Filed Pursuant to Rule 424(b)(4)
Registration No. 333-174248
This is an initial public offering of Common Stock of Digital Domain Media Group, Inc. We are offering 4,920,000 shares of our Common Stock.
Prior to this offering, there has been no public market for shares of our Common Stock.
Our Common Stock has been approved for listing on the New York Stock Exchange under the symbol DDMG.
Investing in our Common Stock involves risks. See Risk Factors beginning on page 18 of this prospectus.
|Initial public offering price||$||8.500||$||41,820,000|
|Proceeds, before expenses, to Digital Domain Media Group, Inc.||$||7.905||$||38,892,600|
|(1)||Additional compensation will be paid to the underwriters. See Underwriting.|
We have granted the underwriters a 30-day option to purchase up to an additional 738,000 shares from us on the same terms and conditions as set forth above if the underwriters sell more than 4,920,000 shares of our Common Stock in this offering.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Roth Capital Partners, on behalf of the underwriters, expects to deliver the shares on or about November 23, 2011.
Roth Capital Partners
Morgan Joseph TriArtisan
Prospectus dated November 18, 2011
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|Summary Historical Consolidated and Pro Forma Financial Information||8|
|Use of Proceeds||34|
|Unaudited Pro Forma Financial Information||42|
|Selected Historical Consolidated Financial Information||45|
|Managements Discussion and Analysis of Financial Condition and Results of Operations||47|
|Certain Relationships and Related Transactions||138|
|Description of Capital Stock||143|
|Shares Eligible for Future Sale||151|
|Material U.S. Federal Income Tax Considerations||153|
|Where You Can Find More Information||163|
|Change in Independent Registered Public Accounting Firm||163|
|Index to Consolidated Financial Statements||F-1|
You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell shares of our Common Stock, and seeking offers to buy shares of our Common Stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our Common Stock.
For investors outside the United States: neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our Common Stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
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This offering and an investment in our Common Stock involve a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before making a decision to invest in our Common Stock. If any of the following risks and uncertainties develop into actual events, our business, results of operations and financial condition could be adversely affected. In those cases, the trading price of our Common Stock could decline and you may lose all or part of your investment.
The VFX industry is an intensely competitive sector of the entertainment industry. Multiple entities, including VFX companies, digital content production companies and animation studios often bid to provide VFX services for the same feature film or cross platform advertising projects, and certain of these entities have greater financial, creative and managerial resources than we do. In addition, large major motion picture studios have developed or acquired the capability to provide such services in house. Moreover, we believe foreign competitors and competitors with operations or subcontractors in countries such as South Korea, China and India may become an increasing source of competition, due largely to their access to low-cost, high-skilled labor.
The full-length, animated feature films industry, which is another intensely competitive sector of the entertainment industry, includes Disney / Pixar, DreamWorks and a number of other studios and independent film production companies. We expect the competition from other animated films to intensify as movie studios continue to develop the capability to internally produce CG imagery. Continuing technological advances may also significantly reduce barriers to entry and decrease the production time for animated films, resulting in further competition.
If we are unable to compete successfully against current or future competitors in the visual effects or animation industry, our revenues, margins and market share could be adversely affected, any of which could significantly harm our business.
A key feature of our growth strategy is to grow the portion of our business in which we participate in the creation, production and marketing of feature films and advertising. Doing so presents significant challenges and subjects our business to significant risks. For example, we face substantial competition in these areas, and do not have as extensive a history of operating in these areas as some of our competitors. If we are unsuccessful in increasing the portion of our business that is devoted to the creation, production and marketing of feature films and advertising, our ability to grow our business could be significantly limited.
Our performance to date has been and will continue to be largely dependent on the talents, efforts and performance of our senior management and key technical personnel, particularly John C. Textor, Jonathan F. Teaford and Ed J. Ulbrich, who generally have significant experience with our company and substantial relationships and reputations within the entertainment industry. Certain of our executive officers and top production executives have entered or will enter into employment and noncompetition agreements. However, while it is customary in the entertainment industry to use employment agreements as a method of retaining the services of key executive personnel, these agreements do not guarantee us the continued services of such employees. In addition, we do not currently have an employment agreement with Mr. Ulbrich, or with most of our key creative, technical and engineering personnel. The loss of our executive officers or our other key personnel, particularly with little or no notice, could cause delays on projects and could have an adverse impact on our client and industry relationships, our business, operating results or financial condition.
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Our success depends to a significant extent on our ability to identify, attract, hire, train and retain qualified creative, technical and managerial personnel. We expect competition for personnel with the specialized creative and technical skills needed to create our products and provide our services will continue to intensify as film studios build or expand in-house visual effects and animation capabilities. We often hire individuals on a project-by-project basis, and individuals who work on one or more projects for us may not be available to work on future projects. If we have difficulty identifying, attracting, hiring, training and retaining such qualified personnel, or incur significant costs in order to do so, our business and financial results could be negatively impacted.
Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. As a result of these fluctuations, financial planning and forecasting may be more difficult and comparisons of our operating results on a period-to-period basis may not necessarily be meaningful. Accordingly, you should not rely on our annual and quarterly results of operations as any indication of future performance. Each of the risk factors described in this Risks Related to Our Business section, and the following factors, may affect our operating results:
|||our ability to continue to attract clients for our services and products;|
|||the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our businesses, operations and infrastructure;|
|||our focus on long-term goals over short-term results;|
|||the results of our investments in high risk projects, such as film co-production projects;|
|||general economic conditions and those economic conditions specific to our industries;|
|||changes in business cycles that affect the markets in which we sell our products and services; and|
|||geopolitical events such as war, threat of war or terrorist actions.|
In response to these fluctuations, the market price of our Common Stock could decrease significantly in spite of our operating performance. In addition, our business has historically been cyclical and seasonal in nature, reflecting overall economic conditions as well as client budgeting and buying patterns in the advertising and entertainment industries generally. The cyclicality and seasonality in our business could become more pronounced and may cause our operating results to fluctuate more widely.
We have a history of losses. We incurred a net loss before non-controlling interests for the year ended December 31, 2010 of $45.2 million. A substantial portion of the expenses in this period was due to non-cash charges for such items as depreciation and amortization, charges related to fair values of warrants and other debt-related liabilities and stock-based compensation expense. Absent these non-cash charges, we incurred a net loss of $2.8 million for the year ended December 31, 2010. During the six months ended June 30, 2011, we incurred a net loss before non-controlling interests of $112.0 million. Absent non-cash charges, we incurred a net loss of $5.7 million during this period. If we cannot become profitable, our financial condition will deteriorate, and we may be unable to achieve our business objectives.
As part of our growth strategy, we may co-produce or invest in feature film projects that require a substantial capital investment. We cannot predict the financial success of any such project because the revenue derived from the distribution of a motion picture depends primarily upon its acceptance by the public, which cannot be accurately predicted. The financial success of a motion picture also depends upon the publics acceptance of competing films, the availability of alternative forms of entertainment and leisure time activities,
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piracy and unauthorized copying and distribution of feature films, general economic conditions, and other tangible and intangible factors, none of which can be predicted with certainty.
We expect to co-produce or invest in a limited number of such projects per year as part of our growth strategy. However, we have not yet co-produced a feature film and may never do so. In addition, the commercial failure of just one co-production project could have a material adverse effect on our results of operations, both in the year of release and in future years.
One of our operating subsidiaries recently entered into a joint marketing and production VFX services agreement with a company headquartered in Mumbai, India. In consideration for this company creating and staffing studio facilities in Mumbai and London, England, through which our subsidiary is to provide VFX services to its clients worldwide, our subsidiary is obligated under the terms of this agreement to guarantee to the Mumbai company specified minimum monthly levels of production revenue generated at these facilities from our subsidiarys VFX projects, in the following estimated annual amounts (based on the U.S. dollar/British pound exchange rate as of November 3, 2011, as applied to those payments under the agreement denominated in British pounds): $18.0 million for the first year of the three-year minimum term of the agreement, $27.7 million for the second year of such term, and $27.3 million for the third year of such term. These payments are required to be made irrespective of whether and to what extent the staff employed at these facilities is working on our subsidiarys VFX projects. In the event that our subsidiary is not able to keep the staff at these facilities fully occupied with its VFX projects, our subsidiary may not be able to satisfy its payment obligations under this agreement, which could have a material adverse effect on our business, consolidated operating results and/or consolidated financial condition.
Our growth strategy depends on our ability to successfully develop visual effects-driven and animated feature films by leveraging the talents of our key artistic personnel, their experience with visual effects and animation production and our proprietary technology. As a company, however, we have not invested capital in the production or distribution of feature films. Entry into the film production business presents significant challenges and subjects our business to significant risks, including those risks set forth below. The inability to successfully manage these challenges could adversely affect our potential success in the film production business with respect to VFX-driven films, animated films, or both. Such failures would significantly limit our ability to grow our business and could also divert significant resources from our digital production and other businesses.
Our successful entry into the film production business faces various risks and challenges, including:
|||the success of our film production business will be primarily dependent on audience acceptance of our films, which is extremely difficult to predict;|
|||only a relatively few hit films account for a significant portion of total revenue in the film industry and any failure by us to produce hit films could cause revenue generated from our proposed film production business to fall below expectations;|
|||the production and marketing of visual effects-driven and animated films is capital-intensive and our capacity to generate cash from our films may be insufficient to meet our anticipated capital requirements;|
|||delays and increased expenditures due to creative problems, technical difficulties, talent availability, accidents, natural disasters or other events beyond the control of the production companies and distributors;|
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|||the entrance of additional film studios into the visual effects-driven and animated film market, which may result in increased competition for visual effects-driven and animated film audiences and for talented computer graphics animators and technical staff;|
|||the costs of producing and marketing feature films have steadily increased and may increase in the future, which may make it more difficult for a film to generate a profit or compete against other films;|
|||film production is subject to seasonal variations based on the timing of theatrical motion picture and home entertainment releases and a short-term negative impact on our business during a time of high seasonal demand (such as might result from a natural disaster or a terrorist attack during the time of one of our theatrical or home entertainment releases) could have a disproportionate effect on our results for the year;|
|||a strike by one or more of the labor unions or similar groups that provide personnel essential to the production of feature films could delay or halt our proposed film production activities;|
|||we have no experience producing or releasing feature films and the strain on our personnel from the effort required to produce such feature films and the time required for creative development of future feature films may hinder our ability to consistently release visual effects-driven and animated feature films; and|
|||the profitable distribution of a motion picture depends in large part on the availability of one or more capable distributors who are able to arrange for appropriate advertising and promotion, proper release dates and bookings in first-run and other theaters and any decision by those distributors not to distribute or promote one of the motion pictures which we may produce or to promote competitors motion pictures to a greater extent than they promote ours, or our inability to enter into profitable distribution arrangements with such distributors, could have an adverse effect on our proposed film production business.|
The projected revenues and success of our animation feature film studio business are substantially dependent on achieving large-scale growth over a short period of time and we may be unable to achieve this anticipated scale or pace of growth. We have limited experience operating an animation studio and developing and producing full-length, animated feature films, and our animation business has not generated and currently does not generate any revenues, each of which makes it challenging to evaluate the prospects of our animation business and design and implement our animation business model. In addition, animated films typically take longer to produce than live-action films, increasing the uncertainties inherent in their production and distribution. We are in the process of constructing our animation studio, which we presently anticipate will be completed in December 2011; any delays in meeting our construction schedule, which we cannot predict, would negatively impact the pace and scale of the growth of our animation business. Because of these uncertainties and risks, we cannot provide any assurances that we will be able to achieve the scale or pace of growth as planned, and furthermore, any period of rapid growth could place a significant strain on our resources and increase demands on our management, our information and reporting systems and our internal controls over financial reporting. Any such failures to achieve or effectively manage the anticipated growth of our animation business could adversely affect this and our other businesses, as well as our results of operations and financial condition.
A substantial part of our business relies on the popularity of 3D motion pictures, both animated and otherwise. If other forms of motion pictures, or other entertainment with which 3D motion pictures compete for consumers leisure time and disposable income, such as conventional motion pictures, television, concerts, amusement parks and sporting events, become more popular than 3D motion pictures, our business and operating results could be harmed.
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As part of our growth strategy, we may selectively pursue strategic acquisitions in our industry and related industries. We may not be able to consummate such acquisitions, which could adversely impact our growth. If we do consummate acquisitions, integrating an acquired company, business or technology may result in unforeseen operating difficulties and expenditures, including:
|||increased expenses due to transaction and integration costs;|
|||potential liabilities of the acquired businesses;|
|||potential adverse tax and accounting effects of the acquisitions;|
|||diversion of capital and other resources from our existing businesses;|
|||diversion of our managements attention during the acquisition process and any transition periods;|
|||loss of key employees of the acquired businesses following the acquisition; and|
|||inaccurate budgets and projected financial statements due to inaccurate valuation assessments of the acquired businesses.|
Foreign acquisitions also involve unique risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Our evaluations of potential acquisitions may not accurately assess the value or prospects of acquisition candidates and the anticipated benefits from our future acquisitions may not materialize. In addition, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our Common Stock, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition.
Our future success is significantly dependent on our ability to provide visual effects services that consistently meet our clients product development schedules. We rely on our software applications, hardware and other information technology and communications systems for the development and provision of our visual effects services and will depend on such technologies for production of our animated feature films. Our systems are vulnerable to damage or interruption from earthquakes, hurricanes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses or other attempts to harm our systems, and similar events. Our facilities are located in areas with a high risk of major earthquakes and hurricanes and are also subject to break-ins, sabotage and intentional acts of vandalism. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster or other unanticipated problems at our Venice or Playa Vista, California facilities, our Vancouver, British Columbia facilities, or our Port St. Lucie, Florida facilities could result in lengthy interruptions in our projects and our ability to deliver services. An error or defect in the software, a failure in the hardware, and a failure of our backup facilities could delay our delivery of products and services and could result in significantly increased production costs, hinder our ability to retain and attract clients and damage our brand if clients believe we are unreliable. Given our reliance on our industry relationships, it could also result in a decrease in our revenues and otherwise adversely affect our business and operating results.
The entertainment industry in general, and the visual effects and animation segments thereof in particular, are rapidly evolving, primarily due to technological developments. The rapid growth of technology and shifting consumer tastes prevent us from being able to accurately predict the overall effect that technological growth may have on our potential revenue and profitability. Furthermore, because we are required to provide advanced digital imagery products to continue to win business we must ensure that our production
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environment integrates the latest tools and techniques developed in the industry. This requires us to either develop these capabilities by upgrading our own proprietary software, which can result in substantial research and development costs and substantial capital expenditures for new equipment, or to purchase third-party licenses, which can result in significant expenditures. In the event we seek to obtain third-party licenses, we cannot guarantee that they will be available or, once obtained, will continue to be available on commercially reasonable terms, or at all. If we are unable to develop and effectively market new technologies that adequately or competitively address the needs of these changing industries, it could have an adverse effect on our business and growth prospects.
We depend on our proprietary technology to develop and produce certain of our products and provide certain of our services. With respect to our proprietary technology, we own seven patents registered with the United States Patent and Trademark Office (USPTO), have several patent applications pending before the USPTO, and plan to file additional applications in the future. We also rely on a combination of copyright and trade secret protection and non-disclosure agreements to establish and protect our proprietary rights. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete.
We generally enter into non-disclosure or license agreements with our employees, consultants and vendors, and generally control access to and distribution of our software, technology and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our software, technology and other proprietary information, without authorization, or to develop similar or superior technology independently. The steps we take may not prevent misappropriation of our technology, and our non-disclosure and license agreements may not be enforceable.
In addition, we may be required to litigate in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have an adverse effect on our business and/or our operating results.
We also rely on certain technology that we license from third parties, including software that is integrated and used with internally developed software. These third-party technology licenses may not in the future be available to us on commercially reasonable terms, or at all. The loss of any of these technology licenses could result in delays in performance of work until we identify, license and integrate equivalent technology, and we may not be able to identify, license or integrate any such equivalent technology in a timely manner or at all. Any resulting delays in our performance could damage our reputation and result in a decrease in our revenues during the period of delay, either of which could materially adversely affect our business, operating results and/or financial condition.
Companies in the visual effects and animation segment of the entertainment industry are subject to the possibility of claims that their products, services or techniques misappropriate or infringe the intellectual property rights of third parties. Infringement or misappropriation claims (or claims for indemnification resulting from such claims) against us may be asserted or prosecuted, regardless of their merit, and any such assertions or prosecutions may adversely affect our business and/or our operating results. Irrespective of the validity or the successful assertion of such claims, we would incur significant costs and diversion of resources relating to the defense of such claims, which could have an adverse effect on our business and/or our operating results. If any claims or actions are asserted against us, we may seek to obtain a license of a third-partys intellectual property rights; however, under such circumstances such a license may not be available on reasonable terms or at all.
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Motion picture piracy is extensive in many parts of the world, including South America, Asia (including South Korea, China and Taiwan), the countries of the former Soviet Union and other former Eastern bloc countries. The Motion Picture Export Association, the American Motion Picture Marketing Association and the American Motion Picture Export Association monitor the progress and efforts made by various countries to limit or prevent piracy. In the past, these various trade associations have enacted voluntary embargoes on motion picture exports to certain countries in order to pressure the governments of those countries to become more aggressive in preventing motion picture piracy. In addition, the U.S. government has publicly considered implementing trade sanctions against specific countries which, in the opinion of the U.S. government, do not prevent copyright infringement of U.S.-produced motion pictures; however, future voluntary industry embargoes or U.S. government trade sanctions may not be enacted. If enacted, such trade sanctions could impact the amount of revenue that we realize from the international exploitation of feature films, depending upon the countries subject to such action and the duration of such action. If embargoes or sanctions are not enacted or if other measures are not taken, we may lose an indeterminate amount of additional revenue as a result of motion picture piracy.
Our visual effects and animation projects generally utilize actors, directors, and writers who are members of the Screen Actors Guild, Directors Guild of America, and Writers Guild of America, respectively, pursuant to industry-wide collective bargaining agreements. Many projects also employ members of a number of other unions, including, among others, the International Alliance of Theatrical and Stage Employees. A strike by one or more of the unions or guilds that provide personnel essential to the production of our projects could delay or halt our ongoing production activities, which could materially adversely affect our business, operating results and/or financial condition.
Historically, we have derived a significant portion of our revenues from a limited number of customers to whom we have provided digital production services on large feature film projects. These customers generally have been major U.S. motion picture studios and such large projects usually extend from six to 18 months. For each of at least the past two years, greater than 45% of our consolidated revenues from this segment have been attributed to a single motion picture studio. During the period from the Inception Date to December 31, 2009 and the year ended December 31, 2010, contracts with two major studios for work in connection with feature films accounted in the aggregate for approximately 45% and 72%, respectively, of our revenues from this segment for those periods. The revenues derived from one of these major studios accounted for a material portion of our revenues during these periods primarily as the result of our being engaged by such studio on a single, large-scale, multi-year project, which project has ended. Significant customers over the last few years have included Walt Disney Pictures, Columbia Pictures, Paramount Pictures, 20th Century Fox, Universal Pictures, New Regency Productions and Warner Bros. Pictures. We expect that in the future we will continue to enter into contracts with customers who have historically represented a significant concentration of our revenues from this segment. If such contracts were terminated, our revenues from this segment and net income could significantly decline. Our future success depends on our ability to maintain and further existing relationships with significant customers, as well as develop relationships potential new customers.
Any adverse change in our relationship with any of the major motion picture studios or other of our principal customers could have an adverse effect on our business. Although we are attempting to expand our customer base, we expect that our customer concentration will not change significantly in the near future. The markets for visual effects services are dominated by a relatively small number of customers. We may not be able to retain our largest customers or attract additional customers, and our customers may not require or purchase services in the same quantities as in prior years. The loss of one or more of our largest customers, a significant reduction in revenues from these customers or our inability to successfully develop relationships with additional customers each could significantly harm our business.
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Production incentives and subsidies for feature film production are widely used throughout the industry and are important in helping film studios and production companies to offset production costs. Many countries and states have programs designed to attract feature film production. Incentives and subsidies are used to reduce feature film production costs and such incentives and subsidies take different forms, including direct government rebates, sale and leaseback transactions or transferable tax credits As a result, film studios and production companies may send their visual effects and animation work to companies in foreign countries and states where we do not have operations in order to take advantage of the incentives and subsidies offered in such places. In addition, we may enjoy film production incentives and subsidies offered by foreign countries (e.g., Canada) or states where we do have operations which may not be available in the future. Any diminution in our ability to secure work on visual effects and animation projects due to such incentives and subsidies could have a material adverse effect on our business, operating results or financial condition.
Grants from third parties, primarily the State of Florida and the Cities of West Palm Beach and Port St. Lucie, Florida, have been and will continue to be an important source of funding for the construction and establishment of our digital studio in Florida. These grants are generally structured to be funded over a three- to five-year period and require that we meet specified target thresholds with respect to business initiation, capital investment and job creation in order to receive the scheduled disbursements. In particular, in order to receive our complete grant funding, without penalty, from the State of Florida and the City of Port St. Lucie, we will be required, by December 31, 2014, to have, among other things, (i) created since our inception at least 500 new jobs in the State of Florida, each with an average annual wage of at least $64,233, and (ii) invested, with development partners, at least $50,000,000 in the State of Florida. As of November 3, 2011, we have 261 employees in the State of Florida, at an average annual salary in excess of the required $65,000, and, as of February 22, 2011, we had satisfied the condition to invest, with our development partners, at least $50,000,000 in the State of Florida. The $8 million remaining under the cash component of our grant from the City of West Palm Beach is disbursable in four scheduled installments ranging in amount from $1 million to $3 million, each of which is subject to the satisfaction of specified conditions precedent, including, among others: (i) by February 28, 2012, the arrangement of the phase 1 construction financing for the DDI campus, the securing of a temporary campus facility for DDI, and the commencement of the accreditation process for DDI; (ii) by September 30, 2012, the commencement by FSU and DDI of classes at this temporary facility with a combined total of 50 students and full-time employees; (iii) by December 31, 2012, commencement of phase 1 construction of DDIs campus, and the enrollment of a combined total of 100 FSU and DDI students at DDIs temporary facility; and (iv) by December 31, 2014, the issuance of the certificate of occupancy for the phase 1 construction project and the enrollment of a combined total of 250 FSU and DDI students at DDIs campus; in addition, if there are fewer than a combined total of 200 FSU and DDI students enrolled at DDIs campus on December 31, 2015, we will be required to repay $2 million of the cash grant received from the City of West Palm Beach, and, if there are less than a combined total of 1,000 FSU and DDI students enrolled at this campus after December 31, 2016, we will be required to repay an additional $2 million of the funds received under this cash grant. As of the date of this prospectus, with respect to the conditions described in clause (i) of the preceding sentence, we have secured a temporary campus facility for DDI and commenced the accreditation process for DDI; we expect to arrange for the phase 1 construction financing for the DDI campus and satisfy the other conditions described in clauses (ii), (iii) and (iv) of such sentence in a timely manner. If the applicable agencies or authorities controlling the disbursements of such grants determine that we have not met such thresholds or are otherwise no longer qualified to received continued grant funding, the loss of this funding or any subsequent obligation to repay any such funding could adversely impact the growth of our business, which may, in turn, adversely affect our operating results or financial condition.
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We expect to experience growth in the number of employees and the scope of our operations. Such growth will result in increased responsibilities for our management. If our management is unable to successfully manage expenses in a manner that allows us to both improve operations and at the same time pursue potential market opportunities, the growth of our business could be adversely impacted, which may, in turn, negatively affect our operating results or financial condition. In addition, we believe that a critical contributor to our success has been our creative culture. As we attempt to grow and alter our business to focus increasingly on the creation, production and marketing of visual imagery, and as we experience change in response to the requirements of being a public company, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our future success.
As a provider of higher education, DDI will be subject to extensive regulation on both the federal and state levels. In particular, the Higher Education Act of 1965, as amended (the Higher Education Act), and related regulations subject higher education institutions that participate in the various federal student financial aid programs under Title IV of the Higher Education Act (Title IV programs) to significant regulatory scrutiny.
The Higher Education Act mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the federal government through the U.S. Department of Education (the Department of Education); (2) the accrediting agencies recognized by the U.S. Secretary of Education (Secretary of Education) and (3) state education regulatory bodies.
The regulations, standards and policies of these regulatory agencies frequently change, and changes in, or new interpretations of, applicable laws, regulations, standards or policies could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs or costs of doing business.
Because DDI will be operating in a highly regulated industry, we will be subject to compliance reviews and claims of non-compliance and related lawsuits by government agencies, accrediting agencies and third parties. For example, the Department of Education regularly conducts program reviews of educational institutions that are participating in Title IV programs and the Office of Inspector General of the Department of Education regularly conducts audits and investigations of such institutions.
If we are found to be in noncompliance with any of these laws, regulations, standards or policies, we could lose our access to Title IV program funds, which could have a material adverse effect on our business. Findings of noncompliance also could result in our being required to pay monetary damages, or being subjected to fines, penalties, injunctions, restrictions on our access to Title IV program funds or other censure that could have a material adverse effect on our business.
Institutional accreditation by an accrediting agency recognized by the Secretary of Education is required in order for an institution to become and remain eligible to participate in Title IV programs. Increased scrutiny of accreditors by the Secretary of Education in connection with the Department of Educations recognition process may result in increased scrutiny of institutions by accreditors. Our failure to obtain accreditation or the loss of accreditation would, among other things, render DDI ineligible to participate in Title IV programs and would have a material adverse effect on our education business.
The success of our education business depends in part on our ability to create the content of our academic programs and develop these new programs in a cost-effective manner that meets the needs of
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prospective students in a timely manner. Building awareness of DDI and the programs we plan to offer is critical to our ability to attract prospective students. If we are unable to successfully market and advertise DDIs educational programs, our ability to attract and enroll prospective students in such programs could be adversely affected. It is also critical to DDIs success that we attract and enroll our students in a cost-effective manner and that enrolled students remain active in our programs.
In connection with the preparation of our financial statements for the year ended December 31, 2010, we identified several significant deficiencies and material weaknesses in our internal controls over financial reporting. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect financial statement misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the companys financial reporting. We identified the following control deficiencies as significant deficiencies as of December 31, 2010:
|||our company had not maintained sufficient records of the actions and meeting minutes of its board and did not have a systemic process to manage its contracts and agreements; and|
|||our company had not maintained sufficient controls over the financial reporting for its Canadian subsidiary.|
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a companys annual or interim financial statements will not be prevented or detected on a timely basis. The following significant deficiencies were identified as material weaknesses as of December 31, 2010:
|||our company lacked control over the revenue recognition reporting for its Canadian subsidiary; and|
|||our company had not implemented an adequate process to consolidate its intercompany accounts and as a result could not conduct a monthly close on a timely basis.|
While we have taken a number of remedial actions to address these significant deficiencies and material weaknesses, we cannot predict the outcome of our remediation efforts at this time. Each of the significant deficiencies and material weaknesses described above could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the significant deficiencies or material weaknesses described above or avoid potential future significant deficiencies or material weaknesses.
A decline in economic conditions in the United States or in other regions of the world could lead to a decrease in discretionary consumer spending, which in turn could adversely affect demand for feature films and box office revenue. In addition, an increase in price levels generally, or in price levels in a particular sector such as the energy sector, could result in a shift in consumer demand away from entertainment products such as feature films. Such events could cause a decrease in the demand for both the visual effects and animation services we offer as well as for the feature films we propose to produce, either of which would have an adverse effect on our profitability and operating results.
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Before this offering, there has been no public market for shares of our Common Stock. An active public trading market may not develop after the consummation of this offering or, if developed, may not be sustained. The price of the shares of our Common Stock sold in this offering will not necessarily reflect the market price of our Common Stock after this offering. The market price for our Common Stock after this offering will be affected by a number of factors, some of which are beyond our control, including those described above under Risk Related to Our Business and the following:
|||announcements by us or our competitors of significant contracts, productions, acquisitions or capital commitments;|
|||changes in financial estimates by analysts;|
|||variations in quarterly operating results;|
|||general economic conditions;|
|||litigation involving our company or investigations or audits by regulators into the operations of our company or our competitors;|
|||future sales of our Common Stock; and|
|||investor perception of us and the industries in which we operate.|
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated to and disproportionate to the operating performance of companies in our industries. These broad market and industry factors may materially reduce the market price of our Common Stock, regardless of our operating performance.
Securities analysts may elect not to provide research coverage of our Common Stock after the consummation of this offering. If securities analysts do not cover our Common Stock after the consummation of this offering, the lack of research coverage may adversely affect the market price of our Common Stock. The trading market for our Common Stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. It may be difficult for companies such as ours, with smaller market capitalizations, to attract independent financial analysts that will cover our Common Stock. This could have a negative effect on the market price of our stock.
After this offering, our executive officers, directors and their affiliated entities will beneficially own or control approximately 28.0% of the outstanding shares of our Common Stock (27.5% if the underwriters exercise their over-allotment option in full). Furthermore, John C. Textor, our Chief Executive Officer and Chairman of our board of directors, and Jonathan Teaford, our Chief Financial Officer and a member of our board of directors, have given indications of interest to purchase up to an aggregate of 1,235,294 shares of our Common Stock in this offering. Because indications of interest are not binding agreements or commitments to purchase, these shareholders may elect not to purchase any shares in this offering; however, if they purchase that number of shares, their post-offering ownership of our outstanding Common Stock combined with that of all of our other executive officers and directors and their respective affiliates would be 31.1%. Accordingly,
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these executive officers, directors and their affiliated entities, acting as a group, will have substantial influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These shareholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other shareholders. This significant concentration of stock ownership may adversely affect the trading price of our Common Stock due to investors perception that conflicts of interest may exist or arise.
We do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general corporate purposes. Any payment of future cash dividends will be at the discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Investors must rely on sales of their shares of our Common Stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase shares of our Common Stock.
Prior to the consummation of the offering, we will adopt amended and restated bylaws. Provisions in our amended and restated articles of incorporation as currently in effect and such amended and restated bylaws, as well as provisions of Florida law, could make it more difficult for a third-party to acquire us, even if doing so would benefit our shareholders. These provisions of our amended and restated articles of incorporation and amended and restated bylaws will:
|||permit our board of directors to issue up to 24,900,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our control;|
|||provide that all vacancies on our board of directors, including those resulting from newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; and|
|||provide that special meetings of our shareholders may, except as otherwise required by law, be called only by the chairman of our board, our board of directors or one or more shareholders holding shares of our Common Stock representing at least 50% of the combined voting power of our Common Stock.|
In addition, as a Florida corporation, we are subject to the Florida Business Corporation Act, which provides that a person who acquires shares in an issuing public corporation, as defined in the statute, in excess of certain specified thresholds generally will not have any voting rights with respect to such shares unless such voting rights are approved by the holders of a majority of the votes of each class of securities entitled to vote separately, excluding shares held or controlled by the acquiring person. The Florida Business Corporation Act also contains a statute which provides that an affiliated transaction with an interested shareholder generally must be approved by (i) the affirmative vote of the holders of two-thirds of our voting shares, other than the shares beneficially owned by the interested shareholder, or (ii) a majority of the disinterested directors.
Upon completion of this offering, there will be 39,500,993 shares of our Common Stock outstanding assuming no exercise of the over-allotment option by the underwriters (or 40,238,993 shares of our Common Stock if the underwriters exercise their over-allotment option in full). The 4,920,000 shares being sold in this offering (or 5,658,000 shares, if the underwriters exercise their over-allotment option in full) will be freely tradable immediately after this offering (except for shares purchased by our affiliates). Substantially all of the
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remaining 34,580,993 shares not sold in this offering are held by our directors, officers and certain of our shareholders who have entered into 180-day lock-up period agreements with respect to such shares. The holders of these shares will be able to sell their respective shares in the public market upon termination of the lock-up period, subject to the applicable volume, manner of sale, holding period and other requirements of Rule 144 under the Securities Act of 1933, as amended (the Securities Act). The number of shares of our Common Stock that will be outstanding after this offering is based on 19,477,910 shares of our Common Stock outstanding as of November 3, 2011, and 15,103,083 shares of our Common Stock issuable upon the automatic conversion and exercise of certain securities in connection with the consummation of this offering, and excludes:
|||5,528,499 shares of our Common Stock issuable upon the exercise of outstanding options with a weighted average exercise price of $5.98 per share;|
|||701,875 shares of our Common Stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share that are not automatically exercised upon the consummation of this offering;|
|||6,132,396 shares of our Common Stock available for issuance in connection with future grants of options and restricted stock under our 2010 Stock Plan;|
|||1,079,997 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $9.63 per share;|
|||934,363 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $6.42 per share;|
|||404,983 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $8.03 per share;|
|||2,769,285 shares of our Common Stock issuable upon the conversion of our convertible notes that are not automatically converted upon the consummation of this offering;|
|||2,699,776 shares of our Common Stock issuable upon the exchange of shares of DDI common stock pursuant to the terms of certain share exchange option agreements entered into by us, DDI and certain investors in connection with an August 2011 private placement conducted by DDI, in accordance with which such investors have the right to exchange each share of DDI common stock covered by each such agreement, from and after the date that is the earlier of (i) the 120th day after the date of such agreement, and (ii) the consummation by us of an initial public offering of our Common Stock, for 0.8307 shares of our Common Stock;|
|||200,000 shares of our Common Stock issuable upon the exercise of warrants with an exercise price of 120% of the initial public offering price per share that we have agreed to grant upon the consummation of this offering; and|
|||21,999 shares of our Common Stock reserved for issuance to purchasers in a private placement conducted by us in 2010 at $6.00 per share.|
If these options, warrants and conversion and exchange rights were to be exercised, additional shares would become available for sale upon expiration of any applicable lock-up period. The lapse of the forfeiture restrictions applicable to any restricted shares of our Common Stock would also result in additional shares of our Common Stock becoming available for sale. Roth Capital Partners, LLC may consent to the release of some or all of the shares subject to the lock-up restrictions for sale prior to the expiration of the lock-up period. A large portion of the shares subject to lock-up agreements are held by a small number of persons and investment funds. Sales by these shareholders of a substantial number of shares after this offering could significantly reduce the market price of our Common Stock. Moreover, after this offering, certain holders of shares of our Common Stock will have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other shareholders.
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We also intend to register the 11,660,895 shares of our Common Stock reserved for issuance as of November 3, 2011 under our 2010 Stock Plan. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the Rule 144 volume limitations and other requirements applicable to our affiliates and the applicable lock-up restrictions referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our Common Stock. See Shares Eligible for Future Sale for a more detailed description of sales that may occur in the future.
If you purchase shares of our Common Stock in this offering, the per share purchase price you will pay for your shares will be substantially greater than the tangible book value per share of our Common Stock outstanding after giving effect to this offering. As a result, as of June 30, 2011, based on an aggregate of 39,500,993 shares of our Common Stock outstanding after this offering, you will incur immediate and substantial dilution of $8.13 per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to this offering and the initial public offering price of $8.50 per share. Investors purchasing shares of our Common Stock in this offering will contribute approximately 64.6% of the total amount we have raised to fund our company, but will own only approximately 12.5% of the shares outstanding immediately following the consummation of this offering. In the past, we issued certain options to acquire shares of our Common Stock at prices significantly below the initial public offering price. The number of shares of our Common Stock that will be outstanding after this offering is based on 19,477,910 shares of our Common Stock outstanding as of November 3, 2011, and 15,103,083 shares of our Common Stock issuable upon the automatic conversion and exercise of certain securities in connection with the consummation of this offering, and excludes 14,318,778 shares of our Common Stock underlying outstanding options, warrants and convertible and exchangeable securities, as described above under Future sales of shares of our Common Stock by existing shareholders would depress the market price of our Common Stock.
To the extent the holders exercise those outstanding convertible securities, or we issue additional options that are then exercised or restricted stock under our 2010 Stock Plan, or forfeiture restrictions to which outstanding restricted shares are subject lapse, you will sustain further dilution. If we raise additional funding by issuing equity securities or convertible debt, or if we acquire other companies or technologies or finance strategic alliances by issuing equity, the newly issued or issuable shares will further dilute your percentage ownership and may also reduce the value of your investment.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and various stock exchanges, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. As a result of our required compliance with Section 404 of the Sarbanes-Oxley Act, we will incur substantial accounting expense and expend significant management efforts and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to ensure such compliance. Furthermore, if we identify any issues in complying with the requirements of the Sarbanes-Oxley Act (for example, if we or our independent registered public accounting firm identify a material weakness or significant deficiency in our internal controls over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation, investor perceptions of us and the trading price of our Common Stock.
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We have not determined the specific allocation for the majority of the net proceeds of this offering. Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our results of operations or enhance the value of our Common Stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business or financial condition, cause the price of our Common Stock to decline and delay product development.
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This prospectus contains forward-looking statements that involve risks and uncertainties relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to:
|||the anticipated benefits and risks associated with our business and growth strategies;|
|||our ability to expand into the visual effects-driven and animated feature film production business and the for-profit education business;|
|||our ability to complete construction of our animation studio on schedule;|
|||our ability to enter into co-production arrangements with film studios;|
|||our ability to utilize effectively the studio facilities that are being established for us by a strategic partner in Mumbai, India and London, England;|
|||our future operating results and the future value of our Common Stock;|
|||the anticipated size or trends of the markets in which we compete and the anticipated competition in those markets;|
|||our ability to attract customers in a cost-efficient manner;|
|||our ability to attract and retain qualified management and technical personnel;|
|||potential government regulation;|
|||our future capital requirements and our ability to satisfy our capital needs;|
|||the anticipated use of the proceeds realized from this offering;|
|||the potential for additional issuances of our securities;|
|||our ability to meet the thresholds attached to the government grants that we have received;|
|||the possibility of future acquisitions of businesses or assets;|
|||possible expansion into international markets; and|
|||our ability to operate effectively as a public company, including our ability to remediate the material weaknesses and significant deficiencies that were previously identified in our internal controls over financial reporting.|
Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the Risk Factors section above. These factors may cause our actual results to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
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Based on the initial public offering price of $8.50 per share, we will receive approximately $36.8 million from our sale of 4,920,000 shares of our Common Stock in this offering, after deducting estimated unpaid offering expenses of approximately $2.1 million and the underwriting discounts and commissions payable to the underwriters. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $42.7 million.
We intend to use the net proceeds from this offering (i) to facilitate our growth strategy by, among other things, advancing our development and production of animated and VFX-driven feature films and building our for-profit education business through development of DDI, to the extent not funded from third-party sources as we currently anticipate (as described below in Business Business Evolution and Business Education), as well as (ii) for working capital and other general corporate purposes.
This anticipated use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including, among other things, the anticipated benefits and risks associated with our business and growth strategies; our ability to expand into the visual effects-driven and animated feature film production business and the for-profit education business; the anticipated size or trends of the markets in which we compete and the anticipated competition in those markets; our ability to attract customers and to attract and retain qualified management and technical personnel; and our future capital requirements. Accordingly, our management will have broad discretion in using the net proceeds of this offering.
Following this offering, we believe that our available funds will be sufficient to allow us to advance our growth strategy. However, it is possible that we will not achieve the progress that we expect because the actual costs, timing of development and effects of competition are difficult to predict and are subject to substantial risks and delays. We have no committed external sources of funds. To the extent that the net proceeds from this offering and our other capital resources are insufficient to serve the purposes stated herein, we will need to finance our cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives.
Pending use of the net proceeds of this offering, we intend to invest the funds in cash, cash equivalents (which may include Treasury Bills, certificates of deposit, money market accounts, money market mutual funds, and other liquid investments), or short-term investment grade securities.
We have never declared or paid any cash dividends on our Common Stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends on such stock in the foreseeable future.
The following table sets forth our capitalization as of June 30, 2011:
|||on an actual basis;|
|||on a pro forma basis to reflect the following:|
|(1)||On June 30, 2011, we owed our former commercial lender the principal balance of $12.0 million. Our unamortized debt discount for this loan on that date was $3.4 million. Therefore, our net carrying value of this loan on that date was $8.6 million. Our former commercial lender owned warrants to purchase 2.5 million shares of our Common Stock with a fair value as of that date of $24.4 million. Our former commercial lender also owned a put right with a fair value as of that date of $0.3 million.|
On June 30, 2011, effective as of July 1, 2011, Comvest paid in full all outstanding balances of principal and interest to our former commercial lender and acquired that lenders rights under its loan agreements with us. In connection with this transaction, we issued a replacement promissory note to Comvest in the aggregate principal amount of $12.0 million. Many of the
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terms of this loan, including maturity, interest rate and security interest, remained unchanged from our former commercial lenders promissory note. The substantive adjustments to this loan included the adjustment of the sole financial covenant and a requirement that we repay the loan upon the completion of a qualified public offering. Comvest also acquired the put right from our former commercial lender valued at $0.3 million.
Also on that date, effective as of July 1, 2011, we entered into a credit facility with Comvest. The credit facility is comprised of a convertible note in the amount of $8.0 million and a revolving credit facility allowing us to borrow up to $15.0 million. In July 2011, we drew $7.4 million from this revolving credit facility, and paid $0.4 million of debt issue costs in connection with these borrowings. We paid $8.0 million to our former commercial lender to retire warrants to purchase 2.5 million shares of our Common Stock that were held by our former commercial lender. In connection with these transactions, we issued warrants to purchase 0.4 million shares of our Common Stock to PBC Digital Holdings, as a finders fee with a fair value of $3.9 million. We also issued warrants to purchase 0.4 million shares of our Common Stock to Comvest with a fair value of $3.9 million. The convertible note with Comvest is convertible into 2.8 million shares of our Common Stock, which was valued at $17.8 million as of the date of these transactions.
Because these transactions were executed concurrently, we bundled these transactions and accounted for them as one transaction. Amounts paid to our former commercial lender were allocated first to the retirement of the debt instrument, based on its fair value on that date. The remaining amounts paid to our former commercial lender were allocated to the acquisition of the warrants. Related to the new debt, we recognized $3.9 million of additional deferred debt issue costs for the finder's fee warrant. We also recognized a debt discount on convertible notes payable of $8.0 million, on the replacement note payable of $1.7 million and on the revolver note payable of $1.1 million. As the warrants qualify for liability accounting, we recognized $11.2 million of additional warrant liabilities. We recognized a decrease in additional paid-in capital of $4.5 million and an increase in the accumulated deficit from these transactions of $3.4 million from a loss on debt extinguishments.
|(2)||In August 2011, 3.3 million shares of common stock of our subsidiary DDI were sold in a private placement for aggregate net proceeds of $23.3 million in cash, net of $2.7 million of costs and fees. We issued warrants to purchase shares of our Common Stock to two parties in connection with this transaction. The estimated fair value of these warrants of $5.6 million was recorded as private placement costs and an increase in additional paid-in capital. The purchase agreements for this transaction include provisions for the exchange of such shares into shares of our Common Stock; thus, this transaction is reflected on an as-exchanged basis.|
|(3)||We intend to repay the equipment financing loan of $2.0 million obtained in May 2011 from PBC Digital Holdings II shortly after the date of this prospectus from operating funds. Additionally, we repaid the line of credit aggregating $0.5 million in August 2011.|
|(4)||Payment of deferred offering costs subsequent to June 30, 2011.|
|(5)||In August 2011, the promissory note held by PBC Digital Holdings II was mandatorily converted into 726,594 shares of our Common Stock. As a result of this conversion, Notes Payable, net of unamortized discount, and Warrant Liabilities decreased by $3.1 million and $2.8 million, respectively. The issuance of stock is reflected as an increase of $7,000 to Common Stock and an increase to additional-paid-in-capital of $7.0 million. We recognized a loss of $1.1 million upon this conversion.|
|(6)||In July and September 2011, certain stockholders of Digital Domain exchanged their shares of Digital Domain common stock for shares of our Common Stock. In the aggregate, 2.9 million shares of our Common Stock were issued in exchange for shares of Digital Domain common stock as a result of these transactions. We recognized $6.9 million of compensation expense in connection with these exchanges, which was offset by an increase in additional paid-in capital.|
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|Additionally, we decreased our non-controlling interests stockholders' equity by $6.5 million offset by increases to additional paid-in capital and Common Stock.|
|(7)||Assumes gross proceeds of $41.8 million from this offering, payment of underwriting commissions and other costs aggregating $4.4 million and the reclassification of deferred offering costs aggregating $4.2 million from other assets to stockholders' equity. The net equity infusion is $33.2 million.|
|(8)||The increase in warrant liabilities caused by the increase in the value per warrant to the offering price per share.|
|(9)||The reclassification of the Comvest note payable to current liabilities as the loan is callable upon the consummation of this offering.|
|(10)||The automatic conversion to Common Stock of the senior convertible note payables aggregating $15.7 million, the elimination of the discounts on such notes of $11.4 million, the write-off of deferred debt issuance costs of $3.9 million as well as the elimination of warrant liabilities aggregating $32.0 million. The loss from this debt conversion was $15.3 million and the fair value of the stock issued was $47.7 million.|
|(11)||Reflects the recording of $15.5 million in warrant liabilities for the fair value of the common stock conversion option of the Comvest convertible debt, reversal of the $3.5 million beneficial conversion feature previously recorded, and $12.0 million of interest expense.|
|(12)||The automatic exercise of Series A Preferred Stock warrants, the Junior Debt conversion warrants and certain other warrants to stockholders equity.|
|||on a pro forma as adjusted basis to give effect to the sale of 4,920,000 shares of our Common Stock by us in this offering at the initial public offering price of $8.50 per share after deducting the underwriting discounts and commissions payable to the underwriters and the other estimated offering expenses payable by us.|
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You should read this table in conjunction with our Consolidated Financial Statements and the related notes as well as Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.
|(In Thousands)||Historical June 30, 2011||Pro Forma Adjustments||Pro Forma||Offering
Pro Forma Adjustments
|Private Equity convertible notes payable||$||20,040||$||8,000||(2)||$||23,715||$||(15,715||)(10)||$||8,000|
|Net private equity convertible notes payable||7,433||(3,121||)||4,312||(4,312||)|||
|Commercial Lender note payable||12,000||(12,000||)(2)|||||||
|Net Commerical Lender note payable||8,629||(8,629||)|||||||
|Comvest note payable||||12,000||(2)||12,000||||12,000|
|Net Comvest note payable||||10,221||10,221||||10,221|
|Other notes payable:
|Comvest revolving credit facility||||7,400||(2)||7,400||||7,400|
|Private equity equipment financing||2,000||(2,000||)(4)|||||||
|Other notes payable||500||(500||)(4)|||||||
|Total other notes payable||2,500||3,839||6,339||||6,339|
|Net debt (current and long-term)||18,562||2,310||20,872||(4,312||)||16,560|
|Capital lease obligations (current and long-term)||1,691||||1,691||||1,691|
|Warrant and other debt-related liabilties: