destination center on International Drive in Orlando, Florida (the “Orlando Project”). As a consequence of the restructuring, the Company now owns an 8.5% membership interest in I Drive Live Parent LLC, the owner of the Orlando Project (the “Project Owner”), pursuant to an operating agreement (the “Operating Agreement”). The Principals (as hereinafter defined), which include certain directors, officers, and greater than 10% stockholders of the Company (the “Company Principals”) and others (with the Company Principals, the “Principals”) own approximately 87.25% of the membership interests in the Project Owner, and a consultant to the Company owns an additional 4.25%.  The Principals provided guarantees as a condition of obtaining financing from an institutional investor/lender (the “Financing Source”) that acquired the parcel of land designated for the Orlando Project (the “Square Parcel”) and has leased the Square Parcel to entities owned by the Project Owner.  As part of the restructuring, the Company entered into a funding agreement (the “Funding Agreement”), pursuant to which the Company is to receive from the project development loan amounts between $100,000 and $250,000 per month to meet its ongoing overhead expenses as long as the Financing Source continues to fund the project development loan for the Orlando Project.  For a more complete description of the restructuring of the Company’s position in the Orlando Project, including changes to the original transaction agreement (the “Transaction Agreement”) pursuant to the related First Amendment and Assignment of Rights Agreement (the “First Amendment”), reference is made to “Item 1.  Business—Overview of the Company and its Current Business” of the 2013 Form 10-K.





Pursuant to the Operating Agreement, the affairs of Project Owner will be managed by managers selected by the members other than the Company.  The Company will be liable for its pro rata share of required additional capital contributions, but the remedies if it is unable to fund all or any portion of required additional capital contributions would be dilution of the Company’s membership interest (dilution of 25% and 50% for the first and second time, respectively, and dilution of 25% for each time thereafter), subordination of the Company's right to receive distributions of net cash flow and the loss of the Company's voting rights.  Voting by members is in accordance with percentage interests, so the Company’s vote of 8.5% will, in all likelihood, not be significant in decision-making authority.  The Operating Agreement further provides that the transfer of membership interests may only be made with consent of a super-majority of the non-transferring members.  There are tag-along rights in the event a member decides to sell its membership interest.  Under the Operating Agreement, distributions of cash or property  will be made first, to members for a preferred return of 12% per annum on their capital contributions; second, to unreturned additional capital contributions; and third, in accordance with percentage interests.  Because of the terms of the loans on the Square Parcel, it is not anticipated that the Company will receive any distributions until the $50,000,000 loan to construct the observation wheel is paid off, as the Financing Source has a cash sweep provision and will apply all excess cash to repayment of the loan and interest earned thereon, estimated to be a minimum of more than 5 years from closing.  There is no assurance that there will ever be distributions to the Company under the Operating Agreement or the amount of any such distributions.




Under the Funding Agreement, certain proceeds shall be disbursed to the Company from project financing, from time to time, only if, as and when disbursed by the lenders.  The Funding Agreement includes a separate commitment to fund between $100,000 and $250,000 a month for ongoing overhead expenses of the Company from the monthly draws for construction and improvements to the property so long as such draws continue, which is anticipated to be approximately 18 to 20 months (from December 2012) during the construction period and if insufficient to meet those expenses, then each of Paul C. Kanavos and Mitchell J. Nelson, executive officers of the Company, have agreed to subordinate his salary to the payment of the other overhead expenses, and the consultant of the Company with the ownership interest in the Project Owner has also agreed to subordinate his consulting fees to the payment of the other overhead expenses.  As of June 30, 2014, the Company is in arrears on current year salaries and consulting fees due to its executive officers and consultants. Amounts accrued to Mr. Kanavos are approximately $1,568,237 as of June 30, 2014. Amounts accrued to Mr. Nelson are approximately $731,250 as of June 30, 2014. The Company has amounts accrued to Maple Hill Companies LLC, the consultant referenced above, of approximately $450,000 as of June 30, 2014. Such amounts are included in the item “Accounts payable and accrued expenses” set forth on the Company’s consolidated balance sheets and consolidated statements of cash flows included elsewhere in this report.





As of October 31, 2013, the Company has stopped making payments to Viggle for its share of Mr. Nelson’s salary, and Mr. Nelson is not being paid for the 25% of his salary that would be paid by the Company.





9





As has been previously reported, on August 23, 2012, the Company, pursuant to a termination and settlement agreement, terminated (i) the Exclusive License Agreement with William J. Kitchen and US ThrillRides, LLC, pursuant to which the Company was granted a worldwide exclusive license to use and commercially exploit all of these counterparties’ patents and other intellectual property, trade secrets and know-how pertaining to all aspects of the adaptation of an observation wheel legally known as a SkyViewTM including, without limitation, its engineering, design, development, construction, operation and maintenance, and (ii) the related Development Agreement with these counterparties (these agreements are collectively referred to as “SkyView Agreements” ).   The Company’s obligations with respect to the SkyView Agreements have been satisfied in full.





On December 31, 2013, the Transaction Agreement expired as to the other property, known as the “OHI Parcel”, consisting of 10 acres in Orlando, Florida.  As has been previously reported, on June 11, 2013, the Company and the other parties to the Transaction Agreement entered into the Second Amendment to Transaction Agreement pursuant to which the closing date for acquisition of the OHI Parcel was extended to December 31, 2013 from June 30, 2013.  In addition, pursuant to the Second Amendment to Transaction Agreement, the Company’s required capital contribution to purchase the 65% interest in the OHI Parcel has been increased from $1,000,000.00 to $2,000,000.00. As an inducement for Charles Whittall and his affiliated entities (the “Whittall Parties”) to enter into the Second Amendment to Transaction Agreement, certain of the majority owners of the Project Owner, who are also the majority stockholders of the Company, agreed to extend the Whittall Parties a loan of up to $2,000,000.00 to fund tenant improvements on the OHI Parcel.





However, the closing of the acquisition of the OHI Parcel did not occur on December 31, 2013. As a result, the Transaction Agreement, as amended by the Second Amendment, expired.  There are no further discussions between the parties relating to the OHI Parcel.





For a more detailed description of the Transaction Agreement, it’s First Amendment, the Operating Agreement, the Funding Agreement and the termination of the SkyView Agreements, reference is made to “Item 1. Business—Overview of the Company and its Current Business” of the 2013 Form 10-K.





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.





Because the Company does not currently generate any revenue from its location-based entertainment line of business, the Company may not be able to continue as a going concern for the next twelve months.  The Company’s ability to continue as a going concern for the next twelve months depends upon the Financing Source funding the construction requirements under the facility for the Orlando Project and the Project Owner, at its discretion, continuing to provide the Company with funds under the Funding Agreement and/or its ability to complete equity and/or debt financings.  During the three months ended June 30, 2014, Messrs. Kanavos, Sillerman and Torino provided the Company with $645,565 of funding to pay certain of its expenses. The Company has classified such funding as capital contributions in its consolidated financial statements included herewith. There is no assurance that Messrs. Kanavos, Sillerman and Torino will provide any additional funding to the Company as capital contributions or otherwise.





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 2013 Form 10-K in order to better understand the financial condition of, and risks of investing in, the Company.





4.
Accounting Policies





Significant Accounting Policies





During the six months ended June 30, 2014, there has been no significant change in the Company’s significant accounting policies and estimates as disclosed in the 2013 Form 10-K.





Recent Accounting Pronouncements





There have been no recent accounting pronouncements or changes in accounting pronouncements that impacted the quarterly periods ended June 30, 2014 and 2013, 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 three months ended June 30, 2014 and 2013, 4,811,961 and 4,811,961 shares, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.











6.
Loans Payable to Related Parties





During 2012, the Company funded its working capital requirements through private debt financings. The debt financings made were unsecured demand loans, bearing interest at the rate of 6% per annum. The total loan proceeds for the year ended December 31, 2012 were $4,033,000.





Because Messrs. Kanavos, Sillerman and Torino made the loans, a majority of the Company’s disinterested directors approved the loans.





7.
Share-Based Payments





There was no compensation expense for stock option grants included in the accompanying consolidated statements of operations in selling, general and administrative expenses for the three and six months ended June 30, 2014 and 2013, 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 six months ended June 30, 2014 and 2013, 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 June 30, 2014.





There are no income tax audits currently in process with any taxing jurisdictions.





9.
Commitments and Contingencies





Huff 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., then 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. The Court approved entry of the order on December 13, 2012, and there was a 30-day period to appeal after entry of the order, after which (assuming no appeal was taken) the terms will be effective upon the payment of $950,000 to Huff. The appeal period was over on January 14, 2013 and the order was final. Under the Settlement Agreement, January 14, 2013 is deemed to be the “Effective Date” of the Settlement Agreement. The $950,000 was funded timely, $650,000 by the Company and $300,000 by its insurance carrier.





11





Under the Settlement Agreement, among other things, the Company 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 and is not permitted to decrease the number of independent directors for a period of at least three (3) years from the Effective Date.  Therefore, the Company’s Board of Directors, upon the recommendation of the Nominating and Corporate Governance Committee, unanimously elected Andrew Perel as a member of the Board of Directors, effective March 1, 2013, to serve until the next annual meeting of stockholders or the earlier of his resignation, removal and death and appointed Mr. Perel to serve as a member of the Board’s Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Immediately prior to Mr. Perel’s election to the Board and his appointment to the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, the Board increased the size of the Board to seven (7) members from six (6) members and increased the size of each of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee by one member.  Effective September 30, 2013, Bryan Bloom, who was serving as a member of the Company’s Board of Directors as the designee of the holder of the Designated Preferred Stock, resigned as a member of the Company Board of Directors, and therefore the size of the Board was decreased from seven (7) members to six (6) members.  The number of independent directors was not changed.  Mr. Bloom was not a member of any Committees of the Board of Directors.








Mr. Perel is an "independent" director (as defined in the Settlement Agreement and also as defined in the Company’s Charters for the Board of Directors’ Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, and by applicable rules of The NASDAQ Global Market and the Securities and Exchange Commission relating thereto). Mr. Perel was reelected as a member of the Board of Directors at the Company’s 2013 annual meeting of stockholders held on September 9, 2013.





Preferred Dividends in Arrears





As of June 30, 2014, there were total dividend arrearages on the Company’s outstanding Series A Convertible Preferred Stock and Series B Convertible Preferred Stock of approximately $600,442 and $841,073, respectively. These dividend arrearages constitute $400.29 and $336.43 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”) (a company owned and controlled by Paul Kanavos, Robert F.X. Sillerman and Brett Torino), from time to time, provide services for the Company. 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 Company’s audit committee.  For the three months ended June 30, 2014 and 2013, Flag incurred and billed the Company $0.1 million and $0.1 million, respectively.  For the six months ended June 30, 2014 and 2013, Flag incurred and billed the Company $0.1 million and $0.2 million, respectively. The services provided for the three and six months ended June 30, 2014 and 2013 were approved by the Company’s audit committee. The services provided consisted primarily of 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 shall each be 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 under the shared services agreement.





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 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 runs until December 31, 2011, but may be extended or earlier terminated 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.  The shared services agreement with BPS was terminated on July 31, 2012.





12





As of February 15, 2011, the Company entered into a shared services agreement with Function (x) Inc., now known as Viggle Inc. (“Viggle”) (a company substantially owned and controlled by Robert F.X. Sillerman), pursuant to which it shares costs for legal and administrative services in support of Mitchell J. Nelson, the Company’s General Counsel and Executive Vice President to Viggle. The shared services agreement provides, in general, for sharing the applicable support provided by either company to Mr. Nelson, and an allocation generally based on the services provided by Mr. Nelson, which are estimated to be divided 25% to Viggle, 50% to SFX, and 25% to the Company. 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 months ended June 30, 2014 and 2013, Viggle incurred and billed the Company $0.1 million and $0.1 million, respectively.  For the six months ended June 30, 2014 and 2013, Viggle incurred and billed the Company $0.1 million and $0.1 million, respectively.





As of January 4, 2013, the Company entered into a shared services agreement with SFX Holding Corporation, now known as SFX Entertainment Inc. (“SFX”) (a company substantially owned and controlled by Robert F.X. Sillerman), pursuant to which it shares costs for legal and administrative services in support of Mitchell J. Nelson, its Senior Legal Advisor and the Company’s General Counsel.  The shared services agreement provides, in general, for sharing generally based on the services provided by Mr. Nelson.  Mr. Nelson will continue to be paid by Viggle, and SFX will reimburse the Company or Viggle directly for its portion of 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).  For the three and six months ended June 30, 2014 and 2013, SFX’s share was 50%, which was reimbursed directly to Viggle.








11.
Subsequent Events





None




13





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 (“SEC”). 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, 2013 and the consolidated financial statements and related notes of the Company included elsewhere in this Quarterly Report.





As has been previously reported, on December 30, 2013, the independent members of the Board of Directors (the "Board") of the Company received a letter (the "Letter") from Paul C. Kanavos, the President and a greater than 10% stockholder of the Company, Robert F.X. Sillerman, a non-independent member of the Board and a greater than 10% stockholder of the Company, and Brett Torino, a greater than 10% stockholder of the Company, in which Kanavos, Sillerman and Torino have proposed to acquire all of shares of common stock of the Company that they do not beneficially own for a purchase price of $0.03 per share pursuant to a short-form merger and related transactions (the "Proposal").





Messrs. Kanavos, Sillerman and Torino beneficially own more than 50% of the outstanding shares of the Company’s common stock.





The Letter acknowledges that the Board will establish a special committee composed solely of independent and disinterested members of the Board to negotiate the terms of the transactions contemplated by the Proposal.





No binding obligation on the part of Messrs. Kanavos, Sillerman and Torino or the Company will arise with respect to the Letter or Proposal (other than as indicated below) unless and until a definitive agreement with the Company is executed and delivered.





Pursuant to the terms of the Letter, Kanavos, Sillerman and Torino have agreed to pay certain of the professional fees of the Company (including those of the special committee of the Board) incurred in connection with the transactions contemplated by the Proposal whether or not completed.





The Board will review and evaluate the Letter and the Proposal in due course, consistent with its fiduciary duties.  Accordingly, in February 2014, the Board formed a Special Committee of independent directors to evaluate the Proposal. The members of the Special Committee are Michael J. Meyer and David Ledy, both of whom the Board believes are independent and disinterested in respect of the Proposal. The Special Committee has retained independent counsel and a financial advisor to evaluate whether any transaction arising out of the Proposal is fair, from a financial point of view, to the Company’s non-participating and unaffiliated shareholders. The Special Committee, with the assistance of its advisors, is in the process of evaluating the Proposal.





In March 2014, Harvey Silverman, a member of our Board, Mitchell J. Nelson, our Executive Vice President and General Counsel, and Maple Hill Companies, LLC or an affiliate thereof, a consultant to the Company, among others, indicated that they intend to participate with Messrs. Kanavos, Sillerman and Torino in the transactions contemplated by the Proposal.





Executive Summary





We have been pursuing the development and commercialization of our new location-based entertainment line of business since September 10, 2010.  The Company does not currently generate any revenue from its location-based entertainment line of business.





As has been previously reported, in November 2012, the Company restructured its position under the Transaction Agreement for the Orlando project (i.e., co-development of an entertainment destination center on International Drive in Orlando, Florida) pursuant to the First Amendment.





14





Also has been previously reported in August 2012, the Company terminated the SkyView Agreements pursuant to a termination and settlement agreement.





In connection with the First Amendment, an institutional investor/lender (the “Financing Source”) acquired the parcel of property designated under the Transaction Agreement for the Orlando project  (the “Square Parcel”), and leased the Square Parcel to entities owned by I Drive Live Parent, LLC (the “Project Owner”), which is an affiliate of certain directors, officers and greater than 10% stockholders of the Company  (the “Company Principals”) and others (collectively, the “Principals”), and provided financing for the construction of the Orlando project, which such Principals guaranteed as a condition to obtaining the financing.  The Company received an 8.5% ownership interest in the Project Owner and benefitted from a funding agreement (the “Funding Agreement”) with the Project Owner entered into pursuant to which certain of the Company’s then outstanding obligations (approximately$5,700,000) were satisfied by the Project Owner.  The Project Owner also agreed to fund Company’s reasonable overhead between $100,000 and $250,000 a month as long as the Financing Source continued to fund the construction requirements under the facility for the Orlando project that was entered into simultaneously with the closing ,and if insufficient to meet those expenses, then each of Paul C. Kanavos and Mitchell J. Nelson, executive officers of the Company, have agreed to subordinate his salary to the payment of the other overhead expenses, and the consultant of the Company with the ownership interest in the Project Owner has also agreed to subordinate his consulting fees to the payment of the other overhead expenses.  As of June 30, 2014, the Company is in arrears on current year salaries and consulting fees due to its executive officers and consultants. Amounts accrued to Mr. Kanavos are approximately $1,568,237 as of June 30, 2014. Amounts accrued to Mr. Nelson are approximately $731,250 as of June 30, 2014.  The Company has amounts accrued to Maple Hill Companies LLC, the consultant referenced above, of approximately $450,000 as of June 30, 2014. Such amounts are included in the item “Accounts payable and accrued expenses” set forth on the Company’s consolidated balance sheets and consolidated statements of cash flows included elsewhere in this report.





Reference is made to note 2 to our consolidated financial statements included elsewhere in this report for a further description of the preceding events and related agreements.





While evaluating the Proposal, the Company has ceased to pursue the development and commercialization of its location-based entertainment line of business.





Because we do not currently generate any revenue from this line of business, we may not be able to continue as a going concern for the next twelve months.  Our ability to continue as a going concern for the next twelve months depends upon the Financing Source funding the construction requirements under the facility for the Orlando project and the Project Owner continuing to provide us, at its discretion, with funds in excess of the limit under the Funding Agreement and/or our ability to complete equity and/or debt financings.   As a result, we have received an opinion from our auditor expressing substantial doubt as to our ability to continue as a going concern.  During the three months ended June 30, 2014, Messrs. Kanavos, Sillerman and Torino provided us with $645,565 of funding to pay certain of our expenses. We have classified such funding as capital contributions in our consolidated financial statements included elsewhere in this report. There is no assurance that Messrs. Kanavos, Sillerman and Torino will provide any additional funding to us as capital contributions or otherwise.





Consolidated Operating Results for the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013





Revenue





No revenue was generated for the three months ended June 30, 2014 and 2013.





Operating Expenses





Operating expenses for the three months ended June 30, 2014 and 2013 were approximately $716,756 and $280,497, respectively. Actual operating expenses, excluding depreciation, increased in the second quarter of 2014 as compared to the second quarter of 2013 by approximately $422,475. This increase includes an increase in selling, general and administrative expenses due to an increase in consulting fees of approximately $62,500, a decrease in legal and professional fees of approximately $26,923; a decrease in funded SG&A costs of approximately $283,979, an increase in rent of approximately $15,942, an increase in shared services expense of approximately $81,330, an increase in other expenses of approximately $26,148 and a decrease in directors’ compensation of approximately $20,500. Included in corporate overhead expenses for the three months ended June 30, 2014 is a charge of approximately $162,536 in shared services charges provided by Flag pursuant to its arrangement with the Company.





Depreciation and Amortization





Depreciation and amortization increased in the second quarter of 2014 as compared to the second quarter of 2013 by approximately $13,784 due primarily to the investment in leasehold improvements and furniture and fixtures.





Interest Expense





Interest expense, net, increased by approximately $19,153 in the second quarter of 2014 as compared to the second quarter of 2013 due to the compounding of the amount of interest due on the notes due to related parties.





15





Income Taxes





For the three months ended June 30, 2014 and 2013, 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.




Consolidated Operating Results for the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013





Revenue





No revenue was generated for the six months ended June 30, 2014 and 2013.





Operating Expenses





Operating expenses for the six months ended June 30, 2014 and 2013 were approximately $1,353,231 and $528,091. Actual operating expenses, excluding depreciation, increased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 by approximately $798,778. This increase includes an increase in legal and professional fees of approximately $435; an increase in funded SG&A costs of approximately $672,500, a decrease in rent of approximately $20,464, a increase in shared services of approximately $121,816,  an increase in other expenses of approximately $2,574 offset by a decrease of approximately $23,917 in directors’ compensation fees and an increase in consulting fees of approximately $45,835.  Included in corporate overhead expenses for the six months ended June 30, 2014 is a charge of approximately $310,856 in shared services charges provided by Flag pursuant to its arrangement with the Company.  Included in corporate overhead expenses for the six months ended June 30, 2013 is a charge of $251,755 in shared services charges provided by Flag pursuant to their arrangements with the Company.





Depreciation and Amortization





Depreciation and amortization increased by approximately $26,362 in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due primarily to the investment in capitalized property and equipment.





Interest Expense





Interest expense, net, increased by approximately $2,834 in the first six months of 2014 as compared to the first six months of 2013 due to the compounding of interest calculated on the notes due to related parties and offset by a decrease in the amount of debt service incurred on the Orlando property pursuant to the restructured Transaction Agreement.





Liquidity and Capital Resources





Because we do not currently generate any revenue, we expect to fund our current line of business and satisfy our liquidity requirements for the next twelve months through the Funding Agreement. However, funding under the Funding Agreement has exceeded its limit and the Project Owner, which has continued to provide funding thereunder at its discretion, may at any time cease to continue doing so, whereupon the Company’s ability to continue as a going concern will depend on its ability to complete equity and/or debt financings until such time, if ever, as it commercializes and generates significant revenue from its location-based line of business.  There is no assurance that we will be able to complete equity and/or debt financings, if necessary, on terms acceptable to us or at all.  During the three months ended June 30, 2014, Messrs. Kanavos, Sillerman and Torino provided us with $645,565 of funding to pay certain of our expenses. We have classified such funding as capital contributions in our consolidated financial statements included elsewhere in this report.  There is no assurance that Messrs. Kanavos, Sillerman and Torino will provide any additional funding to us as capital contributions or otherwise.





16





Unless we can successfully develop and commercialize our location-based entertainment line of business, it is highly unlikely that we will be able to continue as a going concern.  While evaluating the Proposal, we have ceased pursuing the development and commercialization of its location-based entertainment line of business.




Cash Flow for the Six Months Ended June 30, 2014 and 2013





Operating Activities





Cash used in operating activities of approximately $686,252 for the six months ended June 30, 2014 consisted primarily of the net loss for the period of approximately $1,720,431, which includes depreciation and amortization costs of approximately $28,445 and an increase in accounts payable of approximately $272,101, an increase in other assets of approximately $366,432 and an increase in due to related parties of approximately $367,201.  There was an increase in working capital levels of approximately $1,005,734 for the six months ended June 30, 2014.





Cash used in operating activities of approximately $903,660 for the six months ended June 30, 2013 consisted primarily of the net loss for the period of approximately $892,457, which includes depreciation and amortization costs of approximately $2,083 and an decrease in accounts payable of approximately $272,076, an increase in due to related parties of approximately $364,367, offset by a decrease in other assets of approximately $105,577.  There was a decrease in working capital levels of approximately $13,286 for the six months ended June 30, 2013.





Investing Activities





Cash used in investing activities of $35,746 for the six months ended June 30, 2014 primarily reflects the purchase of property and equipment. Cash used in investing activities of $28,772 for the six months ended June 30, 2013 primarily reflects the addition to property and equipment of approximately $24,000 and an increase in capitalized development costs of approximately $4,772.





Financing Activities





Cash provided by financing activities was approximately $645,565 for the six months ended June 30, 2014, which consisted of capital contributions made by Messrs. Kanavos, Sillerman and Torino. Cash provided by financing activities of approximately $249,179 for the six months ended June 30, 2013 represents the net contribution received from the Funding Agreement.





Uses of Capital





At June 30, 2014, we had $11,083,000 of principal amount of debt outstanding and approximately $195,116 in cash and cash equivalents. Our current cash on hand is not sufficient to fund our current needs.





Capital Expenditures





Our business plan is to develop our location-based entertainment line of business, including development opportunities for destination entertainment centers anchored by an observation wheel-type attraction.  The development and commercialization of this location-based entertainment line of business will require significant expenditures for which we do not have adequate sources of financing at this time. During the six months ended June 30, 2014, the Company incurred approximately $0 of capitalized development costs for tenant improvements completed for a new office location, of which the Company took occupancy on October 8, 2013.





Dividends





We currently intend to retain any future earnings to support operations and to finance development and commercialization of our location-based entertainment line of business 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.





17





Commitments and Contingencies





From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its business. There were no pending material claims or legal matters as of June 30, 2014.





Inflation





Inflation is not expected to have an immediate impact on our location-based entertainment line of business.





Application of Critical Accounting Policies





During the six months ended June 30, 2014, 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, 2013.





Off Balance Sheet Arrangements





We do not have any off balance sheet arrangements.





Seasonality





We do not consider our business to be seasonal.





ITEM 4.
CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





Management, with the participation of the Company’s principal executive officer, Paul C. Kanavos, 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 June 30, 2014.  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 not 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.In addition, during 2013, we restated our audited consolidated financial statements (other than the consolidated statement of operations) as of December 31, 2012 and for the year then ended to reflect the effects of accounting and reporting errors related to the incorrect classification and recording of the funds the Company received prior to December 31, 2012 under the Funding Agreement.  The funds received by the Company prior to and since December 31, 2012 under the Funding Agreement have been classified and recorded as equity contributions.





As a result, material weaknesses in internal controls over financial reporting, as previously determined since before December 31, 2010, continue to persist.  Although we had initiated a process which would allow our company to remediate the internal control weaknesses, this process has been terminated due to our financial constraints and limited activities.





There is no assurance we will proceed at any time to 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.





ITEM 1.
LEGAL PROCEEDINGS





Reference is made to note 9 (Huff 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.




18




ITEM 6.
EXHIBITS





The documents set forth below are filed, or furnished herewith.





Exhibit Number

Description31.1 †

Certification of Principal Executive Officer31.2 †

Certification of  Principal Financial Officer32.1 *

Section 1350 Certification of Principal Executive Officer32.2 *

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




† Filed herewith




* Furnished herewith (not filed)




19





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.Date: August 7, 2014
By:
/s/ Paul C. KanavosPaul C. KanavosPresident (Principal Executive Officer)


Date: August 7, 2014
By:
/s/ Gary McHenryGary McHenryChief Financial Officer (Principal Financial Officer and Principal Accounting Officer)






20





INDEX TO EXHIBITS





The documents set forth below are filed or furnished herewith.





Exhibit Number

Description31.1†

Certification of Principal Executive Officer31.2†

Certification of Principal Financial Officer32.1*

Section 1350 Certification of Principal Executive Officer32.2 *

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




† Filed herewith




* Furnished herewith (not filed)