10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2012

OR

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

For the transition period from                   to                  

Commission file number: 001-35325

Digital Domain Media Group, Inc.

(Exact name of registrant as specified in its charter)

Florida	27-0449505
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

10250 SW Village Parkway

Port St. Lucie, FL 34987

(Address of principal executive offices)

(Zip Code)

(772) 345-8000

(Registrant’s telephone number, including area code)

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 x 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

At May 10, 2012, there were 41,677,149 shares of Digital Domain Media Group, Inc.’s common stock outstanding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. We qualify all of our forward-looking statements by these cautionary statements. In addition, the industries in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors including those described in the section entitled “Risk Factors.” These and other factors could cause our results to differ materially from those expressed in this Quarterly Report on Form 10-Q.

As used herein, “the “Company,” “we,” “our,” and similar terms refer to Digital Domain Media Group, Inc., unless the context indicates otherwise.

“Digital Domain” and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

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Table of Contents

Part I	Financial Information
	Item 1	Financial Statements
		a)	Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011	1
		b)	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011 (unaudited)	3
		c)	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited)	4
		d)	Notes to Condensed Consolidated Financial Statements	6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
	Item 3	Quantitative and Qualitative Disclosures About Market Risk		32
	Item 4	Controls and Procedures		33
Part II	Other Information
	Item 1	Legal Proceedings		35
	Item 1A	Risk Factors		35
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		35
	Item 6	Exhibits		37
	Signatures

ii

Part I. Financial Information

Item 1. Financial Statements

DIGITAL DOMAIN MEDIA GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

	March 31,		December 31,
	2012		2011
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,452	$	29,413
Cash, held in trust - short-term	2,490		2,449
Contracts and other receivable, net	9,893		3,110
Tax credits receivable	2,365		2,365
Prepaid expenses and other assets	4,500		5,335
Total current assets	21,700		42,672
Cash, held in trust - long-term	4,153		4,233
Restricted cash	71		71
Property and equipment - net	80,626		80,141
Trade name	15,410		15,410
Unpatented technology - net	19,459		20,106
Other intangible assets - net	6,889		7,105
Goodwill	18,081		18,081
Deferred debt issuance costs - net	2,363		3,022
Film inventory	21,341		6,925
Other assets	101		75
Total assets	$	190,194	$	197,841

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

DIGITAL DOMAIN MEDIA GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

	March 31,			December 31,
	2012			2011
	(Unaudited)
Liabilities, Preferred Stock and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	22,316		$	21,474
Advance payments and deferred revenue	11,121			8,442
Deferred grant revenue from governmental agencies, short-term	2,988			2,988
Deferred land grant revenue, short-term	525			525
Government lease obligation, short-term	4,382			3,399
Short-term convertible and other notes payable - net	6,182			17,612
Warrant and other debt-related liabilities, short-term	5,831			6,462
Earn out liability, short-term	494			400
Unearned revenue, short-term	395			361
Current portion of capital lease obligations	896			763
Total current liabilities	55,130			62,426
Capital lease obligations, net of current portion	390			530
Warrant and other debt-related liabilities	16,814			20,930
Deferred grant revenue from governmental agencies	11,050			9,547
Long-term convertible and other notes payable - net	18,126			455
Deferred income tax liability	6,189			6,189
Deferred revenue land grant, net of current portion	19,644			19,775
Earn out liability, net of current portion	2,131			2,774
Government lease obligation - net	34,787			36,155
Unearned revenue, net of current portion	3,082			3,172
Other long-term liabilities	3,083			—
Total liabilities	170,426			161,953
Commitments and contingencies
Convertible preferred stock, $0.01 par value, 25,000,000 shares authorized at March 31, 2012 and December 31, 2011, respectively; including Preferred Stock A series 100,000 designated, no shares issued or outstanding at March 31, 2012 and December 31, 2011, respectively	—			—
Stockholders’ equity:
Common stock, $0.01 par value at March 31, 2012 and December 31, 2011, respectively - 100,000,000 shares authorized, 41,553,702 and 39,515,326 shares issued, and 41,015,749 and 39,384,003 outstanding as of March 31, 2012 and December 31, 2011, respectively	406			396
Additional paid-in capital	216,553			213,651
Comprehensive income	71			34
Accumulated deficit	(198,634		)	(183,802		)
Treasury stock, at cost	(3,307		)	(829		)
Total stockholders’ equity before non-controlling interests	15,089			29,450
Non-controlling interests	4,679			6,438
Total stockholders’ equity	19,768			35,888
Total liabilities, preferred stock and stockholders’ equity	$	190,194		$	197,841

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIGITAL DOMAIN MEDIA GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In Thousands, Except Share and Per Share Data)

	Three Months Ended
	March 31,
	2012			2011
	(Unaudited)
Statements of Operations
Revenues:
Production revenues	$	30,158		$	37,904
Grant revenues from governmental agencies	878			653
Licensing revenue	90			—
Tuition revenue	15			—
Total revenues	31,141			38,557
Costs and expenses:
Cost of revenues, excluding depreciation and amortization	32,922			30,922
Depreciation expense	3,631			2,870
Selling, general and administrative expenses	10,979			10,849
Amortization of intangible assets	863			863
Total costs and expenses	48,395			45,504
Operating loss	(17,254		)	(6,947		)
Other income (expenses):
Interest and finance (expense) credit:
Issuance of and changes in fair value of warrant and other debt-related liabilities	4,284			(28,965		)
Amortization of discount and issuance costs on notes payable	(1,599		)	(3,013		)
Interest expense on notes payable	(670		)	(502		)
Interest expense on capital and governmental lease obligations	(670		)	(318		)
Other income (expense), net	353			1,067
Loss before income taxes	(15,556		)	(38,678		)
Income tax expense	9			250
Net loss before non-controlling interests	(15,565		)	(38,928		)
Net loss (income) attributable to non-controlling interests	733			(197		)
Net loss attributable to common stockholders	$	(14,832	)	$	(39,125	)
Statements of Comprehensive Loss
Net loss attributable to common stockholders	$	(14,832	)	$	(39,125	)
Unrealized gain from foreign currency translation	37			63
Comprehensive loss	$	(14,795	)	$	(39,062	)
Weighted average number of common shares outstanding:
Basic	39,977,777			14,184,609
Diluted	42,839,565			14,184,609
Basic loss per share:
Loss before non-controlling interests	$	(0.39	)	$	(2.75	)
Net loss (income) attributable to non-controlling interests	0.02			(0.01		)
Basic loss per share attributable to Common Stockholders	$	(0.37	)	$	(2.76	)
Diluted loss per share:
Loss before non-controlling interests	$	(0.45	)	$	(2.75	)
Net loss (income) attributable to non-controlling interest	0.02			(0.01		)
Diluted loss per share attributable to Common Stockholders	$	(0.43	)	$	(2.76	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIGITAL DOMAIN MEDIA GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Three Months Ended
	March 31,
	2012			2011
	(Unaudited)
Cash flows from operating activities:
Net loss before non-controlling interests	$	(15,565	)	$	(38,928	)
Adjustments to reconcile net loss before non-controlling interests to net cash used in operating activities:
Depreciation and amortization of property and equipment and intangible assets	4,494			3,733
Amortization of discount on and issuance costs of notes payable	1,599			3,013
Interest added to principal on notes payable	171			—
Changes related to fair value of warrant and other debt - related liabilities	(4,284		)	28,965
Stock-based compensation	1,878			4,409
Interest on government obligations	(121		)	19
Decrease in earn out liability	(549		)	—
Changes in operating assets and liabilities:
Contracts receivable	(1,779		)	(8,272		)
Prepaid expenses and other assets	483			(1,149		)
Film inventory	(14,415		)	(322		)
Accounts payable and accrued liabilities	2,305			(510		)
Advance payments and deferred revenue	2,620			(8,080		)
Deferred revenue from governmental entities	1,372			(584		)
Unearned revenue	(57		)	—
Net cash used in operating activities	(21,848		)	(17,706		)
Cash flows from investing activities:
Purchases of property and equipment	(2,889		)	(3,727		)
Changes in restricted cash	—			(5		)
Net cash used in investing activities	(2,889		)	(3,732		)
Cash flows from financing activities:
Proceeds from sale of common stock	—			19,501
Proceeds from issuance of notes payable	3,000			—
Payments of stock issuance costs	—			(2,096		)
Deferred offering costs paid	—			(756		)
Repayments on notes payable	—			(554		)
Payments on capital and governmental lease obligations	(2,037		)	(434		)
Payments of debt issuance costs	(50		)	—
Purchase of treasury stock	(3,212		)	—
Net cash provided by (used in) financing activities	(2,299		)	15,661
Effect of exchange rates on cash and cash equivalents	75			84
Net decrease in cash and cash equivalents	(26,961		)	(5,693		)
Cash and cash equivalents at beginning of period	29,413			11,986
Cash and cash equivalents at end of period	$	2,452		$	6,293

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIGITAL DOMAIN MEDIA GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Three Months Ended
	March 31,
	2012		2011
Supplemental disclosure of cash flow information - cash paid during the period for:
Interest	$	539	$	501
Non-cash investing and financing activities:
Increase in debt from debt restructuring	2,380		—
Deferred offering costs included in accounts payable and accrued liabilities at period end	50		—
Purchase of property and equipment in accounts payable at period end	1,891		4,301
Purchase of property and equipment with assets held in trust	—		3,902
Amortization of discount on bond obligation	195		19
Bond interest capitalized to construction-in-progress	—		495
Shares issued from exchange of subsidiary shares	1,034		15

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

DIGITAL DOMAIN MEDIA GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. COMPANY BACKGROUND AND OVERVIEW

Description of Business — Digital Domain Media Group, Inc., formerly known as Digital Domain Holdings Corporation and Wyndcrest DD Florida, Inc., a Florida corporation incorporated on January 7, 2009 (the “Inception Date”), and subsidiaries (collectively, “Digital Domain Media Group” or the “Company”)  is a digital production and animation company focused on the creation of original content animation feature films and the development of computer-generated imagery, including three-dimensional stereoscopic (“3D”) imagery, for large-scale feature films and transmedia advertising.

The common stock is listed on the New York Stock Exchange under the ticker symbol “DDMG”.

Liquidity and Capital Resources — The Company has a history of losses, including a $15.6 million and $144.2 million net loss before non-controlling interests, respectively, for the three months ended March 31, 2012 and the year ended December 31, 2011, respectively. The Company has a limited operating history, had negative working capital of $33.4 million and stockholders’ equity of $19.8 million as of March 31, 2012, and used $21.8 million to fund cash flows from operations during the three months ended March 31, 2012. For the year ended December 31, 2011, the Company used $44.4 million in cash flows from operations. The Company has worked to improve its working capital and its cash flow shortfalls through equity and debt funding and through the completion of its investment in the co-production of the feature film Ender’s Game. The Company raised gross proceeds of $19.5 million in equity capital in a private placement in February and March 2011, gross proceeds of $26.0 million in another private placement consummated in August 2011, and gross proceeds of $41.8 million in its initial public offering completed in November 2011. Furthermore, the Company invested $11.4 million in Ender’s Game during the three months ended March 31, 2012. Additionally, upon completion of the IPO, $94.0 million of convertible debt and warrant liabilities reflected on the Company’s balance sheet were automatically converted or exercised, as applicable, into the Company’s common stock.

2. COLLABORATIVE ARRANGEMENTS

Joint Marketing VFX Services Agreement

On July 8, 2011 Digital Domain Productions, Inc. (“DDPI”), a wholly owned subsidiary of our subsidiary Digital Domain Inc., (“Digital Domain” or “DD”), entered into a Joint Marketing and Production VFX Services Agreement with RelianceMediaWorks Limited (“RMW”), a film and entertainment services company headquartered in Mumbai, India. The term of this agreement is three years, subject to Digital Domain Productions, Inc.’s option to extend for a fourth year. Pursuant to the terms of this agreement, RMW is responsible for creating and staffing studio facilities in both Mumbai and London, England, through which DDPI is to provide VFX services to its clients worldwide. In consideration of RMW’s obligation to provide Digital Domain Productions, Inc. with turnkey studio facilities in these two cities, DDPI has agreed, pursuant to the terms of the agreement, to guarantee to RMW specified minimum monthly levels of production revenues generated at these facilities from DDPI’s VFX projects, in the following estimated annual amounts, based on the U.S. dollar/British pound exchange rate as of March 31, 2012, as applied to those payments under the agreement denominated in British pounds: $18.0 million for the first year of the term of the agreement, $27.5 million for the second year of such term, and $27.0 million for the third year of such term.

From the inception of these agreements through March 31, 2012, the Company recognized $6.2 million in expense, including $3.5 million expensed during the three months ended March 31, 2012.  Through that date, we had paid $2.3 million to RMW and the remaining $3.9 million is included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheet.

Co-Production in Feature Film Project

On February 15, 2012, the Company entered into an Investment and Production Agreement with Ender’s Game Holdings LLC (“EGH”) and OddLot Entertainment LLC (“OLE”) effective as of April 18, 2011, to provide financing and production services to co-produce the VFX action movie Ender’s Game. Principal photography for Ender’s Game began February 27, 2012, in New Orleans. The picture has a production budget slightly in excess of $100 million and is scheduled for theatrical release in the fall of 2013. Distribution services are to be provided by Summit Entertainment. As of March 31, 2012 the Company had provided $13.6 million in financing, which is included in film inventory on the condensed consolidated balance sheet. See Note 10 for further discussion.

6

Digital Domain Galloping Horse Studio

On March 30, 2012, the Company entered into an Amended and Restated Formation and Joint Venture Agreement (“the Agreement”) with Beijing Galloping Horse Film Co., Ltd. (“GH”), a corporation organized under the laws of the People’s Republic of China (the “PRC”) and a shareholder of the Company. Pursuant to the Agreement, the parties have agreed to form a joint venture company for the purpose of creating, owning and operating a studio to be located in the PRC to (i) provide computer-generated animation and digital visual effects (including high-quality 3D content and conversion into 3D of existing film and TV libraries originally created in 2D) (collectively, “VFX”) services (the “VFX Business”) in the PRC, Taiwan, Hong Kong and Macau (the “Territory”) for film projects originating in the Territory, and (ii) develop a range of media and entertainment services, including, without limitation, proprietary technologies and entertainment properties, as may be agreed upon by the parties (the “China Studio”). The Company and GH are each initially to own 50% of the equity interests in the Joint Venture.

Pursuant to the Agreement, (A) GH is obligated to (i) contribute and assign to the Joint Venture certain specified VFX contracts awarded to it, (ii) provide the land for the China Studio to the Joint Venture, under a nominal cost lease, (iii) fund the construction and build-out costs for the China Studio, in an amount not to exceed $50,000,000, and (iv) provide temporary professional facilities for the use of the China Studio under a nominal cost lease to the Joint Venture; and (B) the Company is obligated to (i) grant to the Joint Venture, for the term thereof, a royalty-free site license to use only in the Territory in connection with the VFX Business of the Joint Venture the intellectual property rights of the Company and its subsidiaries relating to the VFX Business, (ii) design and supervise the build-out of the China Studio’s professional facilities, and (iii) provide, training for the professional personnel to be employed by the Joint Venture. Pursuant to the Agreement, each of the Company and GH has agreed that the other party will be its exclusive partner for all VFX-related services that it performs in the Territory, the Company has agreed not to compete with the VFX Business of the Joint Venture in the Territory, and GH has agreed not to compete with the VFX Business of the Joint Venture in any location worldwide, including the Territory.

Additionally, the Company granted to GH the contractual right to require the Company (or its designee), with respect to the period commencing October 1, 2012 (or earlier, under certain specified circumstances) and ending December 31, 2012 (the “Measurement Period”), to purchase from GH, at a price of $8.50 per share (subject to adjustment in the event of stock splits, reverse stock splits and similar corporate events) (the “Exercise Price”), all or any portion of the 588,236 shares of the Company’s common stock currently owned by GH that are owned by GH on the date that it exercises this contractual right; provided, that, and only if, the rolling 15-day average closing price of such common stock on the New York Stock Exchange is less than the Exercise Price at any time during the Measurement Period, and subject to GH’s delivery of a valid exercise notice in writing to the Company on or before January 10, 2013.

As of March 31, 2012, the Company included $5.0 million in contracts and other receivables, $1.9 in warrant and other debt-related liabilities and $3.1 million in other long-term liabilities on the condensed consolidated balance sheet related to this transaction.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, these financial statements, including unaudited financial statements for the interim periods, contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full years. Included are the following consolidated financial statements:

·Consolidated balance sheets as of March 31, 2012 (unaudited) and December 31, 2011, and

·Consolidated statements of operations and comprehensive loss and consolidated statements of cash flows for the three months ended March 31, 2012 and 2011, (unaudited).

The accompanying consolidated financial statements include the accounts of Digital Domain Media Group, Inc., its majority-owned subsidiaries, Digital Domain, Inc. and Digital Domain Institute, Inc. (“DDI”); and its wholly-owned subsidiaries Tradition Studio, Inc., Digital Domain Stereo Group, Inc., DDH Land Holdings LLC, DDH Land Holdings II, LLC, Digital Domain International, Inc., Digital Domain Media Group FZ, LLC and Digital Domain Tactical, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements include certain reclassifications of prior period amounts in order to conform to current period presentation.

Use of Estimates — US GAAP requires management to make estimates and assumptions in the preparation of these interim consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

7

The most significant areas that require management judgment are fair values of consideration issued and net assets acquired in connection with business combinations; revenue and cost recognition; collectability of contracts receivable; deferred grant revenue; deferred income tax valuation allowances; amortization of long-lived assets and intangible assets; impairment of long-lived assets, intangible assets and goodwill; accrued expenses; advance payments and deferred revenue; recognition of stock-based compensation; calculation of the warrant and other debt-related liabilities; allocation of equity to non-controlling interests; debt modification accounting; and contingencies and litigation. The accounting policies for these areas are discussed in this Note and other notes to these consolidated financial statements.

Digital Imagery Revenue — The Company recognizes digital imagery revenue from fixed-price contracts, each consisting of an accepted written bid and agreed-upon payment schedule, for the development of digital imagery and image creation for the entertainment and advertising industries. Contracts to provide digital imagery are accounted for in accordance with FASB ASC Subtopic 605-35, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue recognition is initiated when persuasive evidence of an arrangement with a customer is established, which is upon entry by the Company, or Digital Domain (“DD”) and the customer into a legally enforceable agreement. In accounting for the contracts, the cost-to-cost measures of the percentage-of-completion method of accounting are utilized in accordance with FASB ASC Subtopic 605-35. Under this method, revenues, including estimated earned fees or profits, are recorded as costs are incurred. For all contracts, revenues are calculated based on the percentage of total costs incurred compared to total estimated costs at completion. Contract costs include direct materials, direct labor costs and indirect costs related to contract performance, such as indirect labor, supplies and tools. These costs are included in cost of revenues.

The customer contracts in the digital imagery business represent binding agreements to provide digital effects to the customers’ specifications. The contracts contain subjective standards applicable to the delivered digital effects and objective specifications that relate to the technical format for the digital effects delivered to customers. In all instances, the customer receives complete ownership rights in and to the digital effects as the effort progresses. In the event of a termination of a contract, ownership in the digital effects transfers to the customer, and the Company or DD as the contractor is entitled to receive reimbursement of costs incurred up to that point and a reasonable profit. The contracts contain production schedules setting forth a timeline for production and a final delivery date for the completed digital effects.

Payments for the services are received over the term of the contract, including payments required to be delivered in advance of work to fund a portion of the costs to produce the digital effects. Cash received from customers in excess of costs incurred and gross profit recognized on the related projects are recorded as advance payments. Unbilled receivables represent revenues recognized in excess of amounts billed. The digital effects produced are delivered to the customer at the end of the contract and the customer is not required to deliver the final scheduled payment until receipt and acceptance of the digital effects.

A review of uncompleted contracts is performed on an ongoing basis. Amounts representing contract change orders or claims are included in revenues only when they meet the criteria set forth in FASB ASC Subtopic 605-35. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Changes in estimates of contract sales, costs and profits are recognized in the current period based on the cumulative effect of the changes on current and prior periods. Hence, the effect of the changes on future periods of contract performance is recognized as if the revised estimates had been the original estimates. A significant change in one or more projects could have a material adverse effect on the consolidated financial position or results of operations.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company utilized the following assumptions for determination of the fair value of warrant and other-debt related liabilities as of March 31, 2012 and December 31, 2011, respectively (fair value of liabilities stated in thousands):

8

	Comvest			Falcon			Comvest			Protective
	Common Stock			Notes			Capital II			Put			Galloping
	Conversion			Bridge			Protective			Redeemable			Horse
	Rights			Warrants			Put			Features			Put
March 31, 2012 (unaudited)
Fair value of liability	$	15,131		$	3,914		$	6,622		$	(4,939	)	$	1,917
Term in months	51			24			51			51			9
Risk free interest rate	0.84		%	0.34		%	0.84		%	0.84		%	0.17		%
Volatility	55.25		%	38.81		%	55.25		%	55.25		%	55.18		%
Dividend rate	—			—			—			—			—
December 31, 2011
Fair value of liability	$	17,748		$	3,914		$	5,730		—			—
Term in months	54			24			54			—			—
Risk free interest rate	0.71		%	0.24		%	0.71		%	—			—
Volatility	75.93		%	39.59		%	75.93		%	—			—
Dividend rate	—			—			—			—			—

During 2010, the Company acquired two parcels of land in connection with grants from governmental entities. These parcels of land were valued on May 25, 2010 and September 27, 2010 for $10.5 million and $9.8 million, respectively. The valuations were determined using Level 3 inputs. These amounts are included in Property and equipment-net and deferred land grant revenue in the consolidated balance sheet as of March 31, 2012.  The Company moved into its new headquarters building in December 2011 where one of these parcels of land is located.  Accordingly, the Company began the recognition of the grant revenue related to this land grant in 2012.  The Company recognized $0.1 million of such grant revenue in the three months ended March 31, 2012.

As of March 31, 2012, Goodwill and intangible assets other than goodwill relate to the acquisition of Digital Domain, which occurred on October 15, 2009 and the acquisition of In-Three, which occurred on November 22, 2010. The fair value of Goodwill and intangible assets other than goodwill is subjective and based on estimates rather than precise calculations. The fair value measurement for Goodwill and intangible assets other than goodwill uses significant unobservable inputs that reflect management’s assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. A combination of valuation techniques is used, including (i) an income approach, which utilizes a discounted cash flow analysis using the Company’s weighted-average cost of capital rate, and (ii) the market approach, which compares the fair value of the subject company to similar companies that have been sold whose ownership interests are publicly traded.

The Company as of March 31, 2012 received a valuation of the earn-out liability as of that date, from an independent valuation firm, considering it a Level 3 input. Based on this valuation, the Company reduced the earn-out liability by $0.5 million. This reduction is included in selling, general and administrative expenses on the condensed consolidated statement of operations for the three months ended March 31, 2012. The inputs used by the Company in determination of the $2.6 million of earn out liability at March 31, 2012 included a term of 153 months, a risk-free interest rate of 3.0% and no dividends.

Earnings Per Share — Basic earnings per share is computed based upon the weighted-average number of shares outstanding, including nominal issuances of common share equivalents, for each period presented. Fully-diluted, earnings per share is computed based upon the weighted-average number of shares and dilutive share equivalents outstanding for each period presented. Due to the Company’s net losses for the three months ended March 31, 2012 and 2011, respectively, the inclusion of the dilutive common share equivalents listed below in the calculation of diluted earnings per share would be anti-dilutive. These common stock equivalents include stock options, warrants, convertible debt securities and rights to exchange shares of DDI’s common stock for shares of the Company’s Common Stock. Thus, the common share equivalents have been excluded from the computation of diluted earnings per share for the three months ended March 31, 2012 and 2011, respectively.

The potential dilutive securities outstanding that were excluded from the computation of diluted net loss per share for the following periods, because their inclusion would have had an anti-dilutive effect, are summarized as follows:

	Three Months Ended March 31,
	2012	2011
Stock options issued under 2010 stock plan	6,137,499	3,137,499
Investor warrants	1,012,502	1,012,502
Convertible stock of subsidiary	1,661,400	—
Convertible note payable	533,452	4,911,266
Convertible preferred stock	—	6,266,572
Placement agent and other warrants	1,889,853	3,607,537
Total	11,234,706	18,935,376

Certain dilutive share equivalents including a warrant and convertible note are dilutive in the calculation of diluted earnings per share. The effects of these dilutive share equivalents on loss per share, are summarized as follows:

	Three Months Ended
	2012			2011
	(Unaudited)
Reconciliation of diluted loss per share:
Loss before non-controlling interests	$	(15,565	)	$	(38,928	)
Adjustment for effect of as-if converted securities, net of tax:
Convertible note	(3,474		)	—
	(19,039		)	(38,928		)
Net loss attributable to non-controlling interests	733			(197		)
Net loss attributable to Common Stockholders	$	(18,306	)	$	(39,125	)
Weighted average number of common shares outstanding:
Basic	39,977,777			14,184,609
Adjustment for effect of as-if converted securities, net of tax:
Convertible note	2,861,788			—
Diluted	42,839,565			14,184,609
Diluted loss per share:
Loss before non-controlling interests	$	(0.45	)	$	(2.75	)
Net loss attributable to non-controlling interests	0.02			(0.01		)
Diluted loss per share attributable to Common Stockholders	$	(0.43	)	$	(2.76	)

9

Segment Reporting — Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s reportable segments are Feature Films, Commercials, and Animation. The management approach is used as the conceptual basis for identifying reportable segments and is based on the way that management organizes within the enterprise for making operating decisions, allocating resources, and monitoring performance, which is primarily based on the sources of revenue.

4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2011, the FASB issued ASU No. 2011-08, Intangibles — Goodwill and Other (‘‘ASU No. 2011-08’’). This ASU amends current guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU No. 2011-08 applies to all companies that have goodwill reported in their financial statements. The provisions of this ASU are effective for reporting periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (‘‘ASU No. 2011-05’’). This ASU improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income (‘‘OCI’’) by eliminating the option to present components of OCI as part of the statement of changes in stockholders’ equity. The amendments in ASU No. 2011-05 require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from OCI to net income, in both net income and OCI. This ASU does not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, this ASU does not affect the calculation or reporting of earnings per share. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. The adoption of this guidance is for disclosure purposes only and will not have any impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs (‘‘ASU No. 2011-04’’). This ASU amends the wording used to describe many of the requirements in US GAAP for measuring fair value and disclosing information about fair value measurements. The amendments in ASU No. 2011-04 achieve the objectives of developing common fair value measurement and disclosure requirements in US GAAP and IFRSs and improving their understandability. Some of the requirements clarify the FASB’s intent about the application of existing fair value measurement requirements while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. The adoption of this guidance is for disclosure purposes only and will not have any impact on the Company’s consolidated financial statements.

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5. NON-CONTROLLING INTERESTS

Changes in the non-controlling interest amounts of our subsidiaries for the three months ended March 31, 2012 (unaudited) were as follows (in thousands):

Balance at December 31, 2011	$	6,438
Issuance of common stock upon exchange of stock in subsidiary	(1,034		)
Net loss attributable to non-controlling interests	(733		)
Comprehensive income	8
Balance at March 31, 2012 (unaudited)	$	4,679

During the three months ended March 31, 2012, the Company’s subsidiary Digital Domain realized a net loss of $5.2 million. Pursuant to the requirements under FASB ASC Topic 810, Consolidation, the Company allocates Digital Domain’s earnings to non-controlling interests based on the percentage of common stock of Digital Domain not owned by the Company. Intercompany transactions are eliminated in consolidation but impact the net earnings of each of the respective entities and as such affect amounts allocated to non-controlling interests. During the three months ended March 31, 2012, $4.5 million of Digital Domain’s net loss was allocated to accumulated deficit representing the Company’s proportionate holdings in Digital Domain common stock outstanding (an average of 86.7%) and the remaining 13.3% of Digital Domain’s net loss, amounting to $0.7 million, was allocated to non-controlling interests.  During the three months ended March 31, 2011, $0.8 million of Digital Domain’s net income was allocated to accumulated deficit representing the Company’s proportionate holdings in Digital Domain common stock outstanding (an average of 81.0%), and the remaining 19.0% of Digital Domain’s net income, amounting to $0.2 million, was allocated to non-controlling interests.

In a similar manner, the Company’s subsidiary Digital Domain Institute, Inc. “(DDI”) incurred a net loss of $0.5 million during the three months ended March 31, 2012. Of this amount, $0.4 million was allocated to the accumulated deficit and $0.1 million was allocated to non-controlling interests.  During the three months ended March 31, 2012, certain stockholders of DDI exchanged 1,250,000 shares of DDI stock for 1,038,376 shares of the Company’s common stock.  Upon these exchanges, the Company reclassified $1.0 million of equity attributable to non-controlling interests to additional paid in capital.

6. CONTRACTS AND OTHER RECEIVABLE

The following shows the elements of accounts receivable from contracts as of March 31, 2012 (unaudited) and December 31, 2011 (in thousands):

	March 31,			December 31,
	2012			2011
	(unaudited)
Costs incurred on uncompleted contracts	$	46,178		$	46,700
Accrued profit on uncompleted contracts	11,687			15,412
	57,865			62,112
Less billings to date	(65,001		)	(68,404		)
Unbilled receivables and advance payments on uncompleted contracts	$	(7,136	)	$	(6,292	)
Unbilled Receivables:
Unbilled receivables	$	2,348		$	513
Advance payments	(9,484		)	(6,805		)
	$	(7,136	)	$	(6,292	)
Summary:
Billed:
Completed contracts	$	776		$	900
Contracts in process	896			1,033
Retained	—			—
	1,672			1,933
Unbilled	2,348			513
	$	4,020		$	2,446

In addition to contract receivables, the Company had other receivables of $5.9 million as of March 31, 2012. Of that amount, $5.0 million of other receivables is for a joint venture agreement with Beijing Galloping Horse Film Co., Ltd. for future distribution rights

11

within certain territories of the People’s Republic of China. See Note 2 for further discussion.  Additionally, other receivables include $0.6 million in foreign tax receivables and $0.3 million in grant and royalty receivables.

At March 31, 2011, the Company had other receivables of $0.2 million related to grant and royalty revenues.

7. GRANTS AND TAX INCENTIVES FROM GOVERNMENTAL ENTITIES

In November 2009, as amended on February 22, 2010, the Company entered into a Grant Agreement and a Lease Agreement with the City of Port St. Lucie, Florida (‘‘the City’’) calling for the City to provide to the Company a $10.0 million cash grant (‘‘City Cash Grant’’) and approximately $50.0 million in the form of a land donation and construction financing assistance (the ‘‘Building and Land Grant’’). These awards were granted as an incentive to locate operations in the State of Florida and specifically in Port St. Lucie, and to incent hiring activities, among other things, both of which will provide economic advantages to the general community.

In connection with the Building and Land Grant discussed above, the City issued bonds of $39.9 million on April 27, 2010 for the purpose of financing the construction of a building and installation of related equipment and certain associated expenses. The funds received under the bond issuance were deposited in a construction fund, which is used to fund construction expenses and equipment purchases.

The proceeds from the bonds were recorded in Cash, held in trust, and the obligation as Government lease obligation in the condensed consolidated balance sheet as of March 31, 2012. Through March 31, 2012 (unaudited) and December 31, 2011, the following activities have been recognized (in thousands):

	Cash Held in Trust			Payments From Operating Cash			Property & Equipment, Net		Government Lease Obligation, Net			Accrued Interest on Bonds			Interest Expense		Accrued Construction Expenses to be Funded by Cash, Held in Trust
Balance at December 31, 2010	$	31,219		$	—		$	7,686	$	(38,301	)	$	(661	)	$	57	$	—
Construction in progress - paid by December 31, 2011	(18,644		)	—			18,644		—			—			—		—
Construction costs held in retainer	—			—			1,789		—			—			—		(1,789		)
Recognition of interest expense, capitalized and expensed, net	—			—			1,859		(413		)	(1,973		)	527		—
Purchase of property and equipment place into service	(3,920		)	—			3,920		—			—			—		—
Amortization of OID and issuance costs	—			—			117		(117		)	—			—		—
Issuance cost made available for construction uses	—			—			63		(63		)	—			—		—
Payment of accrued interest, net	(1,973		)	—			—		—			1,973			—		—
Balance at December 31, 2011	6,682			—			34,078		(38,894		)	(661		)	584		(1,789		)
Construction in progress - paid by March 31, 2012	(1,789		)	—			—		—			—			—		1,789
Payment to the City	2,740			(2,740		)	—		—			—			—		—
Recognition of interest expense, capitalized and expensed, net	—						—		(110		)	(495		)	605		—
Payment by the City for interest	(990		)	—			—		—			990			—		—
Balance at March 31, 2012 (unaudited)	$	6,643		$	(2,740	)	$	34,078	$	(39,004	)	$	(166	)	$	1,189	$	—

In addition to the amounts disclosed above, the Company incurred $0.7 million of primarily internal costs associated with the building project that are capitalized in accordance with ASC 310-20, and will pay approximately $0.4 million of costs over-runs accrued in the Company’s Consolidated Balance Sheet as of December 31, 2011, and March 31, 2012. The Company also incurred $3.0 million for leasehold improvements related to the building project. These cost are not included in the table above.

Upon completion of the project in December 2011, the Company evaluated the transaction under FASB ASC Subtopic 360-20 to determine whether a sale transaction had occurred such that the Company would record a sale-leaseback under FASB ASC 840-40. As the Company has retained substantially all the benefits and risks incident to ownership of the property sold and the Company has the option to purchase the building and equipment at the end of the lease term ASC 360-20-40-38 dictates that the transaction must be accounted for as a financing transaction.

In accordance with being considered the owner of the asset under construction during the construction phase of the project and continues to be deemed the owner upon occupancy of the building, the Company accounts for the building and equipment, related depreciation, lease obligations, accrued interest, and cash held in trust, on its consolidated balance sheets and in its statements of operations. Interest expense associated with the bonds is being recognized using an effective rate of 7.6% based on the Company’s cash flows to service the bonds requirements pursuant to the lease agreement. In accordance with FASB ASC 310-20, the Company considered the initial amounts held to service interest during the construction phase and the debt service reserve, as fees paid at the inception of the loan.

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8. PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2012 (unaudited) and December 31, 2011 consisted of the following (in thousands):

	March 31,			December 31,
	2012			2011
	(Unaudited)
Building	$	27,590		$	27,590
Land	21,330			21,330
Computer equipment	25,691			23,763
Computer software	14,875			13,017
Leasehold improvements	7,013			6,902
Machinery and equipment	2,843			2,823
Office equipment, furniture and fixtures	5,063			4,864
Total property and equipment - cost	104,405			100,289
Less accumulated depreciation and amortization	(23,779		)	(20,148		)
Total property and equipment - net	$	80,626		$	80,141

Computer software in the table above includes capitalized costs related to internally developed computer software. There were no additions to such capitalized costs for the three months ended March 31, 2012 and 2011, respectively. The gross carrying amount of capitalized costs associated with internally developed computer software as of March 31, 2012 (unaudited) and December 31, 2011 were each $4.5 million. As of March 31, 2012 (unaudited) and December 31, 2011, the accumulated depreciation on the capitalized costs associated with internally developed computer software was $2.0 million and $1.8 million, respectively.

As of March 31, 2012 (unaudited) and December 31, 2011, the gross carrying amount of property and equipment recorded under capital leases were each $4.5 million. As of these dates, the accumulated depreciation on these leased assets was $3.3 million and $3.0 million, respectively.

Depreciation and amortization expense on property and equipment totaled $3.6 million, and $2.9 million, for the three months ended March 31, 2012 and 2011, respectively (unaudited).

On January 12, 2011, the Company acquired $8.5 million in equipment from an unrelated third party. During the three months ended March 31, 2012, the Company financed the first installment payment of $2.5 million through City of Port St. Lucie bond proceeds, paid $2.0 million from its general funds and paid $4.0 million using proceeds from equipment financing transactions.

9. INTANGIBLE ASSETS AND GOODWILL

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually and more frequently if events or changes in circumstances indicate the assets may be impaired. The Company determined there were no events or changes in circumstances that indicate that carrying values of Goodwill, indefinite-lived intangible assets, or other intangible assets subject to amortization may not be recoverable as of March 31, 2012 and December 31, 2011.

The following table provides information regarding changes in Goodwill and indefinite-lived intangible assets during the three months ended March 31, 2012 (unaudited, in thousands):

	Goodwill		Trademark
Goodwill & intangible assets not subject to amortization:
Balance, December 31, 2011	$	18,081	$	15,410
Changes recognized upon acquisitions or impairment	—		—
Balance, March 31, 2012 (unaudited)	$	18,081	$	15,410

The following tables present information regarding intangible assets with finite lives, all of which were recorded upon the acquisitions of Digital Domain and In-Three, at March 31, 2012 (unaudited) and December 31, 2011 (dollars in thousands):

13

	March 31, 2012 (Unaudited)
								Remaining
	Gross Carrying		Accumulated					Lives
	Amount		Amortization			Net Amount		(Months)
Unpatented technology	$	25,910	$	(6,451	)	$	19,459	105
Patents	420		(35		)	385		165
Titanic participation rights	1,800		(300		)	1,500		150
Customer relationships	300		(50		)	250		150
Proprietary software	5,900		(1,146		)	4,754		210
Total identified intangible assets	$	34,330	$	(7,982	)	$	26,348

	December 31, 2011
								Remaining
	Gross Carrying		Accumulated					Lives
	Amount		Amortization			Net Amount		(Months)
Unpatented technology	$	25,910	$	(5,804	)	$	20,106	108
Patents	420		(28		)	392		168
Titanic participation rights	1,800		(270		)	1,530		153
Customer relationships	300		(45		)	255		153
Proprietary software	5,900		(973		)	4,927		213
Total identified intangible assets	$	34,330	$	(7,120	)	$	27,210

Amortization expense for intangible assets with finite lives was $0.9 million for the three months ended March 31, 2012 and 2011, respectively.

The estimated future amortization expense as of March 31, 2012 (unaudited) is as follows (in thousands):

	March 31,
	2012
	(Unaudited)
2012 (remaining 2012 at March 31, 2012)	$	2,588
2013	3,451
2014	2,984
2015	2,984
2016	2,984
Thereafter	11,357
Total	$	26,348

10. FILM INVENTORY

Film inventory as of March 31, 2012 (unaudited) and December 31, 2011 are summarized as follows (in thousands):

	March 31, 2012		December 31, 2011
	(unaudited)
In-production:
Animation	$	6,932	$	3,926
Live-action	13,580		2,205
Total in-production	20,512		6,131
In-development	829		794
Total film inventory	$	21,341	$	6,925

14

11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities as of March 31, 2012 (unaudited) and December 31, 2011 are summarized as follows (in thousands):

	March 31, 2012		December 31, 2011
	(unaudited)
Accounts payable	$	5,036	$	6,491
Accrued wages and employee benefits	6,921		4,954
Accrued professional fees	200		1,302
Accrued outsource labor	4,837		2,149
Accrued tax credits	2,365		2,365
Other accrued expenses	2,957		4,213
Total accounts payable and accrued liabilities	$	22,316	$	21,474

12. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and for income tax purposes. A deferred income tax asset is recognized if realization of such asset is more likely than not, based upon the weight of available evidence which includes historical operating performance and the Company’s forecast of future operating performance. The Company evaluates the realizability of its deferred income tax assets and a valuation allowance is provided, as necessary. During this evaluation, the Company reviews its forecasts of income in conjunction with the positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is needed.

The Company recognized income tax expense of $ nil and $0.3 million for the three months ended March 31, 2012 and 2011, respectively for foreign income taxes based on the then expected effective income tax rate.  No federal, state and local tax benefit was recorded during the three month periods ended March 31, 2012 and 2011, respectively, for the Company’s pretax loss, because the future realizability of such benefits was not considered to be more likely than not.

13. NOTES PAYABLE AND RELATED FINANCING TRANSACTIONS

Summaries of convertible and other notes payable as of March 31, 2012 (unaudited) and December 31, 2011 are as follows (in thousands):

	March 31, 2012 (Unaudited)
	Comvest			Comvest			Comvest			Other
	Convertible			Lender			Revolver			Notes			Net
	Note Payable			Note Payable			Payable			Payable			Debt
Face amount	$	8,134		$	12,000		$	7,438		$	3,000		$	30,572
Unamortized discount	(4,937		)	(830		)	(497		)	—			(6,264		)
Net debt	3,197			11,170			6,941			3,000			24,308
Less current portion	(938		)	(1,386		)	(858		)	(3,000		)	(6,182		)
Long-term portion	$	2,259		$	9,784		$	6,083		$	—		$	18,126

	December 31, 2011
	Comvest			Comvest			Comvest
	Convertible			Lender			Revolver			Net
	Note Payable			Note Payable			Note Payable			Debt
Face amount	$	8,000		$	12,000		$	7,400		$	27,400
Unamortized discount	(7,545		)	(1,120		)	(668		)	(9,333		)
Net debt	455			10,880			6,732			18,067
Less current portion	—			(10,880		)	(6,732		)	(17,612		)
Long-term portion	$	455		$	—		$	—		$	455

15

Principal maturities of debt at March 31, 2012 (unaudited) are as follows (in thousands):

Remaining 2012	$	4,273
2013	7,636
2014	7,636
2015	7,636
2016	3,391
Total face amount	30,572
Less amounts representing debt discount	(6,264		)
Net debt	$	24,308

The changes in net debt for the three months ended March 31, 2012 (unaudited) and the year ended December 31, 2011 are as follows (in thousands):

	Comvest			Comvest			Comvest			Other
	Convertible			Lender			Revolver			Notes		Total
	Note Payable			Note Payable			Note Payable			Payable		Net Debt
Net debt, December 31, 2011	$	455		$	10,880		$	6,732		$	—	$	18,067
New borrowings	—			—			—			3,000		3,000
Recognition of discounts and deferred issue costs	(44		)	(65		)	(41		)	—		(150		)
Amortization of discounts and deferred issue costs	272			355			213			—		840
Capitalized interest	134			—			37			—		171
Debt restructuring	2,380			—			—			—		2,380
Net debt, March 31, 2012 (unaudited)	$	3,197		$	11,170		$	6,941		$	3,000	$	24,308

Interest and Financing Expense (Credit)— The components of interest expense (credit) for the three months ended March 31, 2012 and 2011 are as follows (unaudited, in thousands):

	Three Months Ended March 31,
	2012			2011
Changes in fair value of warrant and other debt-related liabilities	$	(4,284	)	$	28,965
Amortization of discount and issuance costs on notes payable	1,599			3,013
Interest expense on notes payable	670			502
Interest expense on capital and governmental lease obligations	670			318
Net interest expense (credit)	$	(1,345	)	$	32,798

Debt transactions in the three months ended March 31, 2012 — On February 23, 2012, the convertible note with Comvest was restructured.  This restructuring included amending a protective put right of Comvest (see Note 14) from $4.50 per share to $6.00 per share.  Additionally, certain loan covenants were amended or removed and Comvest forgave certain penalty interest payments due Comvest for breaches of loan covenants.  Among these, the Company’s minimum EBITDA covenant, as defined, was removed and a minimum cash covenant was instituted.  The Company also received a redemption feature to allow the Company to redeem 50% of the post-conversion shares of the convertible note at the purchase price of $6.00 per share prior to the expiration of the protective put.  The effect of this restructuring was to increase the carrying value of the Comvest convertible note by $2.4 million and decrease warrant liabilities by the same amount.  The increase to the carrying value of the convertible note is being amortized over the remaining life of the loan using the effective interest rate method.  The convertible note was exchanged for a subordinated convertible note on May 7, 2012, as discussed later in this section.

On March 19, 2012, the Company borrowed $3.0 million from Legend Pictures Funding, LLC (“Legend Pictures”).  This note bears simple interest at a rate of 8% per annum.  The maturity date of this note is July 18, 2012.  However, the note becomes due in full plus accrued interest earlier than that date upon an occurrence of an Event of Default (as defined) or if Legend Pictures at its sole discretion converts the note into shares of the Company’s common stock. This note is convertible into 533,452 shares of the Company’s common stock at March 31, 2012. Additionally, this note is personally guaranteed by the Company’s Chief Executive Officer.

On March 30, 2012, the Company recognized $0.2 million as additional debt discount and was allocated to the three Comvest notes based on the face value of the notes at that time.

The Comvest convertible note gives the Company the option to pay the interest expense each month in cash of in-kind by adding the monthly interest to the face amount of the note.  The Company elected this option for the months of February and March, 2012.  The Company pays monthly interest at the 10% per annum related to the Comvest revolver note payable.  Beginning January 1, 2012, the Company incurred an additional interest expense each month of 2% per annum for the Comvest revolver rate payable, which is added to the revolver note face value.  The total amount of capitalized interest recorded for these two loans during the three months ended March 31, 2012 aggregated $0.2 million.

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Sale and Issuance of Convertible Notes and Warrants

On May 6, 2012, Digital Domain Media Group, Inc. (the “Company”) entered into a securities purchase agreement (the “Purchase Agreement”) with a group of institutional investors (the “Purchasers”) pursuant to which the Company issued and sold to the Purchasers senior secured convertible notes in the aggregate original principal amount of $35.0 million (the “Senior Notes”) and warrants (the “Warrants”) to purchase up to 1,260,288 shares of the Company’s common stock for an aggregate purchase price of $35.0 million (the “Offering”).  The initial conversion price of the Senior Notes is $9.72, subject to adjustment as provided in the Senior Notes.  The initial exercise price of the Warrants is $9.72 per share, subject to adjustment as provided in the Warrants.  Such issuance and sale were consummated on May 7, 2012.

The indebtedness evidenced by the Senior Notes bears interest at 9.0% per annum, compounded quarterly, payable quarterly in arrears, and matures on the fifth anniversary of the issuance date. Upon the occurrence of an Event of Default (as such term is defined in the Senior Notes), the interest rate shall be adjusted to a rate of 15.0% per annum. The Purchasers may require the Company to redeem all or any portion of the Senior Notes upon the occurrence of an Event of Default (as such term is defined in the Senior Notes) or a Change of Control (as such term is defined in the Senior Notes).  The Senior Notes also contain, among other things, certain affirmative and negative covenants, including, without limitation, limitations on indebtedness, liens and restricted payments and certain financial covenants.

The Senior Notes will amortize in equal monthly installments commencing on the earlier of (i) the effective date of the initial registration statement filed in accordance with the terms of the Registration Rights Agreement (as defined below) or (ii) the six-month anniversary of the closing date. The Senior Notes may be converted into shares of the Company’s common stock, at the option of the holders thereof, at any time following issuance of the Senior Notes.  The Senior Notes are redeemable at the option of the Company if the Company’s common stock trades at a level equal to 175% of the initial conversion price for any 30 consecutive trading days commencing on the date of issuance of the Senior Notes.

On certain Adjustment Dates (as such term is defined in the Senior Notes), the conversion price applicable to the Senior Notes will be adjusted to the lesser of (a) the then-current conversion price and (b) the market price of the Company’s common stock on such date. The Senior Notes have anti-dilution protection in the event that the Company issues securities at an equivalent value less than the conversion price, and the conversion price is also subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions. The Company has agreed to pay each amortization payment in shares of the Company’s common stock, provided that certain conditions are met. The conversion rate applicable to any amortization payment in shares of the Company’s common stock will be the lower of (a) the conversion price then in effect and (b) a price equal to 85.0% of (i) the aggregate of the volume-weighted average prices of the Company’s shares of common stock for each of the ten lowest trading days during the 20 consecutive trading day period ending on the applicable amortization payment date, divided by (ii) 10. The Company is generally prohibited from issuing shares of common stock upon conversion of the Senior Notes if such conversion would cause the Company to breach its obligations under the rules or regulations of the New York Stock Exchange, or such other stock market on which the Company’s common stock is then traded.

The obligations of the Company under the Senior Notes are secured pursuant to the terms of a security and pledge agreement (the “Security Agreement”) and a Canadian security and pledge agreement (the “Canadian Security Agreement”) covering all of the assets of the Company and its subsidiaries (other than inactive subsidiaries) (the “Collateral”) and conferring on the Purchasers, subject to Permitted Liens (as such term is defined in the Purchase Agreement), a first-priority security interest in the Collateral.  The Security Agreement also contains customary representations, warranties and covenants.  In addition, all of the obligations of the Company under the Senior Notes are guaranteed by certain of the Company’s subsidiaries pursuant to the terms of a guaranty (the “Guaranty”).

Under the terms of the Warrants, the holders thereof are entitled to exercise the Warrants to purchase up to an aggregate of 1,260,288 shares of the Company’s common stock at an initial exercise price of $9.72 per share, during the five-year period beginning on the closing date. On certain Adjustment Dates (as defined in the Warrants), the exercise price applicable to the Warrants will be adjusted to the lesser of (a) the then-current exercise price and (b) the market price of the Company’s common stock on such date. The exercise price of the Warrants is also subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions. The Company is generally prohibited from issuing shares of common stock upon exercise of the Warrants if such exercise would cause the Company to breach its obligations under the rules or regulations of the New York Stock Exchange, or such other stock market on which the Company’s common stock is then traded.

In connection with the financing transaction described above, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) pursuant to which it agreed to file a registration statement with the Securities and Exchange Commission (the “Commission”) relating to the offer and sale by the Purchasers of the shares of the Company’s common stock issuable upon the conversion of the Senior Notes and the exercise of the Warrants. Pursuant to the terms of the Registration Rights Agreement, the Company is required to file the registration statement within 30 days of the closing date and to use its reasonable best efforts for the registration statement to be declared effective 90 days after the closing date.

The Senior Notes and the Warrants were issued pursuant to an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving a public offering.  In connection with these transactions, the Company paid a placement agent fee of $2.4 million to the sole placement agent for the offering of the Senior Notes and the Warrants.

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As a condition to the sale of the Senior Notes and the Warrants, two persons who are directors, executive officers and greater than 5% shareholders of the Company, who beneficially own an aggregate of 11,937,984 shares of the Company’s common stock, entered into a voting agreement (the “Voting Agreement”), pursuant to which they agreed not to sell, pledge, hypothecate or otherwise transfer their shares during the six-month period commencing on the closing date of the financing transaction, subject to certain exceptions for estate planning and similar purposes.

Exchange of Outstanding Debt with Existing Lender

On May 6, 2012, concurrently with the execution and delivery of the Purchase Agreement, the Company entered into an Omnibus Consent and Agreement re Restructuring (the “Omnibus Agreement”) with Comvest, pursuant to which, among other things, the Company agreed to (i) use a portion of the proceeds received by it in connection with the financing transaction described above to make payments to Comvest with respect to the outstanding loans to the Company held by Comvest, such that the aggregate outstanding principal balance thereof was reduced to $8.0 million, and (ii) repurchase all but 145,000 shares (the “Retained Shares”) of the Company’s common stock received by Comvest upon full exercise of an outstanding warrant to purchase shares of the Company’s common stock held by Comvest. The aggregate amount paid to Comvest in satisfaction of outstanding indebtedness and in repurchasing such shares, as described above, was $22.5 million, plus certain fees and expenses that the Company agreed to pay.

In connection with the foregoing, the Company and Comvest entered into a Debt Exchange Agreement (the “Debt Exchange Agreement”), pursuant to which, among other things, the Company exchanged the remaining outstanding original principal balance under its outstanding loans held by Comvest for a new secured convertible note in favor of Comvest with an original principal amount of $8.0 million (the “Subordinated Note”), which Subordinated Note, inclusive of any and all accrued interest on the Subordinated Note and other fees, costs and amounts owing thereunder, is convertible into shares of the Company’s common stock, in accordance with the terms thereof. The debt exchange transaction was consummated on May 7, 2012.

The indebtedness evidenced by the Subordinated Note bears interest at 10.0% per annum, compounded quarterly, payable quarterly in arrears, and matures on June 30, 2016. Upon the occurrence of an Event of Default (as such term is defined in the Subordinated Note), the interest rate shall be adjusted to a rate of up to 21.0% per annum, with the actual rate of such penalty interest to be contingent upon the nature of the Event of Default.  Comvest may require the Company to redeem all or any portion of the Subordinated Note upon the occurrence of an Event of Default (as such term is defined in the Subordinated Note).  The Subordinated Note also contains, among other things, certain affirmative and negative covenants, including, without limitation, limitations on indebtedness, liens and restricted payments and certain financial covenants.

The initial conversion price under the Subordinated Note is (i) $2.50 per share for payment of any portion of the original principal amount and (ii) $5.50 per share for payment of any other amounts owing thereunder, subject to adjustment as provided in the Subordinated Note. The Subordinated Note has anti-dilution protection in the event that the Company issues securities at an equivalent value less than the applicable conversion price, and the conversion price is also subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions. The Company is generally prohibited from issuing shares of common stock upon conversion of the Subordinated Note if such conversion would cause the Company to breach its obligations under the rules or regulations of the New York Stock Exchange, or such other stock market on which the Company’s common stock is then traded.

The obligations of the Company under the Subordinated Note are secured pursuant to the terms of a security and pledge agreement (the “Comvest Security Agreement”) and a Canadian security and pledge agreement (the “Comvest Canadian Security Agreement”) covering all of the Collateral and conferring on Comvest, subject to Permitted Liens (as such term is defined in the Debt Exchange Agreement), a security interest in the Collateral.  The Comvest Security Agreement also contains customary representations, warranties and covenants.  In addition, all of the obligations of the Company under the Subordinated Note are guaranteed by certain of the Company’s subsidiaries pursuant to the terms of a guaranty (the “Comvest Guaranty”).  The Company also entered into a subordination and intercreditor agreement (the “Subordination Agreement”) with Comvest and the collateral agent for the Senior Notes, setting forth the seniority and respective rights to collateral among Comvest and the holders of the Senior Notes.

In connection with the debt exchange transaction, the Company entered into a registration rights agreement with Comvest (the “Comvest Registration Rights Agreement”) pursuant to which it agreed to file a registration statement with the Commission relating to the offer and sale of the shares of the Company’s common stock issuable upon conversion of the Subordinated Note and the Retained Shares. Pursuant to the agreement, the Company is required to file the registration statement within 30 days of the closing date and to use its reasonable best efforts for the registration statement to be declared effective 90 days after the closing date of the debt exchange transaction.

As the Comvest debt was replaced with debt maturing in 2017, the Company reclassified $14.9 million of net debt from current liabilities to long-term liabilities as of March 31, 2012, in accordance with ASC 470-10-45-14. The Company has yet to determined the effects of these transactions on its consolidated financial statements.

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14. WARRANTS, OPTIONS AND OTHER DEBT-RELATED LIABILITIES

Summaries of warrant and other debt-related liabilities as of March 31, 2012 (unaudited) and December 31, 2011 are as follows (unaudited, in thousands):

	March 31,			December 31,
	2012			2011
Short-term warrant liabilities:
Comvest Capital II fee warrants	$	—		$	2,548
Galloping Horse put	1,917			—
Digital Domain Bridge Warrants	3,914			3,914
Total short-term warrant liabilities	5,831			6,462
Long-term warrant liabilities:
Comvest Capital II fee warrants	2,422
Comvest Capital II conversion warrants	12,709			15,200
Comvest Capital II protective put	6,622			5,730
Comvest redeemable feature	(4,939		)	—
Total long-term warrant liabilities	16,814			20,930
Total warrant liabilities	$	22,645		$	27,392

The following table summarizes the warrant and other debt-related liabilities transactions from December 31, 2011 through March 31, 2012 (unaudited, in thousands):

	Comvest Capital II			Galloping Horse Put		Digital Domain Bridge Warrants		Total
Balance, December 31, 2011	$	23,478		$	—	$	3,914	$	27,392
Debt restructuring (see Note 15)	(2,380		)	—		—		(2,380		)
Recognition of put liability	—			1,917		—		1,917
Changes in fair value of warrants	(4,284		)	—		—		(4,284		)
Balance, March 31, 2011 (unaudited)	$	16,814		$	1,917	$	3,914	$	22,645

As discussed in Note 13, the Company reclassified the Comvest debt from current liabilities to long-term liabilities as of March 31, 2012.  The Company also reclassified the Comvest fee warrants aggregating $2.4 million from current liabilities to long-term liabilities on that date as well.

15. SEGMENT INFORMATION

Segment financial information for the three months ended March 31, 2012 and 2011, respectively, is as follows (unaudited, in thousands):

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	Three Months Ended
	March 31,
	2012			2011
	(Unaudited)
Revenues:
Digital Production:
Feature Films	$	27,588		$	31,605
Commercials	2,660			6,299
Animation	—			—
Corporate/Other	893			653
Total revenues	31,141			38,557
Costs and expenses:
Digital Production:
Feature Films	30,146			26,231
Commercials	3,131			5,144
Animation	—			—
Corporate/Other	15,118			14,129
Total costs and expenses	48,395			45,504
Operating (loss) income:
Digital Production:
Feature Films	(2,558		)	5,374
Commercials	(471		)	1,155
Animation	—			—
Corporate/Other	(14,225		)	(13,476		)
Net operating loss	$	(17,254	)	$	(6,947	)
Revenues:
United States	$	22,602		$	31,212
Canada	8,539			7,345
Total	$	31,141		$	38,557

16. COMMITMENTS AND CONTINGENCIES

Litigation

Wyndcrest DD Florida, Inc., et al adv. Carl Stork   On March 29, 2010, the Company (under the former name “Wyndcrest DD Florida, Inc.”) sued former Digital Domain Chief Executive Officer and director Carl Stork in Brevard County Florida Circuit Court to enforce a February 2010 stock purchase agreement pursuant to which the Company purchased Mr. Stork’s Digital Domain shares. The case was voluntarily dismissed on December 16, 2010. On September 8, 2010, Mr. Stork filed suit against the Company in Los Angeles County Superior Court seeking rescission of the agreement and compensatory and punitive damages. The case was removed to the United States District Court for the Central District of California. Mr. Stork has been paid the purchase price in full under the agreement. The Company is vigorously defending against the claims. The case is in discovery, and as such the Company cannot reliably predict the outcome. Trial has been set for June 2012.

JK-DD, LLC and Jeffrey Kukes v. John C. Textor, et al   On August 12, 2010 the plaintiffs, who are stockholders of Digital Domain, filed suit against the defendants in Palm Beach County, Florida, Circuit Court seeking rescission of a 2007 settlement agreement that resolved a prior partnership dispute between Mr. Kukes and Mr. Textor pursuant to which the plaintiffs obtained their shares of Digital Domain common stock. The plaintiffs also seek damages for alleged dilution of the value of such shares. The defendants believe the Complaint is an attempt to reverse a valid, binding settlement agreement and are aggressively defending against the claims. On September 27, 2010, the defendants filed a motion to dismiss the plaintiffs’ claims. The plaintiffs subsequently dismissed two of the three counts in their original complaint, mailed defendants a draft amended complaint naming the Company as a defendant, and filed a separate new action against Mr. Textor and his wife, individually. The plaintiffs’ draft amended complaint against the Company has not been filed. Both cases are in discovery, and as such the Company cannot reliably predict the outcome. No trial date has been set in either case.

4580 Thousand Oaks Boulevard Corporation v. In Three, Inc., et al.   On April 21, 2011, the plaintiff, the former commercial landlord of In-Three, Inc., filed suit in California Superior Court (Ventura County) seeking approximately $4.6 million in unpaid rent and operating expenses allegedly owed pursuant to a lease agreement between the plaintiff and In-Three. The subject lease pre-dated our acquisition of certain assets of In-Three and was specifically not assumed by us in that transaction. Notwithstanding, the plaintiff originally named the Company and its subsidiaries Digital Domain Productions and Digital Domain Stereo Group, Inc. (“DDSG”), formerly DD3D, Inc, a subsidiary of the Company, as defendants but voluntarily dismissed its claims against all Digital Domain defendants on June 24, 2011. Subsequently, on October 5, 2011, the

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plaintiff’s counsel sent a letter to us requesting that the Company voluntarily stipulate to a court order permitting the filing of an amended complaint which would have added us back into the lawsuit as a defendant. The Company has refused to stipulate to the filing of an amended complaint on the grounds that such an amendment would be futile as, in the Company’s judgment, no lawful basis exists for advancing any claims against the Company. The plaintiff responded by conducting additional discovery pertinent to the asset purchase transaction to determine whether sufficient evidence exists to support the proposed amended complaint.

In-Three has responded to such discovery, and the plaintiff, thus far, has chosen not to seek leave of court to file the proposed amended complaint. In consequence, we are not defendants in this litigation. The case is currently in trial only as to In-Three. In-Three has acknowledged its contractual indemnity obligation to us pursuant to the asset purchase transaction and, accordingly, will represent us in defense of this action if necessary.

Digital Domain Stereo Group, Inc. v. Prime Focus North America, Inc. and Prime Focus VFX USA, Inc.   DDSG currently holds the assets the Company purchased from In-Three, filed a complaint in the United States District Court for the Central District of California against Prime Focus in November 2011 for damages associated with Prime Focus’ infringement upon DDSG’s stereo 3D conversion patents. Prime Focus answered on February 17, 2012 denying DDSG’s claims, asserting various affirmative defenses and seeking a declaratory judgment of no infringement and patent invalidity, the standard defenses asserted by defendants in patent infringement cases. The case is in its initial stages and as such we cannot reliably predict the outcome. No trial date has been set for this case.

Other—The Company is involved from time to time in routine litigation arising in the ordinary course of conducting our business. In the opinion of management, no pending routine litigation will have a material adverse effect on our consolidated financial condition or results of operations.

17. STOCK OPTION EXPENSE

The Company recognized $1.9 million and $4.4 million in stock option compensation during the three months ended March 31, 2012 and 2011, respectively.

During the three months ended March 31, 2011, the Company granted stock options to the former Chief Executive Officer of the Company’s subsidiary Digital Domain to purchase shares of the Company’s Common Stock which vested immediately resulting in a charge of $3.3 million for that period. Stock option compensation expense for other participants were $1.9 million and $1.1 million for the three months ended March 31, 2012 and 2011, respectively.

18. SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date on which the consolidated financial statements have been issued. The following subsequent events occurred:

Exchange Agreement

On April 5, 2012, certain shareholders of DDI exchanged 2,000,000 shares of common stock of DDI for an aggregate of 1,661,400 shares of the Company’s common stock, pursuant to an exchange option agreement entered into among DDI, DDMG, and such shareholder.

Comvest Waiver

On April 15, 2012, the Company and Comvest entered into an agreement which anticipated the senior convertible note financing described below.

Sale and Issuance of Convertible Notes and Warrants

On May 7, 2012, DDMG completed a $35 million senior convertible note offering to a group of institutional investors and issued an $8 million subordinated convertible note to Comvest to refinance existing debt held by Comvest. These transactions retired existing senior notes that would otherwise have been due in 2012.  The new senior convertible notes are convertible into the Company’s common stock at an initial conversion price of $9.72 per share, mature in five years and carry an interest rate of nine percent. The investors in the senior convertible note offering also received warrants to acquire 1.26 million shares of the company’s common stock at an initial exercise price of $9.72 for a term of five years. The new subordinated convertible note with stated interest of 10%, issued to Comvest replaces an existing convertible note held by Comvest that was issued in 2011 and is convertible into substantially the same number of shares of the company’s common stock as the original note. The new Comvest note also reduced the company’s fixed repayment obligations from $16 million due later this year under the original note to $8 million due in mid-2016.  See Footnote 13 “Notes Payable and Related Financing Transactions” for additional disclosure.

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Part I. Financial Information

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

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

We are an award-winning digital production company. Since our inception in 1993, we have been a leading provider of computer-generated imagery animation and VFX for major motion picture studios and advertisers. Our company, work and employees have been recognized with numerous entertainment industry awards and nominations, including seven awards issued by the Academy of Motion Picture Arts and Sciences (‘‘Academy Awards’’) — three Academy Awardsfor Best Visual Effects and four awards for Scientific and Technical Achievement.

Our Business

Digital Production

We are one of the leading digital production companies. We offer our clients innovative, end-to-end solutions across multiple media platforms spanning the entire content production process from idea generation and pre-production to design, directing, live-action production and post-production. We have three key digital production business units: Digital Domain Productions, Inc. — VFX for feature films and advertising; Mothership Media, Inc. — digital advertising and marketing solutions; and Digital Domain Stereo Group, Inc.— creation and conversion of 3D content.

Animation Studio

Our animation feature film business focuses on the development of our original full-length, family-oriented CG animated feature films. Our business is led by a creative storytelling team of accomplished directors, producers, story artists and animators who joined us from leading companies in the family animation film industry. To house this business, we are currently leasing a 64,000 square foot building while we complete the construction of an 115,000 square foot facility. Since establishing our animation studio in 2009, we have executed Grant Agreements with the State of Florida and the City of Port St. Lucie, Florida to provide grant packages consisting of $80.0 million in cash, land and low interest financing to help us establish this studio. We have also been certified for $20.0 million in potential tax credits from the State of Florida to offset the expenses of producing our first several projects.

Education

We founded Digital Domain Institute, Inc. (“DDI”), a for-profit post-secondary educational institution in partnership with Florida State University, (“FSU”). In April 2011, we entered into agreements with FSU establishing what we believe is a first-of-its-kind public/private education partnership whereby DDI graduates will receive fully-accredited four-year Bachelor degrees from FSU. Working closely with FSU’s College of Motion Picture Arts and the Florida Department of Education, we have designed a curriculum for DDI that we expect will produce workforce-ready graduates possessing both traditional motion picture arts and state-of-the-art technical animation and visual effects CG skills. We expect to also provide our graduates with the skills to compete in the broader digital economy, which includes commercial applications such as military simulation, medical simulation, architecture, engineering, software development and related technologies. We believe this partnership between DDI and FSU represents a cutting-edge collaboration between an industry-leading technology and entertainment-company and one of the nation’s top film schools.

Key Metrics

We rely on certain key performance indicators to manage and assess our business activities. The key indicator described below assists us in evaluating growth trends, establishing budgets, recruiting and hiring employees, and assessing our overall

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operational efficiencies. We discuss revenue and cash flow from operating activities, respectively, under “Results of Operations” and “Liquidity and Capital Resources” below. An important measure of our quarterly and annual performance, Non-GAAP Adjusted EBITDA, is also discussed below.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Accounting principles generally accepted in the United States of America require our management to make estimates and assumptions in the preparation of our condensed consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

The most significant areas that require management judgment are fair values of consideration issued and net assets acquired in connection with business combinations; revenue and cost recognition; collectability of contract receivables; deferred grant revenues; deferred income tax valuation allowances; amortization of long-lived assets and intangible assets; impairment of long-lived assets, intangible assets and goodwill; accrued expenses; advance billings and deferred revenue; recognition of stock-based compensation; calculation of the warrant and other debt-related liabilities; allocation of equity to non-controlling interests; debt modification accounting; and contingencies and litigation. The accounting policies for these areas are discussed in this section and in the notes to our accompanying consolidated financial statements. However, estimates inherently relate to matters that are uncertain at the time the estimates are made, and are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

Digital Imagery Revenue — We recognize digital imagery revenue from fixed-price contracts, each consisting of an accepted written bid and agreed-upon payment schedule, for the development of digital imagery and image creation for the entertainment and advertising industries. Contracts to provide digital imagery are accounted for in accordance with FASB ASC Subtopic 605-35, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue recognition is initiated when persuasive evidence of an arrangement with a customer is established, which is upon entry by us, or our subsidiary Digital Domain (“DD”), and the customer into a legally enforceable agreement. In accounting for the contracts, the cost to- cost measures of the percentage-of-completion method of accounting are utilized in accordance with FASB ASC Subtopic 605-35. Under this method, revenues, including estimated earned fees or profits, are recorded as costs are incurred. For all contracts, revenues are calculated based on the percentage of total costs incurred compared to total estimated costs at completion. Contract costs include direct materials, direct labor costs and indirect costs related to contract performance, such as indirect labor, supplies and tools. These costs are included in cost of revenues.

The customer contracts in the digital imagery business represent binding agreements to provide digital effects to the customers’ specifications. The contracts contain subjective standards applicable to the delivered digital effects and objective specifications that relate to the technical format for the digital effects delivered to customers. In all instances, the customer receives complete ownership rights in and to the digital effects as the effort progresses. In the event of a termination of a contract, ownership in the digital effects transfers to the customer, and we or DD, as the contractor, are entitled to receive reimbursement of costs incurred up to that point and a reasonable profit. The contracts contain production schedules setting forth a timeline for production and a final delivery date for the completed digital effects.

Payments for the services are received over the term of the contract, including payments required to be delivered in advance of work to fund a portion of the costs to produce the digital effects. Cash received from customers in excess of costs incurred and gross profit recognized on the related projects are recorded as advance payments. Unbilled receivables represent revenues recognized in excess of amounts billed. The digital effects produced are delivered to the customer at the end of the contract and the customer is not required to deliver the final scheduled payment until receipt and acceptance of the digital effects.

A review of uncompleted contracts is performed on an ongoing basis. Amounts representing contract change orders or claims are included in revenues only when they meet the criteria set forth in FASB ASC Subtopic 605-35. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income.

Changes in estimates of contract sales, costs and profits are recognized in the current period based on the cumulative effect of the changes on current and prior periods. Hence, the effect of the changes on future periods of contract performance is recognized as if the revised estimates had been the original estimates. A significant change in one or more projects could have a material adverse effect on the consolidated financial position or results of operations.

Fair Value of Financial Instruments — We have adopted FASB ASC Subtopic 820-10, Fair Value Measurements, which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosure on fair value measurements.

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FASB ASC Subtopic 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Subtopic 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC Subtopic 820-10 describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices for identical assets or liabilities in active markets.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that relate to financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

Our financial instruments, including Cash and cash equivalents; Cash, held in trust; Contract receivables; Accounts payable and accrued liabilities; Advance payments and deferred revenue and Contract obligations, are carried at amounts that approximate fair value due to the short maturity of such instruments.

Our loans are carried at the principal amount less unamortized discounts and debt issuance costs.

Certain non-financial assets are measured at fair value on a nonrecurring basis. Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic impairment tests. These items primarily include long-lived assets, Goodwill and Other intangible assets.

Warrants and other debt-related liabilities are measured at fair value on a recurring basis using Level 3 inputs. In valuing warrant and other debt-related liabilities, a combination of valuation techniques is used including the income approach (based on the cash outlays estimated to be paid by us) and the market approach (which allocates the resulting value to various classes of equity using the option pricing method). The value of the warrants is then calculated by multiplying the resulting fair value per share of our Common Stock by the number of shares of our Common Stock into which the warrants are exercisable.

As of March 31, 2012 we received a valuation of the earn-out liability as of that date, from an independent valuation firm, considering it a Level 3 input. Based on this valuation, we reduced the earn-out liability by $0.5 million. This reduction is included in selling, general and administrative expenses on the condensed consolidated statement of operations for the three months ended March 31, 2012. The inputs used by us in determination of the $2.6 million of earn out liability at March 31, 2012 included a term of 153 months, a risk-free interest rate of 3.0% and no dividends.

Segment Reporting — Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our reportable segments are Feature Films, Commercials and Animation. The management approach is used as the conceptual basis for identifying reportable segments and is based on the way that management organizes within the enterprise for making operating decisions, allocating resources, and monitoring performance, which is primarily based on the sources of revenue.

Non-GAAP Adjusted EBITDA

Non-GAAP Adjusted EBITDA represents net income (loss) adjusted for (1) interest expense, net of interest income, (2) income tax provision (benefit), (3) depreciation and amortization, (4) amortization of intangible assets, (5) stock-based compensation expense, (6) amortization of debt and equity issuance costs, (7) other (income) expense and (8) our grant receipts from government agencies that were received in a given period so that these receipts are reflected on a cash basis. Items (1) through (7) are excluded from net income (loss) internally when evaluating our operating performance. Item (8) is included as we believe this adjustment for grant receipts is indicative of our core operating performance both because it reflects our ability to secure and receive grant receipts in a given period and such receipts are matched with the expenses associated with initiating the business operations that those grant receipts were designed, in part, to offset. Management believes Non-GAAP Adjusted EBITDA allows investors to make a more meaningful comparison between our operating results over different periods of time, as well as with those of other companies in our industry, because it both includes grant receipts from government agencies and excludes items such as interest expense and other adjustments related to financing activities that we believe are not representative of our operating performance.

We believe that Non-GAAP Adjusted EBITDA, which is a non-GAAP financial measure, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provides useful information about our operating performance and period-over-period growth, and provides additional information that is useful for evaluating our operating performance. Additionally, we believe that Non-GAAP Adjusted EBITDA provides a more meaningful comparison of our operating results against those of other companies in our industry, as well as on a period-to-period basis, because this measure both includes grant receipts from government agencies and matches such receipts with the expenses that those grant receipts were designed, in part, to offset and excludes items that are not representative of our operating performance, such as the fair value adjustments associated with our historical financings as a private company. We believe that including these costs and excluding cash grant receipts in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which do not have comparable start-up costs or amortization costs related to intangible assets. However, Non-GAAP Adjusted EBITDA is not a measure of financial

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performance under U.S. GAAP and, accordingly, should not be considered as an alternative to net income (loss) as an indicator of operating performance.

A reconciliation of net income (loss), a U.S. GAAP measure, to Adjusted EBITDA, is provided in “— Results of Operations” presented below.

Results of Operations

The following table sets forth certain information regarding our unaudited condensed consolidated results of operations for the three months ended March 31, 2012 and 2011 (in thousands):

	Three Months Ended March 31,
	2012			2011
	(Unaudited)
Revenues:
Revenues	$	30,158		$	37,904
Grant revenues from governmental agencies	878			653
Licensing revenue	90			—
Tuition revenue	15			—
Total revenues	31,141			38,557
Costs and expenses:
Cost of revenues, excluding depreciation and amortization	32,922			30,922
Depreciation expense	3,631			2,870
Selling, general and administrative expenses	10,979			10,849
Amortization of intangible assets	863			863
Total costs and expenses	48,395			45,504
Operating loss	(17,254		)	(6,947		)
Other income (expenses):
Interest and finance (expense) credit:
Issuance of and changes in fair value of warrant and and other debt-related liabilities	4,284			(28,965		)
Amortization of discount and issuance costs on notes payable	(1,599		)	(3,013		)
Interest expense on notes payable	(670		)	(502		)
Interest expense on capital and governmental lease obligations	(670		)	(318		)
Other income (expense), net	353			1,067
Loss before income taxes	(15,556		)	(38,678		)
Income tax expense	9			250
Net loss before non-controlling interests	(15,565		)	(38,928		)
Net (income) loss attributable to non-controlling interests	733			(197		)
Net loss attributable to common stockholders	$	(14,832	)	$	(39,125	)

A reconciliation of net loss before non-controlling interests, a U.S. GAAP measure, to Non-GAAP Adjusted EBITDA, a non-GAAP measure, is presented in the table below (in thousands):

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	Three Months Ended March 31,
	2012			2011
	(Unaudited)
Net loss before non-controlling interests	$	(15,565	)	$	(38,928	)
Add back (reverse) charges (income) pertaining to:
Share-based compensation	1,878			4,409
Income tax expense	9			250
Interest expense, net	2,939			3,833
Depreciation expense	3,631			2,870
Amortization of intangible assets	863			863
Changes related to fair value of warrant and other debt-related liabilities	(4,284		)	28,965
Other EBITDA addbacks:
Grant cash receipts in excess of (less than) grant revenue recognized	1,372			(653		)
Write-off of deferred offering costs	—			434
Non-GAAP Adjusted EBITDA	$	(9,157	)	$	2,043

Operating Segments

FASB ASC Topic 280, Segment Reporting, establishes standards for reporting information about operating segments. This standard requires segmentation based on our internal organization and reporting of revenue and operating income based upon internal accounting methods. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Our three operating segments are Feature Films, Commercials and Animation. These segments are presented in the way we internally manage and monitor our performance. Our reporting systems present various data used by management to operate the business. However, certain expenses are not allocated to the various segments (primarily consisting of support staff salaries and benefits, fees for outside professional services, insurance costs, and utilities costs, all of which are included in selling, general and administrative expenses), and thus a reconciliation is provided between the consolidated financial statements and the data related to the combined segments. Interest and other income are not allocated to the various segments, as the chief operating decision maker does not evaluate segment operations beyond the income (loss) from operations level.

Our digital production business (containing the segments of Feature Films and Commercials) has historically dominated our operations. The revenue for each of the segments is derived from external customers. A majority of all revenues have been generated in the United States from customers located in the United States.

The table below sets forth certain unaudited information regarding the results of operations of our segments for the periods indicated (in thousands):

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	Three Months Ended
	March 31,
	2012			2011
Feature Films
Revenues	$	27,588		$	31,605
Cost of revenues	30,009			25,876
Selling, general and administrative expenses	137			355
Operating income (loss)	$	(2,558	)	$	5,374
Commercials
Revenues	$	2,660		$	6,299
Cost of revenues	2,913			5,046
Selling, general and administrative expenses	218			98
Operating income (loss)	$	(471	)	$	1,155
Animation
Revenues	$	—		$	—
Cost of revenues	—			—
Selling, general and administrative expenses	—			—
Operating income	—			—
	—			—
Corporate & Other
Revenues	$	893		$	653
Cost of revenues	—			—
Depreciation	3,631			2,870
Selling, general and administrative expenses (excluding stock-based compensation)	8,746			5,987
Stock-based compensation and share exchange expense	1,878			4,409
Amortization	863			863
Operating loss	$	(14,225	)	$	(13,476	)
Consolidated
Revenues	$	31,141		$	38,557
Cost of revenues	32,922			30,922
Depreciation	3,631			2,870
Selling, general and administrative expenses	9,101			6,440
Stock-based compensation and share exchange expense	1,878			4,409
Amortization	863			863
Operating loss	$	(17,254	)	$	(6,947	)

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Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Summary of operating results

Our operating loss increased $10.3 million to $17.2 million for the three months ended March 31, 2012 from $6.9 million for the same period of the prior year. The gross profit, defined as revenues less cost of revenues, declined $9.4 million, primarily due to increases in unutilized labor as we elected to maintain our trained and experienced work force and infrastructure in anticipation of future projects, including those projects in which we hold an ownership stake. Additional detail on the components included in our cost of revenues is provided below.  Stock-based compensation decreased from $4.4 million for the three months ended March 31, 2011 to $1.9 million for the three months ended March 31, 2012. Other selling, general and administrative (“S,G&A”) expenses increased by $2.6 million over the prior period to $9.1 million for the three months ended March 31, 2012, primarily resulting from increased staffing and professional fees incurred during the three months ended March 31, 2012. Depreciation and amortization for the three months ended March 31, 2012 increased $0.8 million over the prior period.

Interest and other financing costs decreased $34.1 million to a credit of $1.3 million for the three months ended March 31, 2012 from an expense of $32.8 million for the same period of the prior year. The principal causes of this decrease included a $33.2 million decrease in the non-cash changes in fair value of warrant and other debt-related liabilities and a $1.4 million decrease in the amortization of debt discounts and deferred debt issue costs. The decrease in interest expense, partially offset by the increase in the operating loss, were the principal causes of an improvement of $23.3 million in the net loss before non-controlling interests for the three months ended March 31, 2012.  The net losses before non-controlling interests were $15.6 million and $38.9 million for the three months ended March 31, 2012 and 2011, respectively. These variances are explained in greater detail below.

Revenues

Total revenues decreased $7.4 million to $31.1 million for the three months ended March 31, 2012 from $38.5 million for the same period of the prior year.  This decrease was due primarily to a $4.3 million decrease in feature film revenues and a $3.4 million decrease in commercial revenues, partially offset by increases in grant and other revenues of $0.3 million.

Feature film revenues decreased to $27.5 million for the three months ended March 31, 2012, of which revenues from five features accounted for $23.9 million of this total. Feature film revenues for the three months ended March 31, 2011 were $31.8 million; revenues from four feature films accounted for substantially all of such revenues. The aggregate decrease is due to a larger number of smaller projects that were in production during the three months ended March 31, 2012.

Commercials revenues decreased to $2.7 million for the three months ended March 31, 2012 from $6.1 million for the same period of the prior year. In the three months ended March 31, 2011, we recognized $2.8 million from one large commercial project as well as another $2.3 million from four other substantial commercial projects.  During the three months ended March 31, 2012, our four largest commercial projects generated $1.7 million of revenues.  The aggregate decrease was due to a smaller number of projects completed during the three months ended March 31, 2012.

Grant revenues from governmental sources

During the three months ended March 31, 2012, we received $2.3 million of grant proceeds.  We recognized grant revenue of $0.9 million and $0.7 million for the three months ended March 31, 2012 and 2011, respectively. In April 2011, we began the revenue recognition of grant income related to our grant from the City of West Palm Beach, Florida.  During the three months ended March 31, 2012, we recognized $0.1 million from this grant.  Effective January 1, 2012, we began to recognize revenue from the deferred land grant of $10.5 million from the City of Port St. Lucie related to the parcel of land where our new headquarters building is located.  We moved into this building in December 2011.  We recognized $0.1 million of grant revenues related to this deferred land grant during the three months ended March 31, 2011.

Licensing and tuition revenues

We recognized $0.1 million of licensing and tuition revenues during the three months ended March 31, 2012.  There were no such revenues for the same period of the prior year.

Cost of revenues

The table below lists sets forth the components of cost of revenues (in thousands):

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	Three Months Ended March 31,
	2012				2011
	Amount		% of Revenue		Amount		% of Revenue
	(Unaudited)				(Unaudited)
Cost of Revenues:
Direct cost of revenues	$	22,840	73.3	%	$	23,529	61.0	%
Unutilized labor	4,712		15.1	%	486		1.3	%
Production and other costs	5,370		17.3	%	6,907		17.9	%
Total cost of revenues	$	32,922	105.7	%	$	30,922	80.2	%

Our direct cost of revenues represents the labor required to deliver projects to customers. Unutilized labor represents expenses related to the staff that we retain while we await the start of new projects. Production and other costs represent that portion of our overhead that is allocated to cost of revenues.

Our direct cost of revenues increased during the three months ended March 31, 2012 to 73% of revenue from 61% of revenue for the same period of the prior year.  Of this 12% increase, 7% is due to the inclusion of co-production revenues related to Ender’s Game of $2.2 million at 100% direct costs of revenues.  During the three months ended March 31, 2011, the two largest projects generated $20.1 million of revenues at direct costs of revenues of 59%.  During the three months ended March 31, 2012, the two largest projects generated $18.5 million of revenues at direct costs of revenues of 81%.  Competitive pressures, product mix changes and other factors contributed to the remaining increase in the direct cost percentage of revenues.

Our unutilized labor increased by $4.2 million to $4.7 million during the three months ended March 31, 2012 as compared to the same period of the prior year. We retained digital artists in anticipation of future projects, including those projects in which we are an equity investor.  These costs were 15% and 1% of total revenues for the three months ended March 31, 2012 and 2011, respectively.

Our production and other costs decreased by $1.5 million during the three months ended March 31, 2012 to $5.4 million as compared to the same period of the prior year.  These production and other costs as a percent of revenues were relatively constant at 17% and 18% for the three months ended March 31, 2012 and 2011, respectively.

Depreciation expense

The $0.8 million increase in depreciation expense during the three months ended March 31, 2012 as compared to the same period of the prior year is virtually all due to the growth of our fixed assets in our Florida operations. Of the total increase, $0.3 million was due to the depreciation of our new headquarters building that we moved into in December 2011.  Additionally, we depreciated $0.2 million of assets for that new building in the three months ended March 31, 2012.

Selling, general and administrative expenses (“S,G&A”)

The composition of the S,G&A expenses for the three months ended March 31, 2012 and 2010 are as follows (in thousands):

	Three Months Ended
	March 31,
	2012		2011
	(Unaudited)
Share-based compensation expense:
Senior executive option grant	$	—	$	3,255
Other share-based compensation expense	1,878		1,154
Total share-based compensation expense	1,878		4,409
Payroll- realated expenses	4,104		3,381
Rent and occupancy costs	1,613		1,130
Professional fees	1,551		790
Other S,G&A expenses	1,833		1,139
Total S,G&A	$	10,979	$	10,849

A decrease of $2.5 million in share-based compensation expense was offset by an increase in other S,G&A expenses of $2.7 million for a net increase of $0.2 million of S,G&A expenses for the three months ended March 31, 2012 as compared to the same period of the prior year.

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During the three months ended March 31, 2011, we granted stock options to the former Chief Executive Officer of our subsidiary DD to purchase shares of our Common Stock, which options vested immediately resulting in a charge of $3.3 million for that period.  Other share-based compensation expense increased $0.8 million due to the increased number of participants in our 2010 Stock Plan.

Other S,G&A expenses increased by $2.7 million to $9.1 million in the three months ended March 31, 2012 from $6.4 million for the same period of the prior year.  Payroll-related expenses increased by $0.7 million due to the growth in our operations.  The increase in rent and occupancy costs aggregated $0.5 million, including increased operating costs to operate our new headquarters building of $0.3 million compared to the leased facility during the prior year period.  Professional fees increased by $0.8 million, primarily due to increases in accounting and legal fees in connection with being a public company as we prepared and filed our first Annual Report during the three months ended March 31, 2012. Other operating expenses increased by $0.7 million.

Interest Expense (Credit)

We recognize two types of interest expense.  These types include the interest expense that is paid in cash, such as interest on our notes payable and on our capital lease and government lease obligations.  We also recognize non-cash interest expense (credit), such as for the issuances of and changes in the fair value of warrant liabilities, amortization of debt discounts and deferred debt issuance costs and losses on debt extinguishments.  The composition of interest expense (credit) for the three months ended March 31, 2012 and 2011is as follows (in thousands):

	Three Months Ended March 31,
	2012			2011
	(Unaudited)
Cash-based interest expense:
Interest expense on notes payable	$	670		$	502
Interest expense on capital and governmental lease obligations	670			318
Total cash-based interest expense	1,340			820
Non-cash based interest expense (credit):
Changes in fair value of warrant and other debt-related liabilities	(4,284		)	28,965
Amortization of discount and issuance costs on notes payable	1,599			3,013
Total non-cash-based interest expense (credit)	(2,685		)	31,978
Net interest expense (credit)	$	(1,345	)	$	32,798

The total cash-based interest expense increased by $0.5 million and the non-cash interest expense decreased by $34.7 million for a net decrease in interest expense of $34.1 million for the three months ended March 31, 2012 as compared to the same period of the prior year.

Interest expense on notes payable increased by $0.2 million in the three months ended March 31, 2012 as compared to the same period of the prior year due to higher interest rates.  During the three months ended March 31, 2011, most of the approximately $30.0 million of our indebtedness carried a 6.5% per annum interest rate.  During the three months ended March 31, 2012, the approximately $27.4 million of Comvest debt carried a weighted average of a 10.0% per annum interest rate.

The interest expense on capital and governmental leases increased by $0.3 million in the three months ended March 31, 2012 as compared to the same period of the prior year.  This was due to the interest we pay on the government lease obligation.

Changes in fair value of warrant and other debt-related liabilities

We recognize warrant liabilities for warrants issued in connection with various debt transactions. These warrants are recorded initially at fair value and are adjusted to fair value at each financial reporting date. These fair values are obtained from a third-party independent valuation firm.

During the three months ended March 31, 2012, we recognized a non-cash reduction in the fair value of warrant liabilities of $4.3 million, primarily due to the decrease in the trading price of our Common Stock.  During the three months ended March 31, 2011, we sold 2,025,001 of shares of our Common Stock at $9.63 per share.  We issued certain warrants to the purchasers of these shares.  During that period, we recognized a non-cash charge of $29.0 million for the issuance of these warrants, the increased number of warrants granted due to anti-dilution protection of existing warrants and the increase in the fair value of our Common Stock.

Amortization of discount and issuance costs on notes payable

During the three months ended March 31, 2012 and 2011, we amortized debt discounts of $1.6 million and $3.1 million, respectively.  The decrease in amortized debt discounts was due to the write off of existing debt discounts and deferred debt issue costs in the fourth quarter of 2011 for the Palm Beach Capital loans.  The Comvest loans had relatively lower level of debt discounts and deferred debt issue costs that were amortized in the three months ended March 31, 2012 as compared to the loans that existed during the three months ended March 31, 2011.

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Other income

Other income decreased by $0.7 million to $0.4 million for the three months ended March 31, 2012 as compared to $1.1 million during the same period of the prior year.  During the three months ended March 31, 2011 a third-party wanted to occupy the space occupied by our Digital Domain subsidiary in Venice, California.  That third-party paid Digital Domain to vacate the space, and we recognized $1.0 million of this revenue during the three months ended March 31, 2011.

Income taxes

During the three months ended March 31, 2011, we recognized certain Canadian tax liabilities aggregating $0.3 million.  There was no such recognition during the three months ended March 31, 2012.

Net loss attributable to non-controlling interests

During the three months ended March 31, 2012, the net loss of our subsidiary DD was $5.2 million.  During the same period of the prior year, DD realized net income of $1.0 million. The portions of DD not owned by us during these same periods were 13.3% and 19.0%, respectively. Therefore, the net loss attributable to non-controlling interests related to DD was $0.7 million during the three months ended March 31, 2012.  The net income attributable to non-controlling interests related to DD for the three months ended March 31, 2011was $0.2 million.

Another subsidiary, DDI, received initial financing in July and August of 2011.  During the three months ended March 31, 2012, DDI realized a net loss of $0.5 million.  The portion of DDI not owned by us during this period was 9.9%.  Therefore, the net loss attributable to non-controlling interests related to DDI was $0.1 million.

Liquidity and Capital Resources

As of March 31, 2012, we had a deficit in working capital of $33.4 million.

Our principal sources of liquidity at March 31, 2012 consisted of cash and cash equivalents of $2.5 million, cash held in trust of $6.6 million, contract receivables of $4.9 million and other receivables of $5.0 million. We had a $15.6 million loss before non-controlling interests, and we used $21.8 million to fund cash flows from operations for the three months ended March 31, 2012. As of March 31, 2012 we had $19.8 million in Stockholders’ Equity.  Much of our use of cash from operations in the first three months of 2012 stemmed from our implementation of our plans to participate in the ownership of live-action feature films, our development of our animation studio and the launch of our school. These businesses did not generate a significant amount of revenue during the first three months of 2012.  A majority of the expenses incurred by these businesses was funded by our existing grants from the State of Florida, the City of Port St. Lucie, and the City of West Palm Beach. While many of these grant proceeds were received between 2009 and the present, we only record a small amount of these receipts as revenue. As of March 31, 2012 we had received $29.9 million of grant receipts that we plan to recognize into revenue over the next 5 to 20 years. In addition, we expect to receive $10.3 million in additional grant proceeds over the next several years under our existing grant agreements.

A key component of our working capital is our deferred revenue. We typically receive a substantial portion of a contract for a feature film project up-front. We signed two large feature film contracts in the first quarter of 2012 that contributed to the generation of $2.6 million in cash flow from operations due to increases in advance payments and deferred revenue during the first quarter of 2012.

Another component of our working capital is our ability to attract finding for the feature film projects that we produce or co-produce.  On April 2, 2012, we collected the $5.0 million from Galloping Horse that was in Contracts and other receivables at March 31, 2012 in exchange for the agreement of Galloping Horse to distribute the animated feature film The Legend of Tembo in the PRC.

Sale and issuance of Convertible Notes and Warrants

As is more fully described in Note 13 to our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q, we entered into an agreement (the “Purchase Agreement”) on May 6, 2012 with a group of institutional investors (the “Purchasers”) pursuant to which we issued and sold to the Purchasers senior secured convertible notes in the aggregate amount of $35.0 million (the “Senior Notes”) and warrants (the “Warrants”) to purchase up to 1,260,288 shares of our Common Stock for an aggregate purchase price of $35.0 million (the “Offering”).  Such issuance and sale were consummated on May 7, 2012.

The Senior Notes bear interest at 9.0% per annum and mature on the fifth anniversary of the issuance date.  Upon the occurrence of an Event of Default (as such term is defined in the Senior Notes), the interest rate shall be adjusted to a rate of 15.0% per annum.  The Purchasers may require us to redeem all or any portion of the Senior Notes upon the occurrence of an Event of Default of a Change of Control (as such terms are defined in the Senior Notes)

The Senior Notes will amortize in equal monthly installments commencing on the earlier of (i) the effective date of the initial registration statement filed in accordance with the terms of the Registration Rights Agreement (see Note 13 to our Condensed Consolidated Financial Statements contained elsewhere in this quarterly report) or (ii) the six-month anniversary of the closing date.  The Senior Notes may be converted into shares of our common stock, at the option of the holders thereof, at any time following issuance of the Senior Notes.  The Senior Notes are redeemable at our option if our common stock trades at a level equal to 175% of the initial conversion price for any 30 consecutive trading days commencing on the date of issuance of the Senior Notes.  The initial conversion price of the Senior Notes is $9.72, subject to adjustment as provided in the Senior Notes.  We have agreed to pay each amortization payment in shares of our common stock, assuming certain conditions are met.

Under the terms of the Warrants, the holders thereof are entitled to exercise the Warrants to purchase up to an aggregate of 1,260,288 shares of our common stock at an initial exercise price of $9.72 per share, during the five-year period beginning on the closing date.

Exercise of Outstanding Debt with Existing Lender

As is more fully described in Note 13 to our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q, we entered into an agreement on May 6, 2012 (the “Omnibus Agreement”) with Comvest, pursuant to which, among other things, we agreed to (i) use a portion of the proceeds received from the Senior Notes described above to make payments to Comvest with respect to the outstanding loans to us by Comvest, such that the aggregate outstanding principal balance thereof was reduced to $8.0 million (the aggregate outstanding principal for these loans on that date was $27.7 million), and (ii) repurchase all but 145,000 shares (the “Retained Shares” of our common stock received by Comvest upon full exercise of an outstanding warrant to purchase shares of our common stock held by Comvest.  The aggregate amount paid to Comvest in satisfaction of outstanding indebtedness and in repurchasing such shares, as described above, was $22.5 million, plus certain fees and expenses were agreed to pay.

In connection with the foregoing, we entered into an agreement with Comvest (the “Debt Exchange Agreement”) pursuant to which, among other things, we exchanged the remaining outstanding original principal balance under its outstanding loans held by Comvest for a new secured convertible note in favor of Comvest with an original principal amount of $8.0 million (the “Subordinated Note”),

31

which Subordinated Note, inclusive of any and all accrued interest of the Subordinated Note and other fees, costs and amounts owing thereunder, is convertible into shares of our common stock.

The Subordinated Note bears interest at 10.0% per annum and matures on June 30, 2016.  Upon the occurrence of an Event of Default (as such term is defined in the Subordinated Note), the interest rate shall be adjusted to a rate of up to 21.0% per annum, with the actual rate of such penalty interest to be contingent upon the nature of the Event of Default.  Comvest may require us to redeem all or any portion of the Subordinated Note upon the occurrence of an Event of Default.

The initial conversion price under the Subordinated Note is (i) $2.50 per share for payment of any portion of the original principal amount and (ii) $5.50 per share for payment of any other amounts owing thereunder, subject to adjustment as provided in the Subordinated Note.

Registration Rights Agreements

In connection with the Purchase Agreement and the Omnibus Agreement, we entered into registration rights agreements whereby we agreed to file a registration statement with the Securities and Exchange Commission within 30 days of the closing date and to use our reasonable and best efforts for such registration statement to be declared effective 90 days after the closing date.

Future Liquidity

Our future capital requirements will depend on many factors, including our revenue growth, our ability to obtain advance payments from our customers, the timing and extent of the expansion of our involvement in feature film production and the timing of introductions of new products and enhancements to existing products. Although we currently are not a party to any agreement or letter of intent with respect to potential material investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these type of arrangements in the future, which could also require us to seek additional capital in the form of debt, finance facilities, or equity capital.  Such funds may not be available on terms favorable to us or at all.

As we continue to build our feature animated film, co-production and education line of business, we believe we will enter into contracts for our traditional VFX and animation services to feature film and commercials clients which will adequately fund operations for those services and provide additional liquidity to support our newer lines of business.  We also believe that through our revenues from those VFX and animation services contracts; through the re-financing of debt; and through co-production arrangements for our animated feature film projects, we have sufficient sources of cash to support our operations in 2012.

Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

We used net cash from operating activities aggregating $21.8 million and $17.7 million for the three months ended March 31, 2012 and 2011, respectively.  The net cash operating loss for the three months ended March 31, 2012 was $12.4 million compared to a net profit of $1.2 million for the same period of the prior year. We invested $14.4 million and $0.3 million in the three months ended March 31, 2012 and 2011, respectively, in film inventory.  During the three months ended March 31, 2012, we generated cash flows of $5.0 million from other assets and liabilities, primarily due to growth in accounts payable and deferred revenue.  During the three months ended March 31, 2011, we used cash of $18.6 million from other assets and liabilities.  This included an $8.3 million increase in contracts receivable and an $8.1 million reduction in advance payments and deferred revenue.

During the three months ended March 31, 2012 and 2011, we used cash from investing activities of $2.9 million and $3.7 million, respectively. These amounts were virtually all purchases of property and equipment to support our growing operations.

We used net cash of $2.3 million from financing activities during the three months ended March 31, 2012.  We borrowed $3.0 in a short-term note (see Note 13 to our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q).  We paid our first installment of our capital lease for our new headquarters building of $2.0 million.  Additionally, we paid $3.2 million to purchase 526,784 shares of our common stock in connection with our stock buy-back program.

We generated net cash flows of $15.7 million from financing transactions during the three months ended March 31, 2011.  During that period, we sold 2,025,001 shares of our Common Stock to a group of investors in a private placement at a price per share of $9.63. The aggregate gross proceeds of this offering were $19.5 million.  Through March 31, 2011, we paid $2.1 million in commissions and other expenses related to this private placement.  Other cash uses in this period included $0.8 million of deferred offering costs, $0.5 million of repayment of notes payable and $0.4 million of payments to the City of Port St. Lucie for the bond obligation.

Part I. Financial Information

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. Our cash and cash equivalents balance as of December 31, 2011 and March 31, 2012 was held in money

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market accounts or invested in investment grade commercial paper with maturities of less than 90 days. Our management does not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Any future declines in interest rates will, however, reduce future investment income. As our cash held in trust is held at the City of Port St. Lucie, Florida, the City has the market risk on this financial instrument.

Digital Domain’s Vancouver subsidiary’s functional currency is the Canadian dollar. Assets and liabilities of this office are translated into U.S. dollars using exchange rates as of the respective balance sheet date, and revenues and expenses are translated into U.S. dollars using average exchange rates for the respective period covered. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity. Currently, we do not hedge against translation gain and loss risks as we consider the net impact to our financial statements to be immaterial.

In addition, one of our subsidiaries has issued warrants to third parties that can be settled at the request of the holder for cash under certain conditions. A 10% increase or decrease in the underlying value of our subsidiary can result in a $0.5 million change in the ultimate settlement value of these instruments.

Part I. Financial Information

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Based on their evaluation at the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weakness in our internal controls over financial reporting described below.

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 company’s financial reporting. We identified the following control deficiencies as significant deficiencies as of December 31, 2010 and remain control deficiencies as of March 31, 2012:

·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 company’s 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 and remain material weaknesses as of March 31, 2012:

·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.

Changes in Internal Control over Financial Reporting

We have begun taking numerous steps and plan to take additional steps to remediate the underlying causes of this material weakness, primarily through the development and implementation of formal policies, improved processes and documented procedures, as well as the hiring of additional accounting and finance personnel. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to assess whether the steps we are taking will fully remediate the material weakness in our internal control over financial reporting until we have completed our implementation efforts and sufficient time passes in order to evaluate their effectiveness. We may also conclude that additional measures may be required to remediate the material weakness in our internal controls over financial reporting which may necessitate additional implementation and evaluation time. We will continue to assess the effectiveness of our internal controls over financial reporting and take steps to remediate the known material weakness expeditiously.

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Except as otherwise described herein, there has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

There have been no material developments in the description of material legal proceedings as reported in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

a) Sales of Unregistered Securities

The following sets forth information regarding securities sold or issued by us without registration under the Securities Act during the period commencing on January 1, 2012 and ending on March 31, 2012:

In January 2012, we issued an aggregate of 1,038,375 shares of our Common Stock in exchange for an aggregate of 1,250,000 shares of common stock of DDI, pursuant to exchange rights previously granted to such shareholders of DDI under share exchange option agreements entered into among us, DDI, and each of such shareholders.

In March 2012, we borrowed $3.0 million from a customer in the form of a convertible promissory note, which can be converted at the election of the note holder at any time before July 18, 2012 and is convertible into 535,697 shares of our Common Stock as of March 31, 2012.

From January 1, 2012 to March 31, 2012, we have issued to certain employees options to purchase an aggregate of 520,000 shares of our Common Stock at a weighted average exercise price of $5.89.

Each of the above-described transactions was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Regulation D or Rule 701 promulgated thereunder, as transactions not involving a public offering or involving the issuance of securities in certain compensatory circumstances. With respect to each transaction listed above, no general solicitation was made by either us or any person acting on our behalf; the securities sold are subject to transfer restrictions; and the certificates representing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold other than pursuant to an effective registration statement under the Securities Act or an applicable exemption from the registration requirements thereof.

b) Use of Proceeds from Public Offering of Common Stock

On November 23, 2011, we closed our IPO, in which we sold 4,920,000 shares of our Common Stock at a price to the public of $8.50 per share. The aggregate sale price for shares sold in the offering was approximately $41.8 million. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-174248), which was declared effective by the SEC on November 14, 2011. The offering commenced on November 18, 2011, and did not terminate before all of the securities registered in the registration statement were sold on November 18, 2011. Roth Capital Partners LLC and Morgan Joseph TriArtisan LLC acted as the managing underwriters. We raised approximately $38.4 million in net proceeds after deducting underwriting discounts and commissions of approximately $2.9 million and other unpaid offering expenses of approximately $0.5 million. Net proceeds of the offering totaling approximately $17.2 million were used to fund live-action and VFX film and film development projects. Additional uses of the net proceeds from the offering include $2.7 million payment of governmental lease obligations, approximately $2.9 million for purchases of property, plant and equipment, $3.2 million for purchases of our Common Stock, as more fully discussed below, and approximately $12.4 million for working capital and other general corporate purposes. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries.

c) Stock Repurchase Program

On December 20, 2011, our Board of Directors authorized the repurchase of up to $10 million of our outstanding Common Stock, pursuant to a trading plan established in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act (the “Plan”). The manner, price, number and timing of share repurchases under the Plan is subject to a variety of factors, including market conditions and

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applicable SEC rules and regulations. The Plan has an expiration date of June 22, 2012, and may be limited or terminated at any time without notice. The Plan was suspended by our Board of Directors on February 10, 2012.

The following table sets forth our purchases of shares of our Common Stock during the quarter ended March 31, 2012 under the Plan.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total number of Shares Purchased as Part of Publically Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2012 to January 31, 2012	310,947	$	6.10	310,947	$	7,369,554
February 1, 2012 to February 10, 2012	95,683	$	6.07	95,683	$	6,788,298

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Part II. Other Information

Item 6. Exhibits

10.1Amended and Restated Formation and Joint Venture Agreement, dated as of March 30, 2012, between Beijing Galloping Horse Film Co., Ltd. and Digital Domain Media Group, Inc.

31.1Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS††	XBRL Instance Document
101.SCH††	XBRL Taxonomy Schema Linkbase Document
101.CAL††	XBRL Taxonomy Calculation Linkbase Document
101.DEF††	XBRL Taxonomy Definition Linkbase Document
101.LAB††	XBRL Taxonomy Labels Linkbase Document
101.PRE††	XBRL Taxonomy Presentation Linkbase Document

†† In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Digital Domain Media Group, Inc.
		By:
Date:	May 15, 2012	/s/ John C. Textor
		John C. Textor
		Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors
		By:
Date:	May 15, 2012	/s/ John M. Nichols
		John M. Nichols
		Chief Financial Officer (Principal Financial and Accounting Officer)

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Index to Exhibits

Exhibit Number	Description of Document
10.1	Amended and Restated Formation and Joint Venture Agreement, dated as of March 30, 2012, between Beijing Galloping Horse Film Co., Ltd. and Digital Domain Media Group, Inc.
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS††	XBRL Instance Document
101.SCH††	XBRL Taxonomy Schema Linkbase Document
101.CAL††	XBRL Taxonomy Calculation Linkbase Document
101.DEF††	XBRL Taxonomy Definition Linkbase Document
101.LAB††	XBRL Taxonomy Labels Linkbase Document
101.PRE††	XBRL Taxonomy Presentation Linkbase Document

†† In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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EX-10.1

EXHIBIT 10.1

AMENDED

AND

RESTATED

FORMATION AND

JOINT VENTURE AGREEMENT

BETWEEN

BEIJING GALLOPING HORSE FILM CO., LTD.

AND

DIGITAL DOMAIN MEDIA GROUP, INC.

DATED AS OF MARCH 30, 2012

AMENDED AND RESTATED

FORMATION AND JOINT VENTURE AGREEMENT

This AMENDED AND RESTATED FORMATION AND JOINT VENTURE AGREEMENT dated as of March 30, 2012 (together with all Attachments, Exhibits and Schedules hereto, this “Agreement”) between Beijing Galloping Horse Film Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“GH”), and Digital Domain Media Group, Inc., a corporation organized under the laws of Florida (“D2”, and collectively with GH, the “Founders”).

W I T N E S S E T H :

A.GH is in the business of the development, production and distribution of motion pictures and television programming in the People’s Republic of China (“PRC”) (the “GH Business”);

B.D2 is in the business of (i) providing computer-generated (“CG”) animation and digital visual effects (“VFX”) for major motion picture studios and advertisers (including, high-quality 3D content and conversion into 3D of existing film and TV libraries originally created in 2D) (the “D2 VFX Business”) and (ii) the development and production of animated films (collectively, the “D2 Business”);

C.GH and D2 desire to form a joint venture (the “Joint Venture”) as an exempted company incorporated under the laws of the Cayman Islands under the name of Digital Domain Galloping Horse Studio Limited (the “Company”), which, through a wholly foreign-owned enterprise organized in the PRC and wholly-owned (through an intermediate subsidiary organized in Hong Kong) by the Company, will create, own and operate a studio located in the PRC (the “Studio”) to (i) provide CG animation and VFX services in the Territory to major motion pictures studios and advertisers within the PRC and internationally, with the objective of providing such services in manner and on a scale substantially similar to the D2 VFX Business in the U.S. market (the “Company VFX Business”) and (ii) develop a range of media and entertainment services, including, without limitation, proprietary technologies and entertainment properties, as may be agreed by the Founders (collectively, the “Company Business”);

D.In connection with the Company Business, GH wishes to provide to the Company its services and expertise relating to the GH Business, together with certain contracts relating to CG animation and VFX services, cash contributions, other assets, and personnel as described herein, and D2 wishes to provide to the Company its services and expertise in connection with the D2 VFX Business, including the use of current, under development and future Digital Domain brands and patents and technologies now used or to be used in the D2 VFX Business, together with certain cash contributions, other assets, and personnel as described herein; and

E.The Founders previously entered into that certain “Digital Domain Galloping Horse Studio” Alliance Term Sheet dated November 18, 2011 with respect to the establishment of the Company to conduct the Company Business (the “Original Agreement”), and wish to amend and restate the Original Agreement in its entirety in accordance with the terms, conditions and agreements set forth herein.

NOW, THEREFORE, in consideration of the mutual promises and agreements contained in this Agreement (the mutuality, adequacy and sufficiency of which are hereby acknowledged), and intending to be legally bound, the Parties agree as follows:

ARTICLE 1

Definitions and Rules of Construction

1.1Certain Defined Terms.  Capitalized terms used in this Agreement but not otherwise defined shall have the meanings indicated in Attachment 1.1.

1.2Rules of Construction.  Attachment 1.1 also contains rules of construction that govern the interpretation of this Agreement.

ARTICLE 2

Formation of the Joint Venture

2.1Establishment of the Company.

(a)Generally. The Founders will establish the Company pursuant to the Companies Law of the Cayman Islands, as amended (the “Companies Law”).  The Company shall conduct the Company Business under the name of “Digital Domain Galloping Horse Studio Limited”.  The Memorandum and Articles of Association of the Company shall be in a form reasonably satisfactory to the Founders and consistent with the terms hereof.  As promptly as possible after the formation of the Company, the Founders will cause the Company to become a party to this Agreement.

(b)Capitalization. As will be set forth in the Memorandum and Articles of Association of the Company, the share capital of the Joint Venture on the Closing Date shall consist of 1,000 Class A common shares, par value $1.00 per share (the “Class A Stock”), and 1,000 Class B common shares, par value $1.00 per share (the “Class B Stock” and, together with the Class A Stock, the “Shares”).  For the avoidance of doubt, the Class A Stock and Class B Stock will have identical rights, preferences and privileges.

(c)Purchase and Sale of Shares. On the Closing Date, the Founders shall subscribe and pay for the Shares as follows:

(i)GH shall subscribe for all of the shares of Class A Stock and, in exchange for the issuance to it of such shares, shall make its Initial Cash Capital Contribution and Initial In-Kind Capital Contribution to the Company (or the Studio) as set forth in more detail in Articles 7 and 8, and shall remain committed to make Subsequent Capital Contributions to the Company in accordance with its Remaining Capital Commitment pursuant to the terms and conditions set forth herein, and

2

(ii)D2 shall subscribe for all of the shares of Class B Stock and, in exchange for the issuance to it of such shares, shall make its Initial Cash Capital Contribution and Initial In-Kind Capital Contribution to the Company (or the Studio) as set forth in more detail in Articles 7 and 8, and shall remain committed to make Subsequent In-Kind Capital Contributions to the Company in accordance with its Remaining Capital Commitment pursuant to the terms and conditions set forth herein.

(d)Applicability of the Companies Law. To the extent that the rights and obligations of any holder of common stock of the Company (each a “Shareholder” and collectively, the “Shareholders”) with respect to, and the administration, dissolution, liquidation and termination of, the Company are not set forth in this Agreement, they will be governed by the Companies Law. To the extent that this Agreement contains a provision contrary to a provision under the Companies Law that permits it being overridden by an agreement among the Shareholders, that Companies Law provision is hereby overridden by such contrary provision in this Agreement whether or not specific reference is made to the overridden provision of the Companies Law.

(e)Purpose: the Company Business. The Company may conduct and operate the Company Business and may pursue such complementary business opportunities as the Board of Directors determines, subject to Section 10.4, may be beneficial for the Company and which are not prohibited by this Agreement or the Companies Law. Consistent with the foregoing, the Company may: (i) exercise all other powers necessary to or reasonably connected with the Company Business that may be legally exercised by exempted companies under the Companies Law; and (ii) engage in all activities necessary, customary, convenient, or incident to any of the foregoing.

(f)No Personal Liability of Shareholders. No Shareholder, Director, Officer, employee or agent will have any personal liability to third parties for any debt, obligation, liability or loss of the Company, all as provided in the Companies Law, and the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company.

(g)Waiver of Rights. Each Shareholder hereby expressly waives, on behalf of itself and its successors and assigns, any and all rights to dissolve, terminate or liquidate, or to petition a court for the partition, dissolution, termination or liquidation of the Company, except as provided in this Agreement.

2.2Name. The name of the Company is “Digital Domain Galloping Horse Studio Limited”.

2.3Term. The joint venture will continue in perpetuity, unless earlier terminated and the Company is dissolved in accordance with this Agreement and the Companies Law (the “Term”).

2.4Place and Time of Closing. The completion of the Formation Transactions (the “Closing”), will occur at the offices of Loeb & Loeb LLP Beijing Representative Office, Suite

3

4301, Tower C, Beijing Yintai Centre, 2 Jianguomenwai Dajie, Chaoyang District, Beijing 100022, P.R. China, on such date and time as the Parties may agree (the “Closing Date”).

ARTICLE 3

Representations and Warranties of GH

GH represents and warrants to D2 as of the date hereof and as of the Closing as follows:

3.1Organization and Good Standing. GH is a corporation duly organized, validly existing, and in good standing under the laws of the PRC, with full corporate power and authority (a) to conduct (i) its business as it is now being conducted and (ii) its participation in, including its satisfying its obligations to, the Company, and (b) to perform all of its obligations under this Agreement and the Related Agreements and any other contracts or agreements relating thereto.

3.2Enforceability. This Agreement constitutes, and the Related Agreements to which it is a party, upon execution, will constitute, assuming the due and valid authorization, execution and delivery of this Agreement and such Related Agreements by the other parties thereto, the legal, valid, and binding obligations of GH, enforceable against GH in accordance with their respective terms. GH has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement and the Related Agreements to which it is a party and to perform its obligations under this Agreement and the Related Agreements to which it is a party.

3.3No Conflict, etc. Neither the execution and delivery of this Agreement or the Related Agreements nor the consummation or performance of any of the transactions contemplated by this Agreement or the Related Agreements will, directly or indirectly (with or without notice or lapse of time):

(a)contravene, conflict with, or result in a violation of (i) any provision of the Organizational Documents of GH or (ii) any resolution adopted by the board of directors or the shareholders of GH;

(b)contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the transactions contemplated by this Agreement or the Related Agreements or to exercise any remedy or obtain any relief under any Applicable Law or any Order to which GH, or any of its assets, may be subject;

(c)contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental Authorization that is held by GH and that otherwise relates to the GH Business or the ownership or use of any of its assets;

(d)contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any contract (i) under which GH has or may acquire any rights, (ii) under which GH has or may become subject

4

to any obligations or liability, or (iii) by which GH or any of the assets owned or used by it is or may become bound, which in each case relates to the Company Business; or

(e)result in the imposition or creation of any Encumbrance upon or with respect to any of GH’s assets that are or will be contributed to the Company or are otherwise used by the Company.

3.4Consents and Notices. Except as set forth on Schedule 3.4, GH is not required to give any notice to or obtain any approval, consent, ratification, waiver or other authorization of any Person (including any Governmental Authorization) in connection with the execution and delivery of this Agreement or the consummation or performance of any of the transactions contemplated by this Agreement or the Related Agreements.

3.5Solvency. GH, together with its subsidiaries, is on the date hereof, and on the Closing Date will be, Solvent.

3.6No Other Representations. Except for any representations and warranties made by GH in a Related Agreement, D2 acknowledges and agrees that the only representations and warranties made by GH are the representations and warranties set forth in this Article 3 and D2 has not relied upon any other representations, warranties or other information made or supplied by or on behalf of GH or by any Affiliate or Representative of GH.

ARTICLE 4

Representations and Warranties of D2

D2 represents and warrants to GH as of the date hereof and as of the Closing as follows:

4.1Organization and Good Standing. D2 is a corporation duly organized, validly existing, and in good standing under the laws of the State of Florida, with full corporate power and authority (a) to conduct (i) its business as it is now being conducted and (ii) its participation in, including its satisfying its obligations to, the Company, and (b) to perform all of its obligations under this Agreement and the Related Agreements and any other contracts or agreements relating thereto.

4.2Enforceability. This Agreement constitutes, and the Related Agreements to which it is a party, upon execution, will constitute, assuming the due and valid authorization, execution and delivery of this Agreement and such Related Agreements by the other parties thereto, the legal, valid, and binding obligations of D2, enforceable against D2 in accordance with their respective terms. D2 has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement and the Related Agreements to which it is a party and to perform its obligations under this Agreement and the Related Agreements to which it is a party.

4.3No Conflict, etc. Neither the execution and delivery of this Agreement or the Related Agreements nor the consummation or performance of any of the transactions contemplated by this Agreement or the Related Agreements will, directly or indirectly (with or without notice or lapse of time):

5

(a)contravene, conflict with, or result in a violation of (i) any provision of the Organizational Documents of D2 or (ii) any resolution adopted by the board of directors or the stockholders of D2;

(b)contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the transactions contemplated by this Agreement or the Related Agreements or to exercise any remedy or obtain any relief under any Applicable Law or any Order to which D2, or any of its assets, may be subject;

(c)contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental Authorization that is held by D2 and that otherwise relates to the D2 Business or the ownership or use of any of its assets;

(d)contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any contract (i) under which D2 has or may acquire any rights, (ii) under which D2 has or may become subject to any obligations or liability, or (iii) by which D2 or any of the assets owned or used by it is or may become bound, which in each case relates to the Company Business; or

(e)result in the imposition or creation of any Encumbrance upon or with respect to any of D2’s assets that are or will be contributed to the Company or are otherwise used by the Company.

4.4Consents and Notices. Except as set forth on Schedule 4.4, D2 is not required to give any notice to or obtain any approval, consent, ratification, waiver or other authorization of any Person (including any Governmental Authorization) in connection with the execution and delivery of this Agreement or the consummation or performance of any of the transactions contemplated by this Agreement or the Related Agreements.

4.5Intellectual Property.

(a)Definition. References to “D2” in this Section 4.5 refer to D2 and/or its Affiliates. The term “D2 Assets” means all current, under development and future materials and technology owned by D2 or its Affiliates and used, developed, acquired or created in connection with the D2 VFX Business, including without limitation all software and technical documentation relating to, comprising, embodied in or by or used, developed or created, or to be used, developed or created, in connection with the D2 VFX Business including all enhancements and modifications thereto, and derivative works thereof; provided, however, that D2 Assets do not include any Third Party Intellectual Property (defined infra). “D2 Intellectual Property Assets” means Intellectual Property comprising, covering or contained in the D2 Assets.  The term “Third Party Intellectual Property” means Intellectual Property owned, held, used or licensed by a third party. The term “Intellectual Property” means all intellectual and proprietary property including the following:

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(i)all patents and patent applications, including all continuations, continuations-in-part, divisions, reexaminations, reissues, and extensions, and any renewal rights with respect thereto, and any similar rights, in any country (collectively, “Patents”);

(ii)all registered and unregistered copyrights, and any similar rights, in any country (collectively, “Copyrights”);

(iii)all trademarks, service marks, trade names, brand names, and goodwill associated therewith, including all applications, registrations and renewal rights with respect thereto, and any similar rights, in any country (collectively, “Trademarks”); and

(iv)all inventions, discoveries and concepts, whether or not patentable, know-how, negative know-how, trade secrets, moral rights, Confidential Information, customer lists, software, programs or applications (in both source and object code form), prototypes, designs, technical information, data, process technology, engineering and manufacturing information, procedures, specifications, rights in mask works, plans, drawings, and blue prints (collectively, “Trade Secrets”).

(b)D2 Intellectual Property Assets and Third Party Intellectual Property. Schedule 4.5(b)(i) sets forth a list of all material D2 Intellectual Property Assets used or expected to be used in connection with the D2 VFX Business as of the date of this Agreement.  Schedule 4.5(b)(ii) sets forth a list of all material Third Party Intellectual Property used in connection with the D2 VFX Business as of the date of this Agreement, including a description of such Third Party Intellectual Property, and the approximate aggregate annual license fees incurred by D2 in fiscal year 2011 for each such Third Party Intellectual Property.  All Third Party Intellectual Property used in connection with the D2 VFX Business as of the date of this Agreement is packaged (or downloadable), commercially available licensed software generally sold or licensed to the public, and is not required to be sublicensed to the Company by D2 in order to avoid a material adverse effect on the Company.  D2 will use its commercially reasonable efforts to assist the Company in procuring any Third Party Intellectual Property used in, or necessary to conduct, the D2 VFX Business.  D2 will make available to GH complete and correct copies of all contracts and licenses identified on Schedule 4.5(b)(ii). D2 owns all right, title and interest in and to the D2 Intellectual Property Assets, free and clear of any lien or license.  Notwithstanding any term herein to the contrary, and as an exception to D2’s representations in this Article 4, GH acknowledges that all of the D2 Assets (including all D2 Intellectual Property Assets) are encumbered by a first priority lien thereon in favor of D2’s senior secured lender.

(c)Intellectual Property Assets Sufficient for D2’s use of the D2 Assets. The D2 Intellectual Property Assets identified in Schedule 4.5(b)(i), in conjunction with Third Party Intellectual Property identified in Schedule 4.5(b)(ii), are, in all material respects, all the materials and technology (including without limitation all software, equipment and technical documentation), and all material Intellectual Property rights, that are reasonably necessary for use of the D2 Assets in connection with the Company VFX Business as of the date of this Agreement, and to otherwise carry out the Company VFX Business as D2 conducts it as of the date of this Agreement, and as contemplated or intended by the parties.  D2 is the sole owner worldwide of all right, title and interest in and to each of the D2 Intellectual Property Assets or has the right, and will continue to have the right after completion of the transactions

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contemplated in this Agreement, to use such D2 Intellectual Property Assets, free and clear of any Encumbrances or rights of others. D2 is in compliance in all material respects with all material provisions of any contract pursuant to which it has rights to use any Third Party Intellectual Property. There are no inquiries, investigations or claims or litigation challenging or, to the Knowledge of D2, threatening to challenge, the right, title and interest of D2 with respect to its ownership rights, continued use and its right to preclude others from using any D2 Intellectual Property Assets.

(d)Patents, Copyrights and Trademarks. (i) All of the Patents, Copyrights and Trademarks identified on Schedule 4.5(b) are, in all material respects, in compliance with formal legal requirements, and all of the issued Patents and all registered Copyrights and Trademarks are valid and enforceable, and D2 has not received any notice or claim challenging or questioning the ownership, validity or enforceability of any of the D2 Intellectual Property Assets; (ii) no Patent, Copyright or Trademark identified on Schedule 4.5(b) has been or is now involved in any material interference, reissue, reexamination, threatened reexamination, opposition or other similar proceeding; (iii) to the Knowledge of D2, there is no patent or patent application of any third party that conflicts with, or that limits the expansion of, the Patents except for such matters relating solely to the “In-Three” (3D-related patents); (iv) no D2 Intellectual Property Asset is or has been judicially determined to be invalid or unenforceable and there are no equitable defenses to enforcement based on any act or omission of D2; and (v) no judicial, regulatory or administrative proceeding is currently pending or, to the Knowledge of D2, threatened which challenges the validity or enforceability of any D2 Intellectual Property Asset. D2 has used, and shall continue to use, commercially reasonable efforts to protect and maintain the validity and distinctiveness of the D2 Intellectual Property Assets, so as to protect and enhance the rights and goodwill associated therewith.

(e)Trade Secrets. D2 has taken all commercially reasonable precautions to protect the secrecy and confidentiality of its Trade Secrets. The Trade Secrets are not part of the public domain, and, to the Knowledge of D2, have not been used, divulged, or appropriated either for the benefit of any Person (other than D2) or to the detriment of D2. D2 possesses all rights and licensee required for its use of all software used by it that is contemplated to be licensed to or used in connection with the Company VFX Business.

(f)No Infringement of Rights of Third Parties. None of the D2 Assets or D2 Intellectual Property Assets, in the form thereof delivered by D2 to the Company pursuant to Section 5.3, infringe upon, misappropriate or otherwise violate or is alleged to infringe upon, misappropriate or otherwise violate, or will during the term of the joint venture infringe upon, misappropriate or otherwise violate, any Third Party Intellectual Property rights, nor, to the Knowledge of D2, is there any basis therefor; and, to the Knowledge of D2, no other Person is or has been infringing, misappropriating or otherwise violating any D2 Intellectual Property Assets, except for such matters relating solely to the “In-Three” (3D-related patents). D2 has not received from any third party any written notice that D2 has infringed upon, misappropriated, or otherwise violated any Third Party Intellectual Property.  For clarity, and notwithstanding any term herein to the contrary, D2 will not have any liability hereunder (and, for clarity, there shall be no breach or violation of this Section 4.5(f)) if any such infringement, misappropriation or violation, or claim thereof, is based upon or arises out of: (a) modifications to the D2 Assets or D2 Intellectual Property by the Company or any third party; (b) use of the D2 Assets or D2

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Intellectual Property other than in accordance with this Agreement; (c) combination of the D2 Assets or D2 Intellectual Property with any software, hardware or data not provided by D2 where such combination is the object of the claim; or (d) use of an infringing version of any component of the D2 Assets or D2 Intellectual Property after D2 has made a non-infringing version available to the Company.

4.6Solvency. D2, together with its subsidiaries, is on the date hereof, and on the Closing Date will be, solvent.

4.7No Other Representations. Except for any representations and warranties made by D2 in a Related Agreement, GH acknowledges and agrees that the only representations and warranties made by D2 are the representations and warranties set forth in this Article 4, and GH has not relied upon any other representations, warranties or other information made or supplied by or on behalf of D2 or by any Affiliate or Representative of D2.

ARTICLE 5

Covenants

5.1General. Each Party shall use its commercially reasonable efforts to take all actions promptly and do all things necessary, proper or advisable to perform as required by this Agreement, including taking all reasonable actions to prepare, execute, acknowledge or verify, deliver, and file the Related Agreements, the documents evidencing the Formation Transactions and any other additional documents related thereto, and take or cause to be taken the additional actions, as any Party may reasonably request to carry out the purposes or intent of this Agreement.

5.2GH VFX Contracts; Name Licenses. At the Closing, GH shall contribute and assign the VFX contracts set forth on Schedule 5.2 (the “GH VFX Contracts”) to the Studio pursuant to the terms and conditions of a contribution and assignment agreement in a form reasonably satisfactory to the Founders and consistent with the terms hereof (“GH/VFX Contribution and Assignment Agreement”).  In addition, at the Closing (and notwithstanding the terms of any other provision hereof, including Section 5.4 below), each of D2 and GH shall grant to the Company a non-exclusive royalty-free, revocable license only within the Territory to use the D2 and GH trademarks and service marks identified on Schedule 5.2, subject to the consent of the Directors appointed to the Board by D2 or GH, as the case may be, prior to each use, or, at the option of D2 or GH, as the case may be, each plan or program of use, in connection with the Company Business and the Company’s operation thereof, pursuant to the terms and conditions of a Trademark License Agreement among D2, GH and the Company in a form reasonably satisfactory to the Founders and consistent with the terms hereof.

5.3D2 Asset License Agreement. At the Closing, and so long as GH has not materially breached this Agreement (which breach is not cured within any applicable cure period therefor), D2 (and, if applicable, any subsidiary of D2) shall grant to Company, for the Term, an exclusive (as set forth in Section 5.4, worldwide (with respect to ordinary course marketing of the Studio’s activities and the provision of Studio work product to clients on a worldwide basis),

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royalty-free site license to use only within the Territory the D2 Assets and D2 Intellectual Property Assets, and all enhancements, modifications and derivative works thereof (“Licensed Rights”), in any manner and for any purpose in connection with the Company VFX Business and the Company’s operation thereof pursuant to the terms and conditions of a License Agreement with the Company in a form reasonably satisfactory to the Founders and consistent with the terms hereof (the “D2 Asset License Agreement”). GH acknowledges and agrees that D2 hereby shall retain all rights of D2 that are not expressly granted under this Agreement.

5.4Exclusivity Services in VFX Business. In the Territory, neither Founder, for the Term, shall, directly or indirectly, provide VFX-related services, including, without limitation, the D2 VFX Business and the Company VFX Business, to or by any Person for, or conduct any VFX-related services business, including, without limitation, the D2 VFX Business and the Company VFX Business, in the Territory similar to the D2 VFX Business or the Company VFX Business.

5.5Temporary Facilities. Prior to the completion of the items set forth in Sections 5.6, 5.7 and 5.8 infra, GH will lease to the Company at nominal cost temporary work space for the Company at one of GH’s facilities located in Beijing (the “Temporary Facilities”). The Temporary Facilities shall be reasonably satisfactory to D2. D2 shall cooperate and assist GH and the Company with the build out, as reasonably required and agreed by the Founders, of temporary professional facilities to conduct the Company VFX Business at the Temporary Facilities. The Company will be responsible for its proportional share of ordinary course real estate taxes, utility costs, ordinary course maintenance fees and expenses, and similar ordinary course fees and expenses, in each case relating to the Temporary Facilities.

5.6Land and Building for Studio. As soon as reasonably practicable following the Closing but no later than December 31, 2016, GH shall secure appropriate Governmental Authorizations, valid and enforceable under PRC law, from all necessary Governmental Bodies to build, operate, and own the Studio Facilities (as defined below), to use the land on which the Studio Facilities will be located (the “Land Use Rights”), and to lease the Studio Facilities and to assign the Land Use Rights (collectively, the “Real Estate”) to the Studio by executing a lease agreement in a form to be reasonably satisfactory to the Founders and consistent with the terms hereof agreed by the Founders (the “Studio Real Estate Lease”) , which shall provide for, so long as D2 has not materially breached this Agreement (which breach is not cured within any applicable cure period therefor), a complete “nominal” cost lease to the Company of the Real Estate (and all rights, privileges and appurtenances thereon and thereto) and a lease term co-extensive with the Term; provided, however, for the avoidance of doubt, ordinary course real estate taxes, utility fees, ordinary course maintenance fees and expenses, and similar ordinary course costs and expenses, in each case relating to the Real Estate, shall be for the account of the Company. The Real Estate shall be located at a geographical location in the PRC chosen by GH and reasonably satisfactory to D2, and shall be of a size reasonably satisfactory to the Founders.

5.7Construction and Basic Build-Out of Building. As soon as reasonably practicable following the Closing but no later than December 31, 2016, GH shall prepare the Real Estate for the construction of one building (the “Building”) to house the Studio (including any required filings, approvals, relocations, demolition and excavation) and shall construct and perform a “basic build-out” of such building.  The building shall have a usable space not less than a number

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of square meters reasonably satisfactory to the Founders.  GH will hire and supervise the architect and construction manager for the Building in reasonable consultation with D2.  GH shall be responsible for and perform at its sole cost, all preparation, construction or basic build-out costs of the Building; provided that such out-of-pocket costs shall not be in excess of $50 million in the aggregate.

5.8Construction of Professional Facilities of Studio. Following the Closing and on or before 90 days following the date GH has secured the Governmental Authorizations set forth in Section 5.6, D2 shall provide detailed requirements and specifications for, and perform and/or supervise, in reasonable consultation with GH, the actual build-out of, all the Studio’s professional facilities, including the placement of all furniture, specialty equipment and fixtures, to a standard reasonably equivalent to other similarly-purposed studios owned and operated by D2 in the United States (the “Professional Facilities”, together with the Building, the “Studio Facilities”).  In connection with the Studio Facilities, D2 will provide motion capture cameras and data capture systems equipment, in each case, necessary for a top-quality motion capture studio of a size of 800 square meters.

5.9Personnel Training. D2 shall provide, at its cost, reasonable training for Studio and Company personnel to provide VFX services in connection with the Company VFX Business available now and in the future with the objective and goal of creating and maintaining a professional staff located in the PRC of a standard reasonably equivalent to the professional staff located at similarly purposed studios owned and operated by D2 in the United States.

5.10Employee Secondments. Each Founder will provide a reasonable number of employee secondments to the Company for purposes of the commencement of the Company Business.

5.11Company VFX Business Outside the Territory.  The Company acknowledges and agrees that, prior to making any bid for VFX work for any project originating, and/or being produced, outside of the Territory, it will provide notice thereof to D2 at least ten business days prior to transmitting any such bid; provided, however, that if GH has entered into any co-financing or slate agreement with the studio (or any of its Affiliates) originating and/or producing such project, then the Company will have no obligation to provide such prior notice to D2 and may transmit its bid for the VFX work for such project without any further rights of D2 under Section 5.11 regarding such project.  D2 shall have the right to notify the Company within such ten business day period that it either has or in good faith intends to make a bid for such VFX work, in which case the Company will not transmit any bid for such VFX work.  If D2 does not provide such notice to the Company within such time frame, then the Company may transmit its bid for such VFX work.  Without derogating from the generality of the foregoing, the Company, GH and D2 shall reasonably cooperate to address opportunities in the VFX market (for example, D2 will notify the Company of, and use good faith efforts to direct to the Company, VFX opportunities within the Territory; and GH and the Company will notify D2 of, and use good faith efforts to direct to D2, VFX opportunities outside the Territory).

5.12Company Obligations and Rights. The Founders shall cause the Company to fulfill its obligations in this Agreement. The Company may, as a third party beneficiary or otherwise, independently enforce its rights under this Agreement.

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5.13D2 Software Business In Futuro.  If, following the Closing Date, D2 enters the businesses of selling and marketing any software products, including, without limitation, VFX-related or medical/surgical-related software, then D2 and the Company will negotiate in good faith on market terms for the Company to act as D2’s exclusive reseller of such software in the Territory.

5.14D2 Intellectual Property Assets — Registrations in Territory.  D2 agrees to reasonably cooperate, at the Company’s cost, with the Company in the Company’s filing, prosecution and maintenance of registrations (solely in the name of D2) with respect to the various D2 Intellectual Property Assets, as determined by the Board in its discretion.  All costs of such activities shall be borne by the Company and it is agreed that all resulting registrations will be included in the D2 Intellectual Property Assets.

5.15Note with Respect to Third Party Intellectual Property.  D2 will lend to the Company up to $1.0 million per year for each of the first three years of the Studio’s operations (the “Start-Up Period”)  in order to fund costs and expenses of the Studio arising from or relating to Third Party Intellectual Property, pursuant to a note accruing interest at 6.0% per annum and payable out of net income from the Company’s operations as reasonably determined by the Board of Directors following the completion of the Start-Up Period.

ARTICLE 6

FORMATION TRANSACTIONS CLOSING CONDITIONS

6.1Conditions to the Obligations of D2. The obligation of D2 to consummate the Formation Transactions as contemplated hereby shall be subject to the satisfaction (or waiver by D2) on or prior to the Closing of the following conditions:

(a)the consummation of the Formation Transactions shall not have been enjoined or prohibited by Applicable Law or any judgment, injunction, order or decree and no Proceeding by or before any Governmental Body challenging such transactions shall have been initiated or threatened;

(b)GH shall have delivered to D2 such other documents as D2 may reasonably request (including an officer’s certificate in customary form) for the purpose of (i) evidencing the accuracy of any of GH’s representations and warranties, (ii) evidencing the performance by GH of, or the compliance by GH with, any covenant or obligation required to be performed or complied with by GH, (iii) evidencing the satisfaction of any condition referred to in this Agreement, or (iv) otherwise facilitating the consummation or performance of any of the transactions contemplated by this Agreement;

(c)GH and D2 shall have obtained all Governmental Authorizations -and all third party consents and approvals required to be obtained by GH and D2 in connection with the execution and delivery of this Agreement and the consummation of the Formation Transactions, in each case in a form reasonably satisfactory to each of GH and D2;

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(d)GH shall have executed and delivered the GH/VFX Contribution and Assignment Agreement; and

(e)GH shall have delivered to the Company $500,000.00, representing its Initial Cash Capital Contribution, in cash by wire transfer of immediately available funds to an account designated by the Company.

6.2Conditions to the Obligations of GH. The obligation of GH to consummate the Formation Transactions as contemplated hereby shall be subject to the satisfaction (or waiver by GH) on or prior to the Closing of the following conditions:

(a)the consummation of the Formation Transactions shall not have been enjoined or prohibited by Applicable Law or any judgment, injunction, order or decree and no Proceeding by or before any Governmental Body challenging such transactions shall have been initiated or threatened;

(b)D2 shall have delivered to GH such other documents as GH may reasonably request (including an officer’s certificate in customary form) for the purpose of (i) evidencing the accuracy of any of D2’s representations and warranties, (ii) evidencing the performance by D2 of, or the compliance by D2 with, any covenant or obligation required to be performed or complied with by D2, (iii) evidencing the satisfaction of any condition referred to in this Agreement, or (iv) otherwise facilitating the consummation or performance of any of the transactions contemplated by this Agreement;

(c)GH and D2 shall have obtained all Governmental Authorizations -and all third party consents and approvals required to be obtained by GH and D2 in connection with the execution and delivery of this Agreement and the consummation of the Formation Transactions, in each case in a form reasonably satisfactory to each of GH and D2;

(d)D2 shall have executed and delivered the D2 Asset License Agreement; and

(e)D2 shall have delivered to the Company $500,000.00, representing its Initial Cash Capital Contribution, in cash by wire transfer of immediately available funds to an account designated by the Company.

ARTICLE 7

CAPITAL COMMITMENTS

7.1Aggregate Capital Commitments. Each Founder acknowledges and agrees that its aggregate capital commitment to the Company is set forth in Section 7.2 of this Agreement (the “Aggregate Capital Commitment”) and that at the Closing only a portion of such Aggregate Capital Commitment will be required to be paid in cash or contributed in-kind to the Company in accordance with Article 8. Each Founder further acknowledges and agrees that the remaining portion of such Founder’s capital commitment not previously paid in cash or contributed in-kind to the Company (“Remaining Capital Commitment”), shall be contributed in-kind by such

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Founder and/or one or more affiliates and/or third parties designated by such Founder and acceptable to the other Founder, in accordance with Article 8.  Notice shall be furnished by the Company of such Subsequent Capital Contributions in accordance with Section 8.1(b).

7.2Initial Shareholder Interests.

(a)Generally. At the Closing, the Company shall have initial capital of $1,000,000.00.  At the Closing, the Founders shall subscribe for the Shares as set forth in Section 2.1(c) and, in connection therewith, shall make such Initial Cash Capital Contributions and Initial In-Kind Contributions as set forth in Section 8.1.  Following the Closing, the Founders shall be required to make the Subsequent In-Kind Capital Contributions pursuant to Section 8.2 in the amount of their Remaining Capital Commitments.  The table below sets forth the Founders’ Initial Shares and Initial Capital Contributions as of the Closing.

Name	Shareholder Interests		Initial Shares	Initial Cash Capital Contributions
GH	50.0	%	1,000 shares of Class A Stock	$	500,000
D2	50.0	%	1,000 shares of Class B Stock	$	500,000
Total	100.0	%	2,000 shares of common stock	$	1,000,000

The Founders’ Shareholder Interests will change only (i) by amendment to this Agreement in accordance with Section 19.6(b), (ii) by a transfer of Shares permitted by this Agreement, (iii) by the issuance of additional Shares in accordance with the terms of this Agreement, (iv) to reflect Voluntary Capital Contributions pursuant to Section 8.2 that are not made on a pro rata basis. Such changes will be effective upon the effective date of the amendment, transfer, issuance, additional capital contribution, or event described in Section 7.2(b). The percentages set forth above, as so changed, apply in all circumstances where relevant to determining the extent of the any Person’s Shareholder Interests in the Company, including its pro rata right to any dividends, right to vote on, consent to or otherwise participate in any decision or action to be taken by such Person under this Agreement or the Companies Law.

(b)Adjustments for Tembo. Reference is hereby made to that certain Co-Production Agreement between the Founders of even date herewith (the “Co-Production Agreement”), with respect to the production of the animated feature film currently entitled, “The Legend of Tembo”.  In the event of D2’s failure to satisfy the Tembo Repayment Obligation (as such term is defined in the Co-Production Agreement) pursuant to the terms and conditions of the Co-Production Agreement (presuming such obligation comes due thereunder), then the Company on the next business day following D2’s breach of such obligation shall issue to GH such number of additional shares of Class A Stock so that GH will hold an additional 10% of the issued and outstanding common shares of the Company, e.g., GH’s Shareholder Interest and Initial Shares shall be increased to 60% (subject to any adjustment to account for any changes in ownership made by either Founder in accordance with this Agreement after the Closing Date),

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resulting in D2’s Shareholder Interest being reduced to 40% (subject to any adjustment to account for any changes in ownership made by either Founder in accordance with this Agreement after the Closing Date), as a full and complete discharge and release of any such Tembo Repayment Obligation.

ARTICLE 8

Capital Contributions

8.1Initial Capital Contributions.

(a)Initial Cash and In-Kind Capital Contributions. At the Closing, the following Initial Capital Contributions shall be made by the Founders:

(i)each of the Founders shall make an Initial Cash Capital Contribution of $500,000.00 to the Company;

(ii)GH shall make an Initial In-Kind Capital Contribution of the GH/VFX Contracts pursuant to the GH/VFX Contribution and Assignment Agreement; and

(iii)GH and D2 shall make an Initial In-Kind Capital Contribution of the licensed rights pursuant to the Trademark License Agreement.

(iv)D2 shall make an Initial In-Kind Capital Contribution of the Licensed Rights pursuant to the D2 Asset License Agreement.

(b)Value of Initial In-Kind Capital Contributions. The Founders agree that the value of their respective In-Kind Capital Contributions shall be reasonably determined and agreed upon by the Parties; and the Founders agree, to the extent reasonably practicable, to consistently apply and report same for all tax and related purposes; provided that in making such respective determinations the Founders shall cooperate, to the extent reasonably practicable, in seeking to achieve the most tax-advantaged results, mutually, therefrom. The In-Kind Capital Contributions shall be treated as contributions to capital, increasing each Founder’s taxable basis in its respective Initial Shares; therefore, no further issuances of common shares of the Company shall be made in connection therewith.

8.2Subsequent Capital Contributions, Shareholder Loans and Voluntary Capital Contributions.

(a)Agreed Subsequent In-Kind Capital Contributions.  In connection with the Joint Venture, the Founders are required to perform certain covenants following the Closing as set forth above in Sections 5.5, 5.6, 5.7, and 5.8.  The performance of those covenants shall be deemed to be Subsequent In-Kind Capital Contributions to the Company thereby reducing, upon completion thereof, the applicable Founder’s Remaining Capital Commitments.

(b)Other Subsequent Capital Contributions.  Each Founder shall be required to make other Subsequent Capital Contributions to the Company in accordance with its

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Shareholder Interest, but only in amounts, at the times, and in the form (cash or in-kind) as set forth in the Business Plan or otherwise approved by the Board of Directors; provided that (i) no Founder shall be required to make Subsequent Capital Contributions which would cause its aggregate Capital Contributions to exceed its Aggregate Capital Commitment, (ii) the Founders expect that each Founder’s Aggregate Capital Commitments shall be contributed within the five-year period commencing on the Closing, and (iii) no Founder shall be required to make any Subsequent Capital Contribution in cash.  The Company, at the discretion of the Board of Directors, may request additional cash amounts and/or in-kind contributions from the Founders in excess of their Aggregate Capital Commitments.  Such requests for additional amounts may be in the form of loans (“Shareholder Loans”) or additional voluntary capital contributions (“Voluntary Capital Contributions”).  Such additional capital contributions shall be made in the sole discretion of each of the Founders and shall not be mandatory.  Additional Class A Stock shall be issued to GH and its affiliates in exchange for their Voluntary Capital Contributions in excess of GH’s Aggregate Capital Commitment, and additional Class B Stock shall be issued to D2 and its affiliates in exchange for their Voluntary Capital Contributions in excess of D2’s Aggregate Capital Commitment; provided, however, that all Subsequent Capital Contributions in excess of a Founder’s Aggregate Capital Commitment shall be deemed Shareholder Loans, unless the non-contributing Founder agrees in writing that such may be a Voluntary Capital Contribution thereby causing an additional issuance of shares to such contributing Founder.

(c)Procedure.

(i)Generally. All mandatory requests for Subsequent Capital Contributions or voluntary requests for Voluntary Capital Contributions or Shareholder Loans will be in a notice delivered to each Founder by the CEO stating [a] the aggregate amount of Capital Contributions or Shareholder Loans and the amount of each Shareholder’s share of such Capital Contribution or Shareholder Loan and [b] the date that the Capital Contribution or Shareholder Loan is to be made, which will not be sooner than ten Business Days following the Shareholder’s receipt of the notice.

(ii)Accompanying Certificate. Upon the reasonable request of a Founder, the other Founder will deliver such certifications or other documents, instruments or agreements to the Company and to each other, dated as of the date the Subsequent Capital Contribution or Shareholder Loan is to be made, that contain reasonable representations and warranties as to such matters as is appropriate. In addition, if Subsequent Capital Contributions are to consist of property other than cash, such certificate will contain reasonable representations and warranties as to the ownership and condition of such property.

(iii)Shareholder Loans. Each Shareholder Loan will be evidenced by a promissory note bearing interest or no interest as determined by the Board of Directors. Each Shareholder Loan will [a] be for such term and subject to such security, if any, as determined by the Board of Directors in accordance with Section 10.4, [b] if necessary to secure financing for the Company, be subordinated to any other indebtedness of the Company or a portion of it, [c] become due and payable in the event the Company is dissolved, and [d] rank pari passu with any and all other Shareholder Loans.

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8.3Preemptive Rights. If the Board of Directors determines, subject to Section 10.4, that the Company should offer additional Shares, the Company shall offer the Founders the opportunity to subscribe for such Shares in a specified aggregate amount, by written notice setting forth the terms and conditions upon which such Shares shall be offered. Each Founder shall have the right, but not the obligation, to subscribe for such Shares and make such Capital Contributions pro rata in accordance with its respective Shareholder Interest. Each Founder that wishes to subscribe for such additional Shares pursuant to this Section 8.3 shall so notify the Company in writing within 10 Business Days after its receipt of such notice under this Section 8.3. The election by any Founder not to exercise its rights under this Section 8.3 shall not affect its rights under this Section 8.3 as to any subsequent issuance The rights granted under this Section 8.3 shall in any event terminate immediately prior to the consummation of an initial public offering of the Company.

ARTICLE 9

Dividends

9.1No Priority. Except as otherwise provided in this Agreement, no Shareholder will have priority over any other Shareholder as to any dividend.

9.2Other Dividend Rules. No Shareholder will have the right to demand and receive property other than cash in payment for its share of any dividend. Distribution of non-cash property may only be made with the approval of the Board of Directors.

9.3Liquidating Dividend Provisions. Subject to Section 9.2, dividends made upon liquidation of the Company will be made pro rata in accordance with the Shares held by the Shareholders.

9.4Limitation on Dividends. No distribution will be made to Shareholders if prohibited by the Companies Law or other Applicable Law.

ARTICLE 10

Governance

10.1Board of Directors.

(a)Directors. The business and affairs of the Company will be managed exclusively by or under the direction of a board of directors (the “Board of Directors”) consisting of four directors (each a “Director”). The total number of Directors shall not be increased or decreased, unless this Agreement is amended pursuant to the terms of Section 19.6(b).  Except for the right to appoint an alternate director in Section 10.2(f) and for the delegation of authority to Officers provided in Section 10.6, no Director may delegate his or her rights and powers to manage and control the business and affairs of the Company. Except as otherwise provided herein, the Board of Directors has the exclusive authority to manage the Company Business and to authorize individuals (including Officers), subject to such limitations as are specified by the

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Board of Directors, to act on behalf of the Company. No Director shall have the authority to execute agreements or otherwise bind the Company unless such Director is also a an officer of the Company acting in his capacity as such in accordance with Section 10.5 or such authority is specifically granted by the Board of Directors.

(b)Initial Appointment; Replacement. Following the Closing, GH will appoint two Directors and D2 shall appoint two Directors, including the Chairman of the Board of Directors (the “Chairman”). The initial appointments by each Founder shall be Zhong Lifang and Li Ming for GH, and John Textor (to serve as Chairman) and Edwin Lunsford for D2; provided that any Director serving as Chairman may be relieved of such title with or without cause by either GH or D2 and thereafter replaced with a successor Chairman appointed by GH and D2. By written notice to the other Founder and Directors, a Founder may in its sole discretion remove and replace, with or without cause and at any time, any or all of its appointed Directors with other individuals. A Director may be an officer or employee of a Shareholder or of an Affiliate of a Shareholder. Each Founder shall cause its Directors to comply with the terms of this Agreement that apply to such Directors. The failure of a Director to comply with any term of this Agreement applicable to the Directors shall be equivalent to and deemed to be a breach of this Agreement by the Founder that appointed such Director. Each Director will serve on the Board of Directors until his or her successor is appointed or until his or her earlier death, resignation or removal.

(c)Compensation and Expenses of Directors. Each Founder will pay the compensation and expenses of the Directors it appoints, except for any Director also appointed as an Officer who will be compensated and reimbursed for expenses directly by the Company.

(d)Right to Rely on Officer’s Certificate.Any Person dealing with the Company may rely (without duty of further inquiry) upon a certificate signed by any Officer as to (i) the identity of any Director, Shareholder, or Officer, (ii) the existence or nonexistence of any fact or facts that constitute a condition precedent to acts by the Board of Directors, the Shareholders or the Officers or that are in any other manner germane to the affairs of the Company, (iii) the Persons who are authorized to execute and deliver any instrument or document of the Company, (iv) any act or failure to act by the Company or any other matter whatsoever involving the Company, any Director, or any Shareholder, and (v) the authenticity of any copy of this Agreement and any amendment hereto.

(e)Signing on Behalf of the Company.

(i)Generally. Except as required by law but without limiting the approval requirements of Sections 10.3 and 10.4, the signature of any Officer authorized to act on behalf of the Company by the Board of Directors is sufficient to constitute execution of a document on behalf of the Company. A copy or extract of this Agreement and any authorizing resolution or other document may be shown to the relevant parties in order to confirm such authority.

(ii)Deeds, Certain Promissory Notes, etc.  The signature of the CEO is required [a] to convey title to real property owned by the Company or [b] to execute promissory notes with respect to indebtedness for borrowed money in excess of $250,000 and related trust

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deeds, mortgages and other security instruments and [ii] any other document the subject matter of which exceeds $250,000 or that binds the Company for a period exceeding one year.

(f)No Authority of Directors or Shareholders to Act on Behalf of the Company. Except as otherwise specifically provided in this Agreement, no Director or Shareholder, acting individually in his, her or its capacity as such, will act for, deal on behalf of, or bind the Company in any way other than through its representatives (acting as such) on the Board of Directors. The Company may only act and bind itself through (i) the collective action of the Board of Directors in accordance with this Agreement or (ii) the action of the Officers as and to the extent authorized by this Agreement or by the Board of Directors in accordance with this Agreement.

10.2Board of Director Meetings.

(a)Meetings. The Board of Directors will hold regular meetings (at least monthly for the 12-month period commencing on the Closing and at least quarterly thereafter) at such time and place as it determines. Any Director may call a special meeting of the Board of Directors by giving the notice specified in Section 10.2(g).

(b)Chairman. The Chairman shall preside as chairman over all meetings of the Board of Directors. The Chairman shall have the same voting rights as any other Director. From time to time, another Director may exercise such powers as specifically delegated by the Chairman to the extent the Chairman is absent from the meeting.

(c)Participation. Directors may participate in a meeting of the Board of Directors by conference video or telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Such participation will constitute presence in person at the meeting.

(d)Written Consent. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting upon the unanimous written consent of all of the Directors. A copy of the consent will be filed with the minutes of Board of Directors meetings.

(e)Minutes. The Board of Directors will keep written minutes of all of its meetings reflecting all actions taken by the Board of Directors thereat. Copies of the minutes will be provided to each Director.

(f)Delegation. Each Director has the right to appoint, by written notice to the other Directors, any individual as his or her alternate. That alternate may attend meetings of the Board of Directors on his or her behalf and exercise all of such Director’s authority for all purposes until the appointment is revoked.

(g)Notice. Written notice of each special meeting of the Board of Directors will be given to each Director at least ten Business Days before the meeting by facsimile, electronic mail or other similarly timely means of communication. Each notice will include the date, time and place of the meeting and will identify in reasonable detail the items of business to be conducted at the meeting. No business other than those items listed in the notice may be

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conducted at the special meeting, unless otherwise expressly agreed to by all of the Directors. The notice provisions of this Section may be waived in writing by unanimous consent of all Directors and will be waived by a Director’s attendance at the meeting, unless the Director at the beginning of the meeting or promptly upon his or her arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

10.3Voting of Directors; Quorum.

(a)Generally. Each Director will have one vote. Except as otherwise provided below in Section 10.4, all actions by the Directors will require the approval of a majority of the Directors present at a meeting at which a quorum exists.

(b)Quorum. Provided notice of the meeting complies with Section 10.2(g), three Directors will constitute a quorum for the transaction of business.

10.4Special Actions. The following actions require the unanimous written consent of the Founders:

(a)amendment of or modification to this Agreement or the Memorandum and Articles of Association of the Company;

(b)issuance by the Company of additional Shareholder Interests or other equity participations in the Company, or any request from the Founders or the Shareholders for additional amounts in excess of their Aggregate Capital Commitments;

(c)(i) approval of any Business Plan (other than the initial Business Plan) that, taken as a whole, reflects a material modification to the commercial objectives and operating principles set forth in the initial Business Plan, including a material change to the Company’s employment compensation policy; or (ii) entry into any line of business other than the Company Business;

(d)merger, combination, consolidation, reorganization, reclassification or similar transaction involving the Company;

(e)sale, lease or other disposition of material assets of the Company, other than in the Ordinary Course of Business;

(f)entering into or amending the terms of any Related Agreement or any other agreement, transaction or series of transactions between the Company and any Shareholder, any Affiliate of a Shareholder, or any Director or Affiliate of a Director;

(g)borrowing, guarantee, refinancing or any other incurrence of indebtedness by the Company of more than $3.0 million in the aggregate, the establishment of a line of credit in excess of $3.0 million in the aggregate or the incurrence of an Encumbrance on any Company property in connection with any such borrowing, guarantee, ramming or other incurrence of indebtedness, other than as approved in the then-current Business Plan;

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(h)except as provided in Section 9.1, authorization of dividends or any discretionary distribution, purchase or redemption by the Company of any Shares;

(i)commencement of an initial public offering of the Company or any successor entity, including any conversion of the Company from an exempted company to a corporation or other form of business entity, and the grant of any registration rights to any Person in connection therewith;

(j)material tax election or substantial change in tax, accounting or auditing practices of the Company, and any determination of fair market value of assets or of any adjustment date;

(k)entering into any contract by the Company that has a value in excess of $5.0 million other than in the Ordinary Course of Business or pursuant to the then-current Business Plan;

(l)purchase, lease or other acquisition of assets or other investment with a value in excess of $3.0 million, other than in the Ordinary Course of Business or pursuant to the then-current Business Plan;

(m)settlement of any Proceeding related to the D2 Assets, other than any settlement involving only the payment of monetary damages, the terms of which provide a waiver and release of all claims against D2;

(n)filing of any petition in bankruptcy by (or the decision not to oppose any similar petition filed by third party in respect of) the Company;

(o)appointment or removal of the independent certified public accountant; and

(p)any agreement to take any of the foregoing actions that is not conditioned upon obtaining the consent of the Board of Directors.

The organizational documents the Studio and each other direct or indirect subsidiary of the Company shall provide that each of the matters identified in this Section 10.4 shall be reserved to the Company as such subsidiary’s sole Shareholder or shareholder, as the case may be, and the Board of Directors shall determine such matter with respect to such subsidiary in accordance with this Section 10.4. The parties hereto (other than the Company) agree to exercise their voting power to procure that the following actions identified in this Section 10.4 will require the unanimous written consent of the Founders: (i) an amendment to the Company’s Memorandum and Articles of Association under paragraph (a), (ii) any of the matters set out in paragraph (d) to the extent it is effected by way of a statutory merger and (iii) the matters referred to in paragraph (n).

10.5CEO.

(a)Appointment.  There will be one chief executive officer of the Company (“CEO”), who will be appointed pursuant to the mutual agreement of GH and D2, each acting

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reasonably, and who may be removed with or without cause by either GH or D2 and thereafter replaced with a successor CEO appointed by GH and D2.  The CEO may be an officer or employee of a Shareholder or its Affiliate.

(b)Term. The CEO will hold office until his or her death, resignation or removal.

(c)Authority. Subject to the power and authority of the Board of Directors to revoke or modify the following or to direct the actions of the CEO, the CEO will have responsibility and authority for:

(i)operating and managing the day-to-day business and affairs of the Company in a manner consistent with the then-current Business Plan and then-current budgets;

(ii)proposing revisions to such Business Plan or budget for submission to the Board of Directors for approval;

(iii)implementing such Business Plan and budget as approved by the Board of Directors; and

(iv)making any non-material changes to or taking actions that would constitute a non-material deviation from such Business Plan or budget.

The CEO will keep the Board of Directors reasonably informed of his or her actions.

10.6Officers and Employees.

(a)Officers. The other officers of the Company (along with the CEO, the “Officers”) may include a treasurer (the “Treasurer”), executive vice president(s), vice president(s), and a secretary. The Board of Directors will have discretion to appoint other officers and grant them authority to act on behalf of the Company. An officer may also be an officer or employee of one of the Shareholders or an Affiliate of a Shareholder. Except as otherwise provided herein, each of the Officers shall have such powers and duties as are incident to their office and such other duties and powers as may from time to time be conferred upon or assigned to such Officer by the Board of Directors.

(b)Appointment. The Officers of the Company shall be designated by the Board of Directors and will be appointed by the Board of Directors based on the most qualified candidate for the office regardless of whether that individual is or was employed by a Shareholder or any Affiliate of a Shareholder. In making such appointments, the Board of Directors shall consider recommendations from the CEO.

(c)Authority. Each Officer has the power and authority as is delegated by the Board of Directors. Each Officer will be subject to the direction of the CEO unless, and to the extent that, the Board of Directors directs that he or she report to it. The Board of Directors shall specify the authority of each Officer expected to be appointed by the Board of Directors in the Business Plan and may modify such specifications from time to time.

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(d)Term. Each Officer will hold office until his or her death, resignation or removal. Any Officer may be removed with or without cause at any time by the Board of Directors; provided, however, an officer subject to appointment by a Shareholder may be removed only with the written consent of the appointing Shareholder.

10.7Business Plan.

(a)Initial Business Plan. As soon as practicable upon execution of this Agreement, but in any event within 30 days after the Closing, the Founders shall prepare and approve an initial business plan for the Company, which business plan shall be updated, supplemented and/or modified from time to time as provided herein (the “Business Plan”). The initial Business Plan shall cover the Company’s operations for the remainder of calendar year 2012 and such additional period as the Founders shall agree. It is expected that the Business Plan will outline the Company’s purposed operations for the period covered thereby and will identify the items, if any, the Founders deem to be critical to the Company’s success, including: [i] targets for the development and marketing of the D2 Assets and the operation of the Company Business; [ii] targets for sales, operating profits and net profits for the Company, [iii] targets for the compensation packages of certain senior management employees of the Company and [iv] any other targets that the Board of Directors determines to be appropriate. The Business Plan will include a budget prepared in accordance with Section 10.7(b). The Founders intend that the Business Plan will be reviewed, supplemented and/or updated, as applicable, at least annually and accordingly, at least 120 days before the beginning of each Fiscal Year, the CEO will deliver to the Board of Directors for approval and/or modification a proposed Business Plan for the ensuing Fiscal Year in a form and with details to be specified from time to time by the Board of Directors.

(b)Budget Contents.  The budget will include:

(i)a projected income statement, balance sheet and operational and capital expenditure budgets for the forthcoming Fiscal Year,

(ii)a projected cash flow statement showing in reasonable detail: [a] the projected receipts, disbursements and distributions; [b] the amounts of any corresponding projected cash deficiencies or surpluses; and [c] the amounts and due dates of all projected calls for Subsequent Capital Contributions for the forthcoming Fiscal Year, and

(iii)such other items requested by the Board of Directors.

(c)Consideration of Proposed Plans. Each proposal to approve a modified or supplemented Business Plan will be considered for approval by the Board of Directors beginning at least 90 days before the beginning of the Fiscal Year to which it pertains. The Board of Directors may revise the proposed Business Plan or direct the CEO to submit revisions to the Board of Directors.

(d)Absence of a Business Plan. Until a Business Plan is approved for a particular Fiscal Year, the Company shall be operated in the Ordinary Course of Business by its Officers as reflected in the then-current Business Plan as approved by the Board of Directors from time to time in accordance with Section 10.4. Any actions during such time that are outside

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the ordinary course of the Company’s business or are different than the Company’s historical practices shall be submitted for approval by the Board of Directors in accordance with Article 10.

10.8Business Dispute.

(a)Failure to Approve Actions Requiring Special Approval. If the holders of a majority of Class A Stock and Class B Stock have been unable to agree upon any action listed in Section 10.4 when properly submitted to it for a vote (a “Business Dispute”), then the Directors will consult and negotiate with each other and the appropriate Shareholders in good faith to find a mutually agreeable solution. If the Directors do not negotiate a solution within ten Business Days from the date the disagreement occurred and the failure to reach a solution, in any Founder’s judgment, materially and adversely affects the Company, then that Founder may give notice to the other Founder initiating the procedures under this Section (a “Dispute Notice”).

(b)Consideration by Shareholder Executives. Within two Business Days after the giving of a Dispute Notice, the Business Dispute will be referred by the Directors to the respective chief executive officers of the Founder (each a “Founder Executive”) in an attempt to reach resolution. The Founder Executives shall meet within five Business Days after such referral to discuss the Business Dispute and shall attempt in good faith to resolve the dispute.  If the Founder Executives reach agreement with respect to the Business Dispute, they shall jointly so notify the Board of Directors, and such agreement shall be implemented by the Board of Directors. If they are unable to reach agreement within ten Business Days after such meeting, then, (i) the Founders may agree to submit such Business Dispute to non-binding mediation on such terms as they may agree or (ii) either Founder may submit such Business Dispute for arbitration in accordance with Section 12.2(c). Until an agreement with respect to a Business Dispute is reached or such Business Dispute is otherwise resolved in accordance with this Agreement, the Company shall not implement the actions giving rise to such Business Dispute and shall maintain the status quo in accordance with the then-current Business Plan to the extent commercially practicable, subject to and as modified by any duly approved Board of Directors action.

10.9Standard of Conduct.

(a)Generally.  A Director and each Officer, in managing the business or affairs of the Company, will discharge his or her duties:

(i)in a manner he or she believes in good faith to be in the best interests of the Company;

(ii)in a manner he or she believes in good faith to represent the care an ordinarily prudent person in a like position would exercise under similar circumstances;

(iii)in good faith reliance on the provisions of this Agreement;

(iv)without intentional misconduct or a knowing violation of law; and

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(v)without engaging in any transaction for which he or she receives a personal benefit in violation or breach of any provision of this Agreement.

10.10Exculpation. No Shareholder, Director or Officer will be personally liable to the Company, any other Shareholder or any other Person for monetary damages for any act or omission, including breach of contract or breach of duties (including fiduciary duties) of a Director or Officer to the Company, any other Shareholder or any other Person, except (a) for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing or (b) for any transaction for which the Shareholder, Director or Officer received a personal benefit in violation or breach of any provision of this Agreement. Each Shareholder, Director and Officer shall be fully protected in relying on good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person as to matters such Shareholder, Director or Officer believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company. Notwithstanding the foregoing, nothing in this Section 10.10 shall limit the liability of any Founder, any other Shareholder or any other Person for such Person’s breach of this Agreement or any Related Agreement.

10.11Indemnification.

(a)Generally. The Company will indemnify, defend and hold harmless each Director and Officer and each of their respective representatives and agents (each, a “Company Indemnified Person”) from and against all costs and expenses (including attorneys’ fees and disbursements), judgments, fines, settlements, claims and other liabilities (including all costs of investigation, preparation and defense thereof) incurred by or imposed upon such Company Indemnified Person in connection with, or resulting from, any Proceeding, whether civil, criminal, administrative or otherwise, that may be brought against such Company Indemnified Person by any third party, in each case, by reason of such Company Indemnified Person’s being or having been a Director or Officer (or a representative or agent of the foregoing) or relating to or arising out of the management, business and affairs of the Company or any entity in which the Company has an interest to the fullest extent permitted under the Companies Law and Applicable Law; provided, however, that the foregoing obligations will not apply to the extent that the act or omission of the Company Indemnified Person involved either (i) any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing or (ii) any transaction for which the Company Indemnified Person received a personal benefit in violation or breach of any provision of this Agreement

(b)Procedure. If indemnification is requested by a Company Indemnified Person, the Board of Directors will cause a determination to be made as to whether indemnification of the Company Indemnified Person is proper under the circumstances. Upon any such determination that indemnification is proper, the Company will make indemnification payments of liability, cost, payment or expense asserted against, or paid or incurred by, the Company Indemnified Person to the maximum extent permitted by the Companies Law and Applicable Law.

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(c)Defense Counsel. The Company will have the right (i) to approve any counsel selected by any Company Indemnified Person and (ii) to approve the terms of any proposed settlement. Such approvals will not be unreasonably withheld or delayed.

(d)Expenses.  The Company will advance to any Company Indemnified Person reasonable attorneys’ fees and other costs and expenses incurred in connection with the defense of any Proceeding if the Company Indemnified Person agrees in writing before any advancement that he, she or it will reimburse the Company for such fees, costs and expenses to the extent that the Board of Directors determines that he, she or it was not entitled to indemnification under this Section.

(e)Non-Exclusive; Limitations. The rights accruing to each Company Indemnified Person under this Section will not exclude any other right to which he, she or it may be lawfully entitled. Any indemnity under this Section 11.11 shall be provided solely out of, and only to the extent of, the Company’s assets. Shareholders shall not be required directly to indemnify any Person entitled to indemnification under this Section 11.11. None of the provisions of this Section 11.11 shall be deemed to create any rights in favor of any Person other than the Company Indemnified Persons.

(f)Subsequent Amendment. If the Companies Law or Applicable Law is hereafter amended to eliminate or limit the personal liability of directors or officers, then the liability of a Director or Officer shall be eliminated or limited to the fullest extent permitted by the Companies Law, as so amended. No amendment, termination or other elimination of this Section or of any relevant provisions of the Companies Law or of any other Applicable Law will affect or diminish in any way the rights to indemnification under this Section with respect to any Proceeding arising out of or relating to, any event or act or omission occurring or fact or circumstance existing before the amendment, termination or other elimination.

(g)Continuation of Right to Indemnification. All rights to indemnification under this Section will continue as to a person who has ceased to be a Director or Officer, will inure to the benefit of the heirs, executors, administrators and the estate of that Person, and will be deemed to be a contract between the Company and each such Person. This Section shall be binding upon any successor to the Company, whether by way of merger, consolidation, liquidation, dissolution or otherwise.

(h)Savings Clause. If this Section or any portion of it is invalidated on any ground by any court of competent jurisdiction, then the Company will nevertheless indemnify Persons specified in this Section to the full extent permitted by any applicable portion of this Section that has not been invalidated and to the full extent permitted by Applicable Law.

10.12Insurance. The Company may purchase and maintain insurance, to the extent and in such amounts as the Board of Directors shall deem reasonable, on behalf of Company Indemnified Persons against any liability that may be asserted against such Persons, regardless of whether the Company would have the power to indemnify such Person against such liability hereunder.

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ARTICLE 11

Transfer Restrictions on Shares

11.1Restrictions on Transfer of Shares.

(a)Except to the extent specifically permitted or required by this Agreement, no Shareholder may transfer its Shares or any interest in such Shares. For purposes of this Article, “transfer” and its derivatives include all forms of direct or indirect transfer or disposition, voluntary or involuntary, by operation of law or otherwise, as well as the creation of any Encumbrance on all or any part of its Shares; provided, however, that the foregoing shall not prevent the creation or maintenance of security interests granted to a Founder’s senior secured lender.

(b)Neither a Founder nor its Controlled Person may at any time transfer or otherwise dispose of any of its Shares or Shareholder Interest to any Person engaged in Competition with the other Founder or any of its Controlled Persons.

(c)Any proposed transfer by a Shareholder (other than by a Founder or any of its Controlled Persons) shall be subject to [i] the prior written consent of both of the Founders, [ii] the Founders’ rights under Section 11.7(a) and 11.7(c), and [iii] the limitation that any transferee shall not be engaged in Competition with either of the Founders or any of their Controlled Persons.

(d)Each Founder, together with its Controlled Persons, shall at all times hold Shares representing a Shareholder Interest of 30%.  Any proposed transfer by a Founder or any of its Controlled Persons, the result of which would reduce such Founder’s Shareholder Interest (together with the Shareholder Interests of its Controlled Persons) below 30%, shall be subject to [i] the other Founder’s prior written consent in its sole discretion, [ii] the other Founder’s rights under Section 11.7(a) and 11.7(c), and [iii] Section 11.1(b).

11.2Legends. The Company shall affix to each certificate evidencing Shares issued to Shareholders a legend in substantially the following form:

“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED. NO REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS SUCH TRANSFER IS MADE IN CONNECTION WITH AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH ACT DOES NOT APPLY AND, IN EACH CASE, IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS..

THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN AN AMENDED AND RESTATED FORMATION AND JOINT VENTURE AGREEMENT DATED AS OF MARCH [            ], 2012, AS IT MAY BE AMENDED FROM TIME TO TIME. NO

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REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS AND UNTIL SUCH RESTRICTIONS SHALL HAVE BEEN COMPLIED WITH.”.

11.3Certificates. Certificates representing Shares (i) will be signed by the Chairman and CEO (or other designated officers of the Company) and (ii) will be in such form as specified by the Board of Directors (including any legends in addition to those required by this Agreement).

11.4Assignment to Controlled Persons. Each Shareholder may, from time to time, transfer all of its Shares to a Person controlling, controlled by or under common control with, that Shareholder (and for this purpose, “control” means the direct or indirect beneficial and record ownership of all of the economic and voting interests in the transferee) (a “Controlled Person”), but only if at the time of the transfer:

(a)the transferee agrees in a writing delivered to the Founders and the Company that it will be bound in all respects by this Agreement; and

(b)the transferor guarantees in a writing delivered to the Founders and the Company the performance by the transferee of all of its obligations under this Agreement.

Effective with the delivery of such written undertakings, the transferee will succeed to all of the transferor’s rights and obligations other than the transferor’s obligations under this Section 11.4(b).

11.5Effect of Non-compliance.

(a)Non-Permitted Transfers Null and Void.  ANY ATTEMPTED TRANSFER NOT STRICTLY IN ACCORDANCE WITH THE PROVISIONS OF THIS ARTICLE WILL BE VOID AB INTIO AND OF NO FORCE OR EFFECT WHATSOEVER. THE DIRECTORS SHALL NOT APPROVE ANY TRANSFERS THAT ARE NOT IN ACCORDANCE WITH THIS AGREEMENT.

(b)Other. Without limiting the foregoing, if any Shares or certificate(s) representing such Shares is purported to be transferred in whole or in part in contravention of this Article, the Person to whom the transfer is made will not be entitled to any rights as a Shareholder, including any rights:

(i)to participate in the management, business or affairs of the Company;

(ii)to access any information concerning Company transactions;

(iii)to inspect or copy the Company’s books or records;

(iv)to receive dividends to which the transferor would otherwise be entitled; or

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(v)to receive upon the dissolution and winding up of the Company the net amount otherwise distributable to the transferor.

11.6Special Provisions Relating to Founder Transfers.

(a)Founder Sell-Down Rights.  Each Founder shall have the right to transfer or all or a portion of its Shares representing in the aggregate no more than 20% of its Shareholder Interest to any third-party (each a “Sell-Down Investor”), together with the corresponding obligation to make Subsequent Capital Contributions with respect to a pro rata portion of such Founder’s Remaining Capital Commitment, without the application of Section 11.7 to any such transfer; provided, that [i] the other Founder shall have given its prior written approval of the transfer of Shares to the Sell-Down Investor, which approval shall not be unreasonably withheld, [ii] the Sell-Down Investor is not engaged in Competition with the other Founder, [iii] the Sell-Down Investor complies with Section 11.6(b), and [iv] in connection with such transfer, no Sell-Down Investor shall assume the obligation of any Founder to make a Subsequent In-Kind Capital Contribution without the prior written consent of the other Founder in its sole discretion.

(b)Joinder. Each Sell-Down Investor shall execute a copy of, or agree to be a joinder agreement with respect to, this Agreement pursuant to which it shall agree to be bound by the terms and conditions herein as a Shareholder of the Company.

11.7Rights of First Refusal, Tag-Along and Drag-Along

(a)Rights of First Refusal. Except as provided in Section 11.4 and 11.6(a), if any Shareholder (for the purposes of this Section, the “Selling Shareholder”) desires to sell, transfer or otherwise dispose of all or any part of its Shares pursuant to a bona fide offer from a third-party purchaser, the Selling Shareholder shall give written notice of such intention to the Company and the Founders (who are not Selling Shareholders) and, in such notice, shall offer to sell such Shares on a pro rata basis to the Founders (who are not Selling Shareholders) at the price and terms as were offered to such Selling Shareholder by the prospective third-party purchaser. In addition to the price, terms and conditions offered by the third-party purchaser, such notice shall also include the name and address of the prospective purchaser and the number of Shares involved in the proposed sale. Within 30 days of receiving such written offer, the Founder may, by written notice to the Selling Shareholder, elect to purchase all of the Shares that is offered specifying in such notice the purchase price and terms of purchase. If both Founders are offered Shares but one Founder does not elect to purchase the Shares offered to it, the Selling Shareholder must extend a written offer to purchase such Shares to the other Founder. The other Founder may elect to purchase such Shares within 10 days of receipt of such offer. If any Founder shall so elect to purchase, such Founder shall specify to the Selling Shareholder a closing date not less than 30 nor more than 90 days following receipt of the offer. The closing of any such sale shall take place at the principal executive offices of the Company or such other place as the Selling Shareholder, the Company and the Founders, as applicable, shall otherwise agree.

(b)Transfers to Third Parties. If the Founders do not elect to purchase all of the Shares offered in accordance with Section 11.7(a), the Selling Shareholder shall be free, for 45 days from the expiration of the 30-day period described above in Section 11.7(a), to transfer

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all but not less than all of its Shares that was part of such third-party offer to such original bona fide third-party purchaser described in Section 11.7(a) at the price and on the terms and conditions originally offered by such third-party purchaser. If such sale is consummated, such third party purchaser shall acquire the Selling Shareholder’s Shares subject to the terms of this Agreement (and such third party purchaser shall execute a copy of, or agree to execute a joinder agreement with respect to, this Agreement pursuant to which it shall agree to be bound by the terms and conditions herein as a Shareholder of the Company). If the Selling Shareholder shall fail to make such a transfer within the 45-day period described in this Section 11.7(b), the Shares shall again be subject to the terms of this Agreement.

(c)Tag-Along. If one or more Founders do not elect to purchase all of the Shares offered in accordance with Section 11.7(a), if any Shareholder, or group of Shareholders acting together, owning 15% or more of the outstanding Shares held by all Shareholders (for the purposes of this Section, the “Selling Shareholders”) desires to transfer all or any portion of their Shares to a bona fide third-party purchaser, then the Selling Shareholders shall furnish the Founders (who are not Selling Shareholders, if any) (for the purposes of this Section, the “Tag-Along Founders”) written notice of such intent to transfer its Shares, the portion of their Shares to be transferred, the name and address of the prospective purchaser, the purchase price and terms and conditions of transfer and, if known, the proposed date, time and location of the closing of the sale. For a period of 10 Business Days after receipt of such notice, the Tag Along Founders shall have the right, but not the obligation, to require, as a condition to the sale by the Selling Shareholders of its Shares to such third-party purchaser, that up to a Proportionate Share of the Tag-Along Founders’ Shares be sold to the third-party purchaser at the same price per share and on the same terms and conditions received by the Selling Shareholders (subject to any prior consent requirement of any other Founder under Section 11.1(d)), provided that the Tag-Along Founders shall not be (i) required to make representations and warranties in connection with the transaction other than customary representations and warranties solely with respect to the Tag-Along Founders and the Company, (ii) liable for any indemnification obligations to any potential purchaser in respect of such representations and warranties on a joint, rather than several, basis, and in no event with respect to an amount in excess of the net cash proceeds paid to the Tag-Along Founders in such transaction or (iii) subject to any escrow or similar arrangement relating to such transaction with respect to an amount in excess of the net cash proceeds paid to the Tag-Along Founders in such transaction. If the Tag-Along Founders exercise such right, the Selling Shareholders may not sell its Shares to the third-party purchaser unless up to the Proportionate Share of the Tag Along Founders’ Shares (as requested by the Tag-Along Founders) is purchased in the same transaction. The Tag-Along shall exercise such right by providing written notice to the Selling Shareholders and the Company during the 10 Business Day period set forth above. If the Selling Shareholders shall fail to make such a transfer within a 90 day period following the delivery of the notice to the Tag-Along Founders, the Shares shall again be subject to the terms of this Agreement. Such 90-day period may be extended to the extent necessary to comply with any regulatory requirements applicable to the proposed transfer. For the purposes of this Section, the term “Proportionate Share” shall mean that portion of the Shares for sale by the Selling Shareholders as compared to the entire Shares held by the Selling Shareholders.

(d)Drag Along. If at any time one or more Founders owning in the aggregate Shares representing more than 50% of the Shareholder Interests held by all Shareholders (the

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“Majority”) receives a bona fide third-party offer to purchase all of their Shares and the Majority desires to transfer such Shareholder Interest to such third-party purchaser, then the Majority may require the other Shareholders to sell a Proportionate Share of their Shares to the third-party purchaser at the same pro rata price and upon the same terms and conditions received by the Majority, provided that the other Shareholders shall not be (i) required to make representations and warranties in connection with the transaction other than customary representations and warranties solely with respect to the other Shareholders and the Company, (ii) liable for any indemnification obligations to any potential purchaser in respect of such representations and warranties on a joint, rather than several, basis, and in no event with respect to an amount in excess of the net cash proceeds paid to the other Shareholders in such transaction or (iii) subject to any escrow or similar arrangement relating to such transaction with respect to an amount in excess of the net cash proceeds paid to the other Shareholders in such transaction. The Majority shall exercise such right by giving written notice to the other Shareholders and the Company of the exercise of its rights under this Section 11.7(d) and the amount of the Shares of the other Shareholders to be purchased.  If the Majority shall fail, to make such a transfer within a 90 day period following the delivery of the notice to the other Shareholders, the Shares shall again be subject to the terms of this Agreement. Such 90-day period may be extended to the extent necessary to comply with any regulatory requirements applicable to the proposed transfer.

ARTICLE 12

Dissolution and Other Rights Upon Default

12.1Applicability. This Article applies only if (a) only one Founder is a Defaulting Founder, in which case the Non-Defaulting Founder may elect to terminate and dissolve the Company in accordance with Section 12.3, or (b) both Founders are Defaulting Founders, in which case Section 12.4 will apply.

12.2Definitions-Defaulting Founder, Non-Defaulting Founder and Default Event. “Defaulting Founder” is a Founder with respect to which any Default Event has occurred. A “Non-Defaulting Founder” is a Founder with respect to which no Default Event has occurred. Each of the following is a “Default Event:”

(a)Material Default. Any material default or breach by a Founder in the performance of any covenant or of any representation or warranty provided in this Agreement or in the performance of any material provision of any Related Agreement, which default or breach continues for a period of 30 days after written notice thereof has been given by the Non- Defaulting Founder to the Defaulting Founder. A “material default” under this Section includes any failure to make within five Business Days of when due a Subsequent Capital Contribution in accordance with Section 8.2.

(b)Termination of Existence by a Founder. A Founder commences any Proceeding to wind up, dissolve or otherwise terminate its legal existence.

(c)Termination of Existence by another Person. Any Proceeding commenced against a Founder that seeks or requires the winding up, dissolution or other termination of its legal existence that is not defended or contested by such Founder in good faith within 15 days of

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its commencement and stayed within 90 days of its commencement. A Default Event will not exist so long as the stay continues and the Founder pursues the defense or contest diligently thereafter or the Proceeding is dismissed.

(d)Prohibited Transfer. The Founder agrees to any transaction that would, if consummated, breach, or result in a default under, Article 11.

(e)Insolvency Proceeding. If any of the following occurs: (i) the Founder seeks relief in any Proceeding relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors (an “Insolvency Proceeding”); (ii) the institution against the Founder of an involuntary Insolvency Proceeding; provided, however, that if the Founder defends or contests that Insolvency Proceeding in good faith within 15 days of its commencement and obtains a stay of that Proceeding within 90 days of its commencement, a Default Event will not exist so long as the stay continues and the Founder pursues the defense or contest diligently thereafter or the Proceeding is dismissed; (iii) the Founder admits the material allegations of a petition against the Founder in any Insolvency Proceeding; or (iv) an order for relief (or similar order under non-U.S. law) is issued in any Insolvency Proceeding.

(f)Appointment of a Receiver or Levy. Either (i) a Proceeding has been commenced to appoint a receiver, receiver-manager, trustee, custodian or the like for all or a substantial part of the business or assets of the Founder or (ii) any writ, judgment, warrant of attachment, warrant of execution, distress warrant, charging order or other similar process (each, a “Levy”) of any court is made or attaches to the Founder’s Shareholder Interest or a substantial part of the Founder’s properties; provided, however, that if the Founder defends or contests that Proceeding or Levy in good faith within 15 days of its commencement and obtains a stay of that Proceeding or Levy within 90 days of its commencement, a Default Event will not exist so long as the stay continues and it pursues the defense or contest diligently thereafter or the Proceeding is dismissed.

(g)Assignment for Benefit of Creditors. The Founder makes a general assignment for the benefit of creditors, composition, marshalling of assets for creditors or other, similar arrangement in respect of the Founder’s creditors generally or any substantial portion of those creditors.

(h)Bank Default. A Founder is in material default under any loan agreement with any creditor to whom the Founder has pledged its Shares as collateral, which default is not cured within any applicable cure period therefor.

12.3Remedies-Upon Default by One Founder.

(a)By Non-Defaulting Founder. A Non-Defaulting Founder may, within 90 days of becoming aware of the occurrence of a Default Event, give notice of the Default Event (a “Default Notice”) to the Defaulting Founder. The Default Notice must specify one of the following remedies (which, together with Section 12.3(c) and subject to Section 12.3(b), are exclusive remedies):

(i)Dissolution. Dissolution of the Company in accordance with Article 13;

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(ii)Right to Buy. The purchase of the Defaulting Founder’s Shareholder Interest for 70% of Fair Market Value and otherwise in accordance with Article 14; or

(iii)Right to Sale of Shares. The sale of the Non-Defaulting Founder’s and the Defaulting Founder’s Shares to a third party that is not an Affiliate of the Non-Defaulting Founder. The sale of the Shares under this Section 12.3(a)(iii) shall be at the price and on the terms of purchase as are offered by such third party purchaser and accepted by the Non-Defaulting Founder and shall not be subject to the provisions of Section 6.4. Of the net proceeds from the sale of the Shares under this Section 12.3(a)(iii), the Non-Defaulting Founder shall be entitled to the percentage of the net proceeds attributable to its Shares plus 30% of the net proceeds attributable to the Defaulting Founder’s Shares. The Defaulting Founder shall be entitled to the remaining portion of the net proceeds received from the sale of the Shares. Not less than twenty (20) days before the closing of the sale of the Shares under this Section 12.3(a)(iii), the Non-Defaulting Founder shall provide the Defaulting Founder written notice of the terms and conditions of the sale of the Shares by the Non-Defaulting Founder. At the Default Buy-Sell Closing related to a sale pursuant to this Section 12.3(a)(iii), the Founders will deliver to the purchasing third party such customary documentation that is reasonably acceptable to the Non-Defaulting Founder, provided that the Defaulting Founder shall not be (i) required to make representations and warranties in connection with the transaction other than customary representations and warranties solely with respect to the Defaulting Founder and the Company, (ii) liable for any indemnification obligations to any potential purchaser in respect of such representations and warranties on a joint, rather than several, basis, and in no event with respect to an amount in excess of the net cash proceeds paid to the Defaulting Founder in such transaction or (iii) subject to any escrow or similar arrangement relating to such transaction with respect to an amount in excess of the net cash proceeds paid to the Defaulting Founder in such transaction.

(b)Other Remedies.

(i)Generally. Except as provided otherwise in this Agreement, the Non-Defaulting Shareholder’s election to dissolve the Company under Article 13 will not preclude its exercise of whatever rights it may also have under Article 13 or at law or in equity, However, the Non-Defaulting Founder’s election to purchase the Defaulting Founder’s Shares above under Section 12.3(a)(ii) or to conduct the sale of the Company under Section 12.3(a)(iii) is the election of an exclusive remedy.

(ii)Fees and Expenses. The Non-Defaulting Founder’s legal fees and expenses will be deducted from any distribution otherwise to be made to the Defaulting Founder and will be paid to the Non-Defaulting Founder or, if the Non-Defaulting Founder elects, will be paid by the Defaulting Founder to the Non-Defaulting Founder.

(c)Effect of Notice. If the Non-Defaulting Founder elects in its Default Notice the remedy in Section 12.3(a)(i), it will carry out that dissolution in accordance with Article 13. If the Non-Defaulting Founder elects in its Default Notice either to buy under Section 12.3(a)(ii) or to sell the Company under Section 12.3(a)(iii), the Founders will complete that purchase or sale, as applicable, in accordance with Article 14.

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12.4        Remedies if Both Founders are Defaulting Founders. If both Founders are, or become, Defaulting Founders, simultaneously or sequentially, before a sale of a Shareholder Interest under Section 7.3(a)(ii) or a sale of the Company pursuant to Section 12.3(a)(iii) has been completed, then notwithstanding any election previously made by a Non-Defaulting Founder or steps taken to further such election, (a) the Founders and the Directors will proceed as expeditiously as possible to dissolve the Company in accordance with Article 13 (other than Section 13.1(a)) as though such dissolution resulted from an election pursuant to Section 13.1, and (b) both Defaulting Founders will thereafter have whatever rights and remedies available to them under Article 13 and Applicable Law.

ARTICLE 13

Dissolution Procedures

13.1        Generally. Promptly after the Founders unanimously elect in writing to dissolve the Company, or upon any other event requiring dissolution or winding up of the Company:

(a)           if there is notice delivered pursuant to Section 12.3(a)(i), the Company shall be wound up in the manner set forth in this Article; or

(b)           in the case of any other event providing for or requiring dissolution, liquidation or winding up of the Company, the Board of Directors will proceed to wind up the affairs of the Company in the manner set forth in this Article.

After such notice or other event, neither Founder will be obligated to provide any additional funds that would otherwise be required by the Company except amounts owing by such Founder pursuant to this Agreement or other contractual arrangements, including under the Related Agreements.

Upon the occurrence of a Fundamental Company Failure, the Founders will dissolve the Company, and the dissolution will be effected pursuant to Section 13.1(b), unless the Founders agree in writing upon an alternative course of action within 60 days after the occurrence of the Fundamental Company Failure. A “Fundamental Company Failure” means the failure of the Founders (a) to agree upon and approve the initial Business Plan within 90 days of the Closing, (b) to secure the Real Estate to the complete professional fit-out of the Studio Facilities as set forth in the initial Business Plan within six months of the dates specified in the Business Plan and (c) to consummate the Closing within 180 days of the date of this Agreement.

13.2        Method of Sale. In the discretion of the Non-Defaulting Founder in the case of a Default Event, or the Board of Directors in the case of any other event requiring the sale of the Company, if the Company has generated revenue from the Company Business, then the Board of Directors or the Non-Defaulting Founder, as the case may be, may retain a nationally recognized independent business broker and will cause the business of the Company to be listed for sale as a going concern. If either (a) an offer reasonably acceptable to the Board of Directors or the Non-Defaulting Founder, as applicable, has not been received within 120 days of listing the Company for sale or (b) if the Company has not generated revenue from the Company Business (in the discretion of the Board of Directors or the Non-Defaulting Founder, as applicable), then the

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assets of the Company will be sold in the manner determined by the Board of Directors or the Non- Defaulting Founder, as applicable, whether in whole or in part. The Board of Directors or the Non-Defaulting Founder, as the case may be, will liquidate the Company’s assets and discharge the liabilities of the Company over a reasonable time in order to minimize the losses that may otherwise result from an immediate liquidation.

13.3        Application of Proceeds of Liquidation. The proceeds of the liquidation of the Company will be applied in the following order:

(a)           first, to the payment of the expenses of liquidation;

(b)           second, to the payment of the liabilities and obligations of the Company, other than those owing to a Shareholder;

(c)           third, to the payment of liabilities and obligations owing to the Founders under any Shareholder Loan; and

(d)           thereafter to the Shareholders on a pro rata basis in accordance with their Shareholder Interests.

Distribution required by this Section 13.3 may be made in cash or, if approved by the Board of Directors, in non-cash property either (i) on a pro rata basis to each Shareholder or (ii) as the Shareholders may otherwise agree.

ARTICLE 14

Buy-Sell upon Default

14.1        Generally. This Article applies if a Non-Defaulting Founder has elected the provisions of Section 12.3(a)(ii).

14.2        Price.

(a)           The purchase price for a Defaulting Shareholder’s Shares pursuant to a termination notice under Section 12.3(a)(ii) will be equal to 70% of the Fair Market Value of the Defaulting Shareholder’s Shares. If there is a default described in Section 7.2, then the Non-Defaulting Shareholder will suffer damages as a consequence of the default and the difference between the purchase price and the Fair Market Value of the Defaulting Founder’s Shares will be regarded for all purposes as liquidated damages and not as a penalty.

14.3        Fair Market Value.

(a)           The fair market value (the “Fair Market Value”) of any Shares as of a determination date shall be the product of (x) the fair market value of the Company and (y) the Shareholder Interest represented by such Shares.

(b)           The Fair Market Value shall be determined in the following manner:

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(i)            During the 30 days following the date on which a Founder exercises its right to buy or sell any Shares pursuant to Section 12.3(a)(ii) (for the purposes of this Section, the “Initiation Date”), the Founders shall attempt in good faith to agree on the Fair Market Value of such Shares. Any such agreed value shall constitute the Fair Market Value of such Shares as of such date for purposes of Section 12.3(a)(ii).

(ii)           If the Founders shall not have agreed upon such Fair Market Value on or before the 30th day following the Initiation Date, then the Founders shall promptly engage an independent appraiser with internationally recognized valuation expertise in industry sectors relevant to the Company Business and that has not had any business dealings with any Founder or its Affiliates in the two years prior to appointment (a “Qualified Firm”) to determine the Fair Market Value. The Qualified Firm that is mutually appointed by such Founders is referred to as the “Independent Appraiser”. The Founders shall promptly cause to be furnished to the Independent Appraiser such information concerning the Company (“Financial Information”) as the Independent Appraiser may reasonably request. The Independent Appraiser shall be instructed by each Founder to use its commercially reasonable efforts to render its determination of such Fair Market Value within 30 days following receipt of such Financial Information as the Independent Appraiser deems reasonably necessary. Such determination shall constitute the Fair Market Value for purposes of this Agreement. The fees and expenses of the Independent Appraiser shall be borne equally by the Founders.

(iii)          If the Founders shall not have agreed on an Independent Appraiser within 60 days following the Initiation Date, either Founder may request the Hong Kong International Arbitration Association (the “HKIAC”) to select a Qualified Firm (the “Outside Appraiser”), which selection shall be binding. The Founders shall promptly cause to be furnished to the Outside Appraiser such Financial Information as the Outside Appraiser may reasonably request. The Founders shall instruct the Outside Appraiser to use commercially reasonable efforts to render its determination of Fair Market Value within 30 days of receipt of such Financial Information. Such determination shall constitute the Fair Market Value for purposes of this Agreement. The fees and expenses of the Outside Appraiser shall be borne equally by the Founders.

14.4        Default Buy-Sell Closing. The closing (the “Default Buy-Sell Closing”) of the purchase and sale of the Defaulting Founder’s Shareholder Interest in connection with a Default Event will take place on the 60th day following the date on which the Parties are given notice that the Fair Market Value has been determined in accordance with this Article 9, or, if that day is not a Business Day, on the next following Business Day (the “Default Buy-Sell Closing Date”). The Default Buy-Sell Closing Date will be extended to the extent necessary for either Founder or any purchasing third party, as the case may be, to secure any required Governmental Authorization to a date five Business Days following the receipt of such Governmental Authorization so long as the Founder and, if applicable, such third party are using their respective commercially reasonable efforts to pursue such Governmental Authorization. The Default Buy-Sell Closing will take place at such time and place as the Company and the Founders shall agree.

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ARTICLE 15

Reporting and Accounting Provisions

15.1        Books and Records. The Company will make and keep books, records and accounts that, in reasonable detail, accurately and fairly reflect in all material respects the assets, liabilities and operations of the Company. The Company will also maintain a system of internal accounting controls that complies with Applicable Law and that will provide assurance that:

(a)           transactions are executed in accordance with the Board of Director’s general or specific authorization;

(b)           transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with both US GAAP and PRC GAAP, and (ii) to maintain accountability for assets;

(c)           access to assets is permitted only in accordance with management’s general or specific authorization; and

(d)           the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

15.2        Distribution of Financial Statements and Other Reports. The Company will distribute to each Founder:

(a)           Monthly Information. To the extent not provided to a Founder through its participation on the Board of Directors, upon a Founder’s request, internally generated balance sheet and income and cash flow statements of the Company showing the Company’s financial position, results of operations, cash flows and other reasonably relevant financial information necessary to an understanding of the Company’s financial operations from the prior month.

(b)           Quarterly Information. As soon as practical after the end of each of the first three quarterly periods and in any event within 30 days after the end of each period, a balance sheet as of the end of the period and statements of income and cash flow, both for the period and for the year to date, that will be certified by the Treasurer as fairly presenting in all material respects the Company’s financial position as of that date and the results of its operations for those periods in accordance with both US GAAP and PRC GAAP (subject to normal year-end adjustments and the furnishing of notes; provided, however, that notes will be furnished to the extent necessary to make the statements not misleading);

(c)           Annual Information. As soon as practical after the end of the Fiscal Year and in any event within 90 days thereafter:

(i)            a balance sheet as of the year-end and statements of income and cash flow, both for the fourth quarter and for the year; and

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(ii)           the Company’s tax return, which will be reviewed by its independent certified public accountants, and, to the extent practicable, information reasonably required to permit each Founder to prepare its tax return.

The year-end balance sheet and the statements for the year will be examined in accordance with generally accepted auditing standards by the Company’s independent certified public accountants, who will render their opinion on whether those statements fairly present in all material respects the Company’s financial position as of that date and the results of its operations for those periods in accordance with both US GAAP and PRC GAAP.

15.3        Right of Inspection and Examination. At all reasonable times, each Founders, through its representatives, has the right to inspect and copy the records of the Company and to examine the employees of the Company with regard to its activities. These rights may be exercised through any agent or employee of the Founders designated by notice to the Board. The inspecting Founder will bear all expenses incurred in the inspection or examination.

15.4        Auditors. The auditors of the Company shall be determined and appointed by the Board of Directors.

ARTICLE 16

Indemnification

16.1        Survival; Other.

(a)           Survival. Each representation, warranty, covenant and agreement in this Agreement, and in any certificate or document delivered pursuant to this Agreement, survives the Applicable Closing only (i) for the time period specified in Section 16.5 and (ii) as to claims made within those time periods, until resolved. “Applicable Closing” means, as applicable, the Closing and each subsequent transfer of property pursuant to Section 8.2. The representations and warranties of a Party shall not be affected or deemed waived by reason of any investigation made by or on behalf of the other Party or by reason of the fact that the other Party knew or should have (mown that any such representation or warranty is or might be inaccurate.

(b)           Relation to Default Provisions. Except as set forth in Section 12.3(b), the fact that a Party has an indemnification right under this Article 16 will not preclude the exercise of rights under Article 12.

16.2        Indemnification-By GH.  GH will indemnify and hold harmless and pay promptly to D2 and its Affiliates and also their respective representatives and stockholders (collectively, the “D2 Indemnified Persons”) the amount of any Damages (as defined below) arising from or in connection with:

(i)            Breach of Representations or Warranties. Any breach of any representation or warranty in this Agreement or in any certificate delivered pursuant to this Agreement made by GH in connection with an Applicable Closing; and

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(ii)           Breach of Covenants. Any breach by GH in the performance of its covenants or obligations in this Agreement or in any certificate or document delivered pursuant to this Agreement in connection with an Applicable Closing.

“Damages” means [a] any loss, whether in the nature of a cost, damage, expense, payment, diminution in value, liability or obligation or otherwise, and related attorneys’, accountants’ and other professional advisors’ fees and expenses (including those as to investigation, prosecution or defense of any claim or threatened claim), whether or not involving a third-party claim, and [b] in the case of third party claims, special, incidental, consequential, punitive or any other damages.

16.3        Indemnification-By D2. D2 will indemnify and hold harmless and pay promptly to GH and its Affiliates and also their respective representatives and shareholders (collectively, the “GH Indemnified Persons”) the amount of any Damages arising from or in connection with:

(i)            Breach of Representations or Warranties. Any breach of any representation or warranty in this Agreement or in any certificate delivered pursuant to this Agreement made by D2 in connection with an Applicable Closing; and

(ii)           Breach of Covenants. Any breach by D2 in the performance of its covenants or obligations in this Agreement or in any certificate or document delivered pursuant to this Agreement in connection with an Applicable Closing.

16.4        Deduction from Indemnification Amount. GH will not have any liability for indemnification with respect to the matters described in Section 16.2(i) and D2 will not have any liability with respect to the matters described in Section 16.3(i) until the total of all such Damages with respect to the matters for which the Shareholder is otherwise liable exceeds $50,000; provided, however once such threshold is met; the applicable Shareholder shall be liable for the total amount of such Damages. The foregoing limitation will not apply to (a) fraud or (b) any willful breach by a Shareholder of any of its representations or warranties.

16.5        Time Limitations. No Founder will have any liability for indemnification under this Article 16 unless the Person claiming the right to be indemnified gives notice to the Founder from whom indemnification is being sought of facts that it in good faith thinks constitute a reasonable basis for indemnification:

(a)           Taxes and Intellectual Property. In the case of claims involving Taxes or the D2 Intellectual Property Assets, within 30 days after the expiration of the statute of limitation (including extensions of it) applicable thereto; and

(b)           Other. In the case of claims involving any other representation or warranty or covenant to be performed and complied with at or before the Applicable Closing, on or before the third anniversary of the Applicable Closing.

Notwithstanding the foregoing, no limitations as to the time for making claims applies to those involving any covenant to be performed and complied with after the Applicable Closing.

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16.6        Procedure for Indemnification-Third Party Claims.

(a)           Notice. Promptly, and in any event no later than 10 Business Days after receipt by a Person entitled to indemnification of notice of the commencement of any Proceeding against it, the indemnified Person will, if a claim is to be made against an indemnifying Shareholder, give notice to the indemnifying Founder of the commencement of the claim; provided, however, that the failure to notify the indemnifying Founder will not relieve the indemnifying Founder of any liability that it may have to any indemnified Person, except to the extent that the indemnifying Founder demonstrates that the defense of the Proceeding is materially prejudiced by the indemnified Person’s failure to give the notice timely.

(b)           Participation. If any Proceeding referred to in Section 16.6(a) is brought against an indemnified Person and the indemnified Person gives notice to the indemnifying Founder of the commencement of the Proceeding, the indemnifying Founder may (i) participate in the Proceeding and (ii) elect by notice to the indemnified Person to assume the defense of the Proceeding with lawyers reasonably satisfactory to the indemnified Person unless the indemnifying Founder is also a party to the Proceeding and the indemnified Person determines in good faith that joint representation would be inappropriate. If the indemnifying Founder assumes the defense of the Proceeding, [i] the indemnifying Founder will not, as long as it diligently conducts the defense, be liable to the indemnified Person under this Section for any fees of other lawyers or any other expenses with respect to the defense of the Proceeding subsequently incurred by the indemnified Person in connection with the defense of the Proceeding, other than reasonable costs of investigation and [ii] no compromise or settlement of the claims may be effected by the indemnifying Founder without the indemnified Person’s written consent (which consent will not be unreasonably withheld or delayed) unless the proposed compromise or settlement involves only the payment of money damages and does not impose an injunction or other equitable relief upon the indemnified Person.

(c)           Right of Indemnified Person to Defend. Notwithstanding the foregoing, if an indemnified Person determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its Affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified Person may, by notice to the indemnifying Founder, assume the exclusive right to defend, compromise, or settle the Proceeding, but the indemnifying Founder will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which will not be unreasonably withheld or delayed).

16.7        Procedures for Indemnification-Other Claims. A claim for indemnification for any matter not involving a third-party claim will be asserted by notice to the Founder from whom indemnification is sought promptly after becoming aware of the acts or omissions or facts and circumstances on which the claim is based, but the failure to notify the indemnifying Founder will not relieve the indemnifying Founder of any liability that it may have to any indemnified Person, except to the extent that the indemnifying Founder demonstrates that it is materially prejudiced by the failure.

16.8        Satisfaction of Indemnification Obligations.  Subject to the procedure set forth above and in accordance with the deadlines specified in the preceding subsections, an indemnifying Founder will satisfy its liability to a D2 Indemnified Person or to a GH Indemnified Person (as applicable) for indemnified Damages by paying the amount of the

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liability to the applicable Person. Payments pursuant to the foregoing will be by wire transfer of immediately available funds.

16.9        Exclusiveness of Remedies. Except (a) as provided in Sections 12.3(b) and 16.1(b) and (b) for claims relating to fraud or willful misconduct, the remedies provided in this Article constitute the sole and exclusive remedies available to the D2 Indemnified Persons and the GH Indemnified Persons with respect to matters covered in Sections 16.2 and 16.3. Neither the foregoing nor anything else in this Agreement will limit the right of a Shareholder or the Company to enforce the performance of this Agreement or of any Contract, document or other instrument executed and delivered pursuant to this Agreement by any remedy available to it in equity, including specific performance. The Shareholders waive any requirement that the Person seeking equitable relief post a bond or other security.

ARTICLE 17

Competition

17.1        D2.  D2 agrees that GH will be the exclusive partner (and joint venturer) of D2 for all VFX-related services, including, without limitation, the D2 VFX Business and the Company VFX Business, that D2 performs in the Territory; provided, however, for the avoidance of doubt, nothing herein shall prevent or prohibit D2 from operating in the ordinary course of its business in the Territory with respect to its businesses other than VFX-related services. D2 will not, and will take all actions necessary to ensure that its Affiliates will not, enter into another joint venture arrangement with any other Person for the purpose of engaging in a business that is engaged in Competition with the Company VFX Business within the Territory, or engage in a business that is in Competition with the Company VFX Business within the Territory, provided nothing herein shall exclude any passive investment of not more than 1% of the outstanding voting securities of any Person that is publicly traded on any securities exchange or national market system.  Notwithstanding any term to the contrary in this Agreement or any Related Agreement, D2 and/or any of its Affiliates will have the unfettered right to conduct any and all business (other than the D2 VFX Business) in any location worldwide (including within the Territory), including, without limitation, business in the fields of education, software, and film development, production and distribution.

17.2        GH.  GH agrees that D2 will be the exclusive partner (and joint venturer) of GH for all VFX-related services, including, without limitation, the D2 VFX Business and the Company VFX Business, that GH performs in the Territory; provided, however, for the avoidance of doubt, nothing herein shall prevent or prohibit GH from operating in the ordinary course of its business in the Territory with respect to its businesses other than VFX-related services, including, without limitation, the provision of financing and co-production and distribution services in the Territory with respect to motion pictures, television, advertisements and other media and programming which may contain work product of third parties in Competition with the Company and D2. GH will not, and will take all actions necessary to ensure that its Affiliates will not, enter into any business and/or enter into another joint venture arrangement with any other Person for the purpose of providing assets, products, services or engage in a business, that is engaged in Competition with the Company VFX Business in any

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location, worldwide, including within the Territory, provided nothing herein shall exclude any passive investment of not more than 1% of the outstanding voting securities of any Person that is publicly traded on any securities exchange or national market system.  In addition, GH agrees that it will use commercially reasonable efforts to direct all opportunities that would be of the type the Company would potentially exploit or otherwise potentially perform (with respect to the Company Business) in the Territory to the Company and no other Person; provided, however, for the avoidance of doubt, nothing herein shall prevent or prohibit GH from operating in the ordinary course of its business in the Territory with respect to its businesses other than VFX-related services, including, without limitation, the provision of financing and co-production and distribution services in the Territory with respect to motion pictures, television, advertisements and other media and programming which may contain work product of third parties in Competition with the Company and D2.

17.3        Competition. For purposes of this Agreement, “Competition” by a Person with respect to another Person, shall mean such first Person’s (i) engaging in, or otherwise, directly or indirectly, being employed by; or (ii) acting, directly or indirectly, formally or informally, as a consultant or lender to; or (iii) being a director, officer, employee, principal or agent of; or (iv) owning any equity interests of; or (v) permitting such first Person’s name to be used in connection with the activities of; or (vi) obtaining any benefit, monetary or otherwise, direct or indirect, at or about the time of such occurrence from; or (vii) receiving any promise, agreement, arrangement or understanding to receive any benefit, monetary or otherwise, direct or indirect, at any time in the future, from; any other business or organization which competes or intends to compete, directly or indirectly, with the business of the second Person, at any time during the term of this Agreement; provided nothing herein shall exclude any passive investment of not more than 1% of the outstanding voting securities of any Person that is publicly traded on any internationally recognized securities exchange or market system.

17.4        Independent Agreements.  The agreements set forth in this Article 17 are, will be deemed, and will be construed as separate and independent agreements. If any agreement or any part of the agreements is held invalid, void or unenforceable by any court of competent jurisdiction, then such invalidity, voidness or unenforceability will in no way render invalid, void or unenforceable any other part of the agreements; and this Article 17 and any other provision of this Agreement relating to Competition will in that case be construed as if the void, invalid or unenforceable provisions were omitted.

17.5        Scope of Restrictions. While the restrictions contained in this Article or any other provision of this Agreement relating to Competition are considered by the Founders to be reasonable in all the circumstances, it is recognized that restrictions of the nature in question may not be enforced as written by a court or arbitrator. Accordingly, if any of those restrictions are determined to be void as going beyond what is reasonable in all the circumstances for the protection of the interest of the Founders, but would be valid if restrictive periods were reduced or if the range of activities or area dealt with were reduced in scope, then the periods, activities or area will apply with the modifications as are necessary to make them enforceable.

17.6        Specific Performance. The Founders acknowledge that there may be no adequate remedy at law for a breach of this Article 17 or any other provision of this Agreement relating to Competition and that money damages may not be an appropriate remedy for breach of such

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Article or provisions. The Founders accordingly agree that either Founder shall have the right to injunctive relief and specific performance of this Article 17 or any other provision in this Agreement relating to Competition in the event of any breach of such Article or provision in addition to any rights it may have for damages, which shall include out-of-pocket expenses, loss of business opportunities and any other damages, direct or indirect, consequential, punitive or otherwise. The remedies set forth in this Section 17.6 are cumulative and shall in no way limit any other remedy any Founder may have at law, in equity or otherwise.

ARTICLE 18

Confidentiality

18.1        Confidentiality-This Agreement.  Except as otherwise expressly permitted by this Article 18 or by Applicable Law, each Shareholder and the Company will keep confidential, will not disclose and will otherwise retain in strictest confidence the terms of this Agreement, except as may otherwise be approved in writing by both Shareholders.

18.2        Confidentiality-Company Information.  Except as otherwise expressly permitted by this Article 18:

(a)           Obligations of the Shareholders.  Each Shareholder will keep confidential, will not disclose, will not use, and will otherwise retain in strictest confidence the Company Information. Without limiting the foregoing, each Shareholder will use no less than the same degree of care, and no less than a reasonable degree of care, to protect the Company Information as it uses to protect its own trade secrets and confidential information.

(b)           Obligations of the Company. The Company will keep confidential, will not disclose, and will otherwise retain in strictest confidence the Company Information. The foregoing permits the Company to use the Company Information, but the Company will adopt procedures in connection with its use of Company Information that are reasonably expected to prevent that information from becoming publicly available. The foregoing does not limit the Company’s obligations otherwise set forth in this Article 18, including those in Sections 18.5 and 18.6.

18.3        Definitions-Company Information and Other.

(a)           Company Information. “Company Information” means all information (whether written, oral or in another form) that consists of, or includes, the Company Trade Secrets or Confidential Information.

(b)           Trade Secrets. “Company Trade Secrets” means trade secrets under applicable trade secret or other law concerning the Company; and includes, however documented, concepts, ideas, designs, know-how, methods, data, processes, formulae, compositions, improvements, inventions, discoveries, product specifications, past, current and planned research and development and manufacturing or distribution methods and processes, lists of actual or potential customers or suppliers, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object

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code and source code), computer software and database technologies, systems, structures and architectures, and any other information that is a trade secret within the meaning of Applicable Law.

(c)           Confidential Information. “Confidential Information” means written or other information concerning the Company, other than trade secrets, not generally known to the public; and, to the extent consistent with the foregoing definition, includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, and any information that is marked “confidential” or in some comparable manner.

18.4         Certain Exceptions. The prohibitions in Sections 18.1 and 18.2 will not apply only to the extent that:

(a)           Previously in Possession. The disclosing Person (i) demonstrates through written records that the same Company Information was in its possession before disclosure to it (other than pursuant to the Mutual Non-Disclosure Agreement dated as of March [    ], 2011 between the Founders, in which case such the restrictions set forth in such agreement shall apply to such information) and (ii) the disclosing Person provided the Company and each Founder with written notice of prior possession promptly upon its becoming aware of the Company Information;

(b)           Becomes Public. The disclosing Person demonstrates (i) that the same information is currently publicly available or has become publicly available and (ii) that such public availability does not result from [a] the misappropriation or improper disclosure of such Company Information by the disclosing Person or [b] the obtaining of such Company Information by improper means of the disclosing Person;

(c)           Independently Developed. The disclosing Person demonstrates that the same information was developed independently by the disclosing Person without the use of the Company Information;

(d)           Legal Obligation to Disclose. The disclosing Person demonstrates that Applicable Law requires it to disclose the Company Information, but then only (i) to the extent disclosure is required and (ii) after giving the Company and each Founder notice of the obligation so that it may seek a protective order or other similar or appropriate relief. In the absence of an order or relief, the disclosing Person must use commercially reasonable efforts to have the disclosed information treated confidentially consistent with this Article;

(e)           Enforcement of Agreement. The disclosing Person demonstrates that it is reasonably necessary for the disclosing Person to make the disclosure to enforce this Agreement, and then only if the disclosing Person undertakes in good faith to limit the manner and extent of that disclosure to the extent practical including obtaining protective orders from the court or arbitrator from whom enforcement is sought;

(f)            Stock Exchange Rules and Securities Laws.  The disclosing Person demonstrates that disclosure is, in the written opinion of lawyers to the disclosing Person, necessary or desirable in order to comply with applicable stock exchange rules or federal or state

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securities laws, in which case the disclosing Person shall provide the each Founder with written notice of such required disclosure (and an opportunity to comment thereon) as far in advance of such disclosure as is reasonably practicable; or

(g)           Sale of Shareholder Interest.  Disclosure is made by a Shareholder or the Company in connection with the sale, transfer or other disposition, in whole or in part, of Shares or the assets of the Company in accordance with this Agreement (but then only if disclosure is subject to a non-disclosure agreement then customary in such transactions and as to which the Company, the other Shareholder and each of its Affiliates is a third party beneficiary).

18.5         Permitted Disclosure to Representatives. Notwithstanding the prohibitions of this Article, each Shareholder and the Company may disclose the terms of this Agreement and Company Information to its Representatives directly involved with the Company but:

(a)           only to the extent necessary for the Representative to accomplish his assigned tasks and otherwise strictly on a need to know basis; and

(b)           only if the Representative is advised in writing by the disclosing Person [a] that he or she is obligated to keep confidential, not disclose and retain in strictest confidence the Company Information and [b] that the Company or any Shareholder may directly enforce the obligation. Each disclosing Person will be responsible for violations of this Article by its Representatives regardless of whether the Company or any Shareholder has rights against the Representative. “Representatives” means a Person’s directors, officers, employees, agents, consultants, advisors or other representatives, including lawyers, accountants and financial advisors. In the case of a Shareholder, “Representatives” includes the Representatives of that Shareholder’s Affiliates.

18.6         Disclosure to Non-Representatives. Any disclosure of the terms of this Agreement or any Company Information may be made to a non-Representative only if the receiving Person executes and delivers a confidentiality agreement in form and substance approved by the Board of Directors.

18.7         Continuing Protection of Trade Secrets. Any Company Trade Secrets will also be entitled to all of the protections and benefits under Applicable Law. If a court of competent jurisdiction determines that any Company Information that the Company deems to be a Company Trade Secret is not a Trade Secret, or ceases to be a Trade Secret under Applicable Law, then the Company Information will be considered Confidential Information for purposes of this Article.

18.8         Remedies. Each Shareholder recognizes that the activities proscribed by this Article will result in irreparable damage and harm to the Company and the Shareholders and that the Company and Shareholders and their Affiliates may be without an adequate remedy at law in the event of any such activities. Therefore, if any of the foregoing Sections of this Article is breached or is threatened to be breached, the Company, each Shareholder, and each of their Affiliates may (a) obtain specific performance; (b) enjoin any Person that has breached or threatens to breach from engaging in any activity proscribed by this Article; and (c) pursue any one or more of the foregoing or any other remedy available to it under Applicable Law,

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including actual and/or punitive damages and set-off rights. A Person seeking or obtaining any such relief will not be deemed to be precluded from obtaining any other relief to which that Person may be entitled. Each Shareholder waives on behalf of itself and each of its Affiliates any requirement that a Person seeking to enforce this Article submit proof of the economic value of any Trade Secret or post any bond or other security in connection therewith.

18.9         Attorney-Client Privilege. To the extent that any Company Information includes materials subject to the attorney-client privilege, the Company is not waiving and will not be deemed to have waived or diminished its attorney work-product protections, attorney-client privileges or similar protections and privileges as a result of disclosing any Company Information (including Company Information related to pending or threatened litigation) to a Shareholder, whether or not the Company has asserted, or is or may be entitled to assert, those privileges and protections. The Company and the Shareholders: (a) share a common legal and commercial interest in all such Company Information  that is subject to such privileges and protections; (b) are or may become joint defendants in Proceedings to which such Company Information covered by those protections and privileges relates; and (c) intend that those privileges and protections remain intact if the Company or any Shareholder becomes subject to any actual or threatened proceeding to which such Company Information covered by such protections and privileges relates. In furtherance of the foregoing, no Shareholder shall claim or contend, in proceedings involving the Company or any Shareholder, that the Company waived its attorney work-product protections, attorney-client privileges or similar protections and privileges as a result of disclosing any Company Information (including Company Information related to pending or threatened litigation) to the Shareholder.

18.10       Continuing Obligations. The obligations in this Article will be effective from the date of this Agreement and will bind (a) the Company indefinitely and (b) each Shareholder (i) with respect to the Company’s Confidential Information, for so long as that Shareholder is bound by the non-competition provisions of Article 17 and (ii) with respect to the Company’s Trade Secrets, for as long as the Company’s Trade Secrets remain trade secrets under Applicable Law.

18.11       No Limitation on Other Agreements. The prohibitions in this Article are in addition to, and will be interpreted as separate and independent from, any similar prohibitions in:

(a)           the D2 Asset License Agreement; and

(b)           any agreement between the Company and any of its Representatives that limits the use or disclosure of information concerning the Company.

18.12       Pre-Joint Venture Non-Disclosure Agreement. The rights and obligations of the Founders under the Mutual Non-Disclosure Agreement dated as of March [    ], 2011 between the Founders will continue in full force and effect with respect to information of either Founder that is not, and does not become, either (a) Company Information pursuant to this Article or (b) information subject to the D2 Asset License Agreement.

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ARTICLE 19

Miscellaneous

19.1         Further Assurances.

(a)           Generally. The Shareholders will (i) furnish upon request to each other further information, (ii) execute and deliver to each other documents, and (iii) do other acts and things,  all as the other Shareholder may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

(b)           Transition. In connection with and for a reasonable time following a purchase of a Shareholder’s Shares, the selling Shareholder will cooperate in connection with any reasonable requests of the Company or the other Shareholder to effect the purchase, but the selling Shareholder will be entitled to be reimbursed the actual out-of-pocket expenses it incurs in complying with the request.

19.2         Ownership.

(a)           D2 Property.  As between the parties, unless otherwise agreed to in writing by the Founders, D2 shall retain sole and exclusive ownership of any Intellectual Property conceived, developed, owned, or licensed from time to time by D2 prior to the Closing Date or independent of this Agreement (including, without limitation, all D2 Assets and D2 Intellectual Property Assets); all enhancements, modifications and derivative works thereof created or developed by any party under the Agreement (including, without limitation, in connection with the Company Business); and all Intellectual Property conceived, developed, acquired or licensed by D2 without the assistance of any one or more employees or agents of GH and without the use of GH’s Confidential Information or Intellectual Property.

(b)           GH Property.  As between the parties, unless otherwise agreed to in writing by the Founders, GH shall retain sole and exclusive ownership of any Intellectual Property conceived, developed, owned, or licensed from time to time by GH prior to the Closing Date or independent of this Agreement; all enhancements, modifications and derivative works thereof created or developed by any party under the Agreement (including, without limitation, in connection with the Company Business); and all Intellectual Property conceived, developed, acquired or licensed by GH without the assistance of any one or more employees or agents of D2 and without the use of D2’s Confidential Information or the D2 Intellectual Property Assets.

(c)           Joint Developments. The Company shall own all Intellectual Property conceived, developed, acquired or licensed by the Company in connection with the Company’s performance and operations under the Agreement, or by one party with the assistance of any one or more employees or agents of the other party or with the use of the other party’s Confidential Information or other Intellectual Property (“Joint Developments”); provided, however, that Joint Developments shall not include any enhancements, modifications or derivative works of the D2 Assets and/or D2 Intellectual Property Assets (all of which shall be owned exclusively by D2).  Upon dissolution of the Company pursuant to the terms of the Agreement, the Joint Developments shall be jointly owned by GH and D2, whereupon each of GH and D2 shall have

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an unrestricted right to use, commercialize, and exploit any such Joint Developments, without need for any notice to, consent or approval by, or accounting to the other party, including, without limitation, using, offering, selling, leasing, otherwise disposing of, importing and exporting any product or services, and reproducing, distributing, creating derivative works of, performing, and displaying any work, and otherwise exploiting the Joint Developments.  GH and D2 shall cooperate with each other in the protection and enforcement of Joint Developments.

(d)           Right to Obtain Patents and Copyrights.  If either Founder desires to pursue the issuance or registration of any Patent, Copyright or similar protections covering patentable or copyrightable subject matter included within the Joint Developments (“Joint Patent Rights”), then the other party shall cooperate reasonably in the patent, copyright or similar registration process (“Joint Prosecution”) and any resulting patents, registered copyrights or similar rights shall be issued jointly to GH and D2; provided, however, that the decision to file any application with respect to Joint Patent Rights shall be made by the Board of Directors.  With respect to each Joint Patent Right, the Founders shall cooperate in good faith to mutually agree on a party to control the Joint Prosecution of such Joint Patent Right.  The Founders shall share equally all costs associated with any Joint Prosecution efforts.  If either Founder breaches its obligation to provide reasonable cooperation, or to pay an equal share of costs, as provided in this Section, then the non-breaching party shall have the right, but the not the obligation, at the sole expense of the non-breaching party, to acquire such patents, registered copyrights or similar rights, and to prosecute and maintain such patents, registered copyrights or similar rights in its own name, without additional compensation to the breaching party, and the breaching party, at its sole expense, shall execute any documentation, or take such other actions, as are reasonably necessary to assign all of the breaching party’s rights under such patents, registered copyrights or similar rights to the non-breaching party; provided, however, that the breaching party shall retain, and the non-breaching party hereby grants to the breaching party and its affiliates, a non-exclusive, irrevocable, perpetual, worldwide, royalty-free right and license (without a right to sublicense) under the subject patents, registered copyrights or similar rights for all fields, all applications and all purposes.

(e)           Infringement.

(i)            Claims Against Third Parties.  Each Founder shall promptly inform the other Founder in writing if such informing party develops actual knowledge of any (A) applications for a patent or copyright or an issued patent or registered copyright that conflicts with the Joint Developments or (B) acts of infringement or potential infringement by any third party involving the Joint Developments, and shall promptly provide the other Founder with any evidence thereof in such informing Founder’s possession or control.  Either Founder may, in its sole discretion and without the consent of the other Founder, bring suits against an unlicensed third party or parties for infringement of any Joint Developments, after first providing the other Founder with written notice and the opportunity to participate in such suit.  If both Founders participate in such suit, then (x) each Founder shall bear an equal share of the entire expense of the suit, and (y) all monetary recoveries shall be applied first to reimburse each Founder for its reasonable out-of-pocket expenses (including but not limited to, reasonable attorneys’ fees and court costs) in prosecuting such action, and any balance shall be evenly divided by the Founders.  If one Founder declines to participate in such suit, then the Founder bringing the suit shall bear the entire expense of the suit and shall retain the entire recovery.

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(ii)           Claims by Third Parties.  In the event a suit is brought against either Founder by a third party alleging that the Joint Developments infringe any intellectual property right of such third party, the named Founder shall give the other Founder prompt notice thereof.  Each Founder shall defend itself against such third party; provided, however, that any settlement with such third party involving royalties or other payments shall require the prior written consent of both Founders.  Notwithstanding the foregoing, in the event a claim of infringement is caused by the activities of only one Founder, that Founder shall indemnify, defend and hold harmless the other Founder hereunder from any liability resulting from such infringement claim.  Subject to the foregoing, each Founder shall pay that portion of all out-of-pocket liabilities to third parties incurred by the other Founder in proportion to their relative fault in the matter.

(iii)          Cooperation.  Each Founder shall provide reasonable cooperation to the other party in connection with the legal actions described in this Section.

(iv)          Settlement.  Notwithstanding anything to the contrary in this Section, neither Founder may compromise, settle, grant a license, covenant not to sue or take any similar action in connection with a suit against or by a third party without the consent of the other Founder, which consent shall not be unreasonably withheld or delayed.

19.3         Notices.  All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by courier service, by cable, by telecopy, by telegram, by telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 19.3):

If to GH, to: Beijing Galloping Horse Film Co., Ltd. 11/F Easyhome Tower No. 3A Dongzhimen South Street Dongcheng District, P.R. China Attention: [                      ] Fax No.: with a copy to: Loeb & Loeb LLP Suite 4301, Tower C Beijing Yintai Center Chaoyang District Beijing 100022, P.R. China Attention: Frank J. Marinaro Fax No.: +1 212 646 1349

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If to D2, to: Digital Domain Media Group, Inc. 8881 South US Highway One Port St. Lucie, FL USA 34952 Attention: John C. Textor Fax No.: 772.345.8114 with a copy to: Sullivan & Triggs, LLP 1230 Montana Avenue, Suite 201 Santa Monica, California USA 90403 Attention: D. Thomas Triggs Fax No.: 310.451.8303

19.4         Jurisdiction, Service of Process. All Proceedings relating to this Agreement (whether to enforce a right or obligation or obtain a remedy or otherwise) will be brought and determined in Hong Kong under the HKIAC Administered Arbitration Rules in force when the Notice of Arbitration is submitted in accordance with such rules (the “HKIAC Rules”). The number of arbitrators shall be three. The arbitration proceedings shall be conducted in English. Each Shareholder hereby unconditionally and irrevocably consents to the jurisdiction of the HKIAC and waives its rights to bring any action or Proceeding against the other Shareholder except such tribunal; provided that if a Shareholder refuses to participate in an arbitration proceeding as required by this Agreement, the other Shareholder may petition any court having proper jurisdiction for an order directing the refusing Shareholder to participate in the arbitration proceeding. All costs and expenses incurred by the petitioning Shareholder in enforcing the terms of this paragraph will be paid by the refusing Shareholder. Each Shareholder will proceed in good faith to conclude the arbitration proceeding as quickly as reasonably possible. The arbitrators’ determination will be binding and conclusive and the arbitration award may be confirmed in any court having proper jurisdiction. Each Shareholder will bear its own costs and expenses incurred in connection with the arbitration proceeding and each Shareholder will pay one-half of the costs and expenses of the arbitration, including the fees and expenses of the arbitrators. Any payments or reimbursements required by the decision of the arbitrators will be made within 30 days following the decision. Process in any action or Proceeding referred to above may be served on any Shareholder anywhere in the world. Each Shareholder irrevocably waives any right to a jury trial with respect to any matter arising out of or in connection with this Agreement. If any Shareholder seeks to enforce its rights under this Agreement by joining another Person to a Proceeding before a jury in which the third party is a party, the Parties will request the court to try the claims between the Shareholders without submitting the matter to the jury.

19.5         Waiver. Neither the failure nor any delay by any Person in exercising any right, power or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of the right, power or privilege, and no single or partial exercise of any right, power or privilege will preclude any other or further exercise of the right, power or privilege or the exercise of any other right, power or privilege. To the extent permitted by Applicable Law: (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one Person, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other Person; (b) no waiver that may be given by a Person will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one Person will be deemed to be a waiver of any obligation of that

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Person or of the right of the Person giving the notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

19.6         Entire Agreement and Amendment. This Agreement and the Related Agreements (subject, in the case of the Pre-Joint Venture Non-Disclosure Agreement, to Section 18.12)

(a)           supersede all prior agreements between the Parties with respect to their subject matter, and

(b)           constitute a complete and exclusive statement of the terms of the agreement between the Parties with respect to their subject matter. This Agreement may not be amended except by a written agreement executed by the Founders.

19.7         Assignments, Successors. Except as expressly provided in this Agreement, no Shareholder may assign any of its rights under this Agreement without the prior consent of the other Shareholder. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon and inure to the benefit of the successors and permitted assigns of the Shareholders. The foregoing does not modify Article 11 in any respect.

19.8         No Third Party Rights. Other than the indemnification rights of Company Indemnified Persons, GH Indemnified Persons and D2 Indemnified Persons hereunder, nothing expressed or referred to in this Agreement will be construed to give any Person other than the Shareholders (and the Company) any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the Shareholders (and the Company) and their successors and assigns.

19.9         Severability. If any provision of this Agreement not essential to accomplishing its purposes is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

19.10       Expenses. Each Shareholder will bear its own expenses and any expenses it incurs on behalf of the Company incurred in connection with the negotiation, drafting, implementation and performance of this Agreement, the Related Agreements, and the transactions contemplated hereby and thereby, except as provided in Section 12.3(b)(ii); provided, however, that the Company shall reimburse each Founder for reasonable, documented legal expenses greater than $70,000 for the negotiation and closing of the transactions contemplated by this Agreement, with each Founder’s aggregate reimbursement capped at $60,000.

19.11       Governing Law. Except for the application of the HKIAC rules, as modified hereby, to dispute resolution as provided in this Agreement, this Agreement, including issues arising out of or related to this Agreement, will be governed by the laws of the State of New York (except the laws of that jurisdiction that would render such choice of law ineffective); provided, however, matters related to the application of the Companies Law to the Company and this Agreement shall be governed by the Companies Law.

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19.12       Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. Signatures delivered by facsimile or by e-mail in portable document format (“pdf”) shall be binding for all purposes hereof;

[Remainder of page intentionally left blank; signatures are on next page]

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IN WITNESS WHEREOF, the Parties below have executed this Agreement on the 30th day of March, 2012.

BEIJING GALLOPING HORSE FILM CO., LTD.
By:	/s/ Zhong Li Fang
Name:	Zhong Li Fang
Title:	Vice Chairman of Galloping Horse Media
DIGITAL DOMAIN MEDIA GROUP, INC.
By:	/s/ John C. Textor
Name:	John C. Textor
Title	Chief Executive Officer

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ATTACHMENT 1.1

DEFINITIONS AND CERTAIN RULES OF CONSTRUCTION

(a)           Definitions:

Affiliate of a Person means: (a) a director, officer, partner, Shareholder, manager, executor or trustee of a Person and (b) any Person directly or indirectly controlling, controlled by, or under common control with, that Person, provided, however, no party to this Agreement will be considered an affiliate of any other party solely by reason of its participation in the Company. For purposes of this definition, “control,” “controlling” and “controlled” mean having the right to elect a majority of the board of directors or other comparable body responsible for management and direction of a Person by contract, by virtue of share ownership or otherwise.

Aggregate Capital Commitmenthas the meaning given in Section 7.1.

Agreementhas the meaning given in the Preamble.

Applicable Lawmeans each applicable provision of any constitution, statute, law, ordinance, code, rule, regulation, decision, order, decree, judgment, award, injunction, verdict, subpoena, release, license or other legally binding pronouncement of any Governmental Body.

Board of Directorshas the meaning given in Section10.1.

Building has the meaning given in Section 5.7.

Business Daymeans any day other than Saturday, Sunday or any public or legal holiday, whether federal or state, in the place in which a duty or obligation is to be performed.

Business Disputehas the meaning given in Section 10.8(a).

Business Planhas the meaning given in Section 10.7(a).

Capital Contributionsmeans capital contributions made to the Company or the Studio in accordance with Articles 7 and 8 of this Agreement.

CEO has the meaning given in Section 10.5.

CG has the meaning given in the Recitals.

Chairmanhas the meaning given in Section 10.1.

Class A Stock has the meaning given in Section 2.1(b).

Class B Stock has the meaning given in Section 2.1(b).

Closinghas the meaning given in Section 2.4.

Closing Date has the meaning given in Section 2.4.

Companies Law has the meaning given in Section 2.1(a).

Companyhas the meaning given in the Recitals.

Company Businesshas the meaning given in the Recitals.

Company Indemnified Personhas the meaning given in Section 10.11(a).

Company Informationhas the meaning given in Section 18.3(a).

Company Trade Secrets has the meaning given in Section 18.3(b).

Competition has the meaning given in Section 17.2.

Company VFX Business has the meaning given in the Recitals.

Confidential Informationhas the meaning given in Section 18.3(c).

Contractmeans any contract, agreement, commitment, arrangement, undertaking or understanding of any kind whatsoever, together with all related amendments, modifications, supplements, waivers and consents.

Controlled Person has the meaning given in Section 11.4.

Copyrights has the meaning given in Section 4.5(a)(ii).

D2has the meaning given in the Preamble of this Agreement.

D2 Assetshas the meaning given in Section 4.5.

D2 Asset License Agreement has the meaning given in Section 5.3.

D2 Businesshas the meaning given in the Recitals.

D2 Indemnified Personhas the meaning given in Section 16.2.

D2 Intellectual Property Assetshas the meaning given in Section 4.5.

D2 VFX Business has the meaning given in the Recitals.

Damageshas the meaning given in Section 16.2.

Default Buy-Sell Closinghas the meaning given in Section 14.4.

Default Buy-Sell Closing Datehas the meaning given in Section 14.4.

Default Eventhas the meaning given in Section 12.2.

2

Default Noticehas the meaning given in Section 12.3(a).

Defaulting Founderhas the meaning given in Section 12.2.

Directorhas the meaning given in Section 10.1(a).

Dispute Noticehas the meaning given in Section 10.8(a).

Dividend Policyhas the meaning given in Section 9.1.

Dollars or “$” means United States dollars.

Encumbrancemeans any charge, claim, condition, equitable interest, lien, option, pledge, security interest, right of refusal or restriction of any kind, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership.

Fair Market Valuehas the meaning given in Section 14.3(a).

Financial Informationhas the meaning given in Section 14.3(b)(ii).

Fiscal Yearmeans the Company’s fiscal year, which shall end on December 31 of each year.

Formation Transactionsmeans all of the transactions contemplated by this Agreement, including the formation of the Company and the actions to be taken by the Founders at the Closing, including execution of this Agreement and the Related Agreements.

Founders has the meaning given in the Preamble to this Agreement.

Founder Executive has the meaning given in Section 10.8(b).

Fundamental Company Failure has the meaning given in Section 13.1.

GHhas the meaning given in the Preamble of this Agreement.

GH Indemnified Personhas the meaning given in Section 16.3.

GH Business has the meaning given in the Recitals.

GH VFX Contracts has the meaning given in Section 5.2.

GH/VFX Contribution and Assignment Agreement has the meaning given in Section 5.2.

Governmental Authorizationmeans any consent, license, permit or other authorization issued, gamed, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Applicable Law.

3

Governmental Bodymeans any governmental or quasi-governmental body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power.

HKIAC has the meaning given in Section 14.3(b)(iii).

Independent Appraiser has the meaning given in Section 14.3(b)(ii).

Initial Capital Contributions means the Initial Cash Capital Contributions and the Initial In-Kind Capital Contributions made at the Closing and set forth in Section 8.1.

Initial Cash Capital Contribution means a Capital Contribution made by a Founder in cash at the Closing and set forth in Section 8.1.

Initial In-Kind Capital Contribution means a Capital Contribution made by a Founder in-kind at the Closing and set forth in Section 8.1.

Initiation Datehas the meaning given in Section 8.2(a)(i).

Insolvency Proceedinghas the meaning given in Section 12.2(e).

Intellectual Propertyhas the meaning given in Section 4.5.

Joint Venture has the meaning given in the Recitals.

Joint Developments has the meaning given in Section 19.2(c).

Joint Patent Rights has the meaning given in Section 19.2(d).

Joint Prosecution has the meaning given in Section 19.2(d).

Knowledge means, with respect to any Person, the actual knowledge of such Person, without any duty of investigation or inquiry; and, if such Person is an entity, the actual knowledge of any of the executive officers thereof, without any duty of investigation or inquiry.

Land Use Rights has the meaning given in Section 5.6.

Levyhas the meaning given in Section 12.2(f).

License Term has the meaning given in the Section 5.3.

Licensed Rights has the meaning given in the Section 5.3.

Majorityhas the meaning given in Section 11.7(c).

Non-Contributing Founderhas the meaning given in Section 8.3(a).

Non-Defaulting Founderhas the meaning given in Section 12.2.

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Officermeans any officer of the Company appointed pursuant to Section 10.6(a).

Ordermeans any award, decision, injunction, judgment, ruling or verdict entered, issued, made or rendered by any Governmental Body or by any arbitrator.

Ordinary Course of Businessmeans an action taken by a Person only if it is consistent with the past practices of that Person and is taken in the ordinary course of the normal day-to-day operations of that Person; and, if undertaken by the Company, does not require approval by the Board of Directors or the Shareholders.

Organizational Documentsmeans: (a) the memorandum and articles of association of a company; (b) the articles or certificate of incorporation and the bylaws of a corporation or articles/certificate of organization and operating agreement/memorandum of formation of a limited liability company; (c) the partnership agreement and any statement of partnership of a general partnership; (d) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (e) any charter or similar document adopted or filed in connection with the caution, formation, or organization of a Person; and (f) any amendment to any of the foregoing.

Original Agreement has the meaning given in the Recitals.

Outside Appraiserhas the meaning given in Section 14.3(b)(iii).

Party or Partiesmeans each or all, as applicable, of the entities who have executed and delivered this Agreement, each permitted successor or assign of a party and when appropriate to effect the binding nature of this Agreement for the benefit of another party, any other successor or assign of a party.

Patentshas the meaning given in Section 4.5(a)(i).

Personmeans any person or entity of every kind and is to be construed as broadly as possible.

PRC GAAP means People’s Republic China generally accepted accounting principles and practices in effect from time to time applied consistently throughout the periods involved.

Proceedingmeans any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced by or before, or otherwise involving, any Governmental Body or arbitrator.

Professional Facilities has the meaning given in Section 5.8.

Proportionate Sharehas the meaning given in Section 11.7(c).

Qualified Firmhas the meaning given in Section 14.3(b)(ii).

Real Estate has the meaning given in Section 5.6.

5

Related Agreements means the D2 Asset License Agreement and the GH/VFX Contribution and Assignment Agreement.

Remaining Capital Commitment has the meaning given in Section 7.1.

Renewal License has the meaning given in Section 5.3.

Representativeshas the meaning given in Section 18.5(b).

Sell-Down Investor has the meaning given in Section 11.6.

Selling Shareholderhas the meaning given in Section 11.7(a).

Shareholdermeans a Person who is or becomes a Shareholder as provided in this Agreement, each permitted successor or assign of a Shareholder, and, when appropriate to effect the binding nature of this Agreement for the benefit of another party, any other successor or assign of a Shareholder.

Shareholder Interestmeans all of a Shareholder’s interest in the Company, including the Shareholder’s transferable interest and all management and other rights. The interest is generally expressed as a percentage of all interests in the Company as determined in accordance with this Agreement.

Shareholder Loanshas the meaning given in Section 8.2(b).

Shares has the meaning given in Section 2.1(b).

Solvent means, with respect to a Person, that the fair value of its assets is in excess of its liabilities, and that it is generally able to pay its debts as they are due.

Studio has the meaning given in the Recitals.

Studio Facilities has the meaning given in Section 5.8.

Studio Real Estate Lease has the meaning given in Section 5.6.

Tag-Along Founders has the meaning given in Section 11.7(c).

Taxmeans any tax or other similar charge, whether based on income, the ownership of property, the happening of an event or otherwise (including penalties, interest or additions to tax related thereto), assessed by or under the authority of any Governmental Body or payable pursuant to any Contract relating to the sharing of the payment of any such tax or charge.

Term has the meaning given in Section 2.3.

Territory means the People’s Republic of China, including Taiwan and the Special Administrative Regions of Hong Kong and Macau.

6

Third Party Intellectual Propertyhas the meaning given in Section 4.5.

Trade Secrets has the meaning given in Section 4.5.

Trademarks has the meaning given in Section 4.5.

Treasurerhas the meaning given in Section 10.6(a).

US GAAP means United States generally accepted accounting principles and practices in effect from time to time applied consistently throughout the periods involved.

VFX has the meaning given in the Recitals.

Voluntary Capital Contributions has the meaning given in Section 8.2(b).

(b)Certain Rules of Construction:

For purposes of this Agreement:

1              The phrase “breach of a representation” includes a misrepresentation and the failure of a representation to be accurate.

2.             “Including” and any other words or phrases of inclusion will not be construed as terms of limitation, so that references to “included” matters will be regarded as non-exclusive, non-characterizing illustrations.

3.             “Copy” or “copies” means that the copy or copies of the material to which it relates are true, correct and complete.

4.             When “Article,” “Section,” “Exhibit,’ or “Attachment” is capitalized in this Agreement, it refers to an article, section, exhibit or attachment to this Agreement.

5.             “Will” has the same meaning as “shall” and, thus, connotes an obligation and an imperative and not a futurity.

6.             Titles and captions of or in this Agreement, the cover sheet and table of contents of this Agreement, and language in parenthesis following section references are inserted only as a matter of convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any of its provisions.

7.             Whenever the context requires, the singular includes the plural and the plural includes the singular, and the gender of any pronoun includes the other genders.

8.             Each exhibit and schedule referred to in this Agreement and each attachment to any of them or this Agreement is hereby incorporated by reference into this Agreement and is made a part of this Agreement as if set out in full in the first place that reference is made to it.

7

9.             Any reference to any statutory provision includes each successor provision and all Applicable Laws as to that provision.

10.          Acknowledging that the Parties have participated jointly in the negotiation and drafting of this Agreement, if an ambiguity or question of intent or interpretation arises as to any aspect of this Agreement, then it will be construed as if drafted jointly by the Parties and no presumption or burden of proof will arise favoring or disfavoring any Party by virtue of the authorship of any provision of this Agreement.

8

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John C. Textor, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Digital Domain Media Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ John C. Textor

John C. Textor

Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors

May 15, 2012

1

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John M. Nichols, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Digital Domain Media Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ John M. Nichols

John M. Nichols

Chief Financial Officer (Principal Financial and Accounting Officer)

May 15, 2012

1

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Digital Domain Media Group, Inc., a Florida corporation (the “Company”), on Form 10-Q for the fiscal quarter ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John C. Textor, Chief Executive Officer of the Company, does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John C. Textor

John C. Textor

Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors

May 15, 2012

This certification accompanying this Report is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of such Section, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before, on or after the date of the Report), irrespective of any general incorporation language contained in such filing.

1

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Digital Domain Media Group, Inc., a Florida corporation (the “Company”), on Form 10-Q for the fiscal quarter ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John M. Nichols, Chief Financial Officer of the Company, does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John M. Nichols

John M. Nichols

Chief Financial Officer (Principal Financial and Accounting Officer)

May 15, 2012

This certification accompanying this Report is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of such Section, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before, on or after the date of the Report), irrespective of any general incorporation language contained in such filing.

1

XML

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

3 Months Ended

Mar. 31, 2012

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2011, the FASB issued ASU No. 2011-08, Intangibles — Goodwill and Other (‘‘ASU No. 2011-08’’). This ASU amends current guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU No. 2011-08 applies to all companies that have goodwill reported in their financial statements. The provisions of this ASU are effective for reporting periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (‘‘ASU No. 2011-05’’). This ASU improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income (‘‘OCI’’) by eliminating the option to present components of OCI as part of the statement of changes in stockholders’ equity. The amendments in ASU No. 2011-05 require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from OCI to net income, in both net income and OCI. This ASU does not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, this ASU does not affect the calculation or reporting of earnings per share. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. The adoption of this guidance is for disclosure purposes only and will not have any impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs (‘‘ASU No. 2011-04’’). This ASU amends the wording used to describe many of the requirements in US GAAP for measuring fair value and disclosing information about fair value measurements. The amendments in ASU No. 2011-04 achieve the objectives of developing common fair value measurement and disclosure requirements in US GAAP and IFRSs and improving their understandability. Some of the requirements clarify the FASB’s intent about the application of existing fair value measurement requirements while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. The adoption of this guidance is for disclosure purposes only and will not have any impact on the Company’s consolidated financial statements.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, these financial statements, including unaudited financial statements for the interim periods, contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full years. Included are the following consolidated financial statements:

·Consolidated balance sheets as of March 31, 2012 (unaudited) and December 31, 2011, and

·Consolidated statements of operations and comprehensive loss and consolidated statements of cash flows for the three months ended March 31, 2012 and 2011, (unaudited).

The accompanying consolidated financial statements include the accounts of Digital Domain Media Group, Inc., its majority-owned subsidiaries, Digital Domain, Inc. and Digital Domain Institute, Inc. (“DDI”); and its wholly-owned subsidiaries Tradition Studio, Inc., Digital Domain Stereo Group, Inc., DDH Land Holdings LLC, DDH Land Holdings II, LLC, Digital Domain International, Inc., Digital Domain Media Group FZ, LLC and Digital Domain Tactical, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements include certain reclassifications of prior period amounts in order to conform to current period presentation.

Use of Estimates — US GAAP requires management to make estimates and assumptions in the preparation of these interim consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

The most significant areas that require management judgment are fair values of consideration issued and net assets acquired in connection with business combinations; revenue and cost recognition; collectability of contracts receivable; deferred grant revenue; deferred income tax valuation allowances; amortization of long-lived assets and intangible assets; impairment of long-lived assets, intangible assets and goodwill; accrued expenses; advance payments and deferred revenue; recognition of stock-based compensation; calculation of the warrant and other debt-related liabilities; allocation of equity to non-controlling interests; debt modification accounting; and contingencies and litigation. The accounting policies for these areas are discussed in this Note and other notes to these consolidated financial statements.

Digital Imagery Revenue — The Company recognizes digital imagery revenue from fixed-price contracts, each consisting of an accepted written bid and agreed-upon payment schedule, for the development of digital imagery and image creation for the entertainment and advertising industries. Contracts to provide digital imagery are accounted for in accordance with FASB ASC Subtopic 605-35, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue recognition is initiated when persuasive evidence of an arrangement with a customer is established, which is upon entry by the Company, or Digital Domain (“DD”) and the customer into a legally enforceable agreement. In accounting for the contracts, the cost-to-cost measures of the percentage-of-completion method of accounting are utilized in accordance with FASB ASC Subtopic 605-35. Under this method, revenues, including estimated earned fees or profits, are recorded as costs are incurred. For all contracts, revenues are calculated based on the percentage of total costs incurred compared to total estimated costs at completion. Contract costs include direct materials, direct labor costs and indirect costs related to contract performance, such as indirect labor, supplies and tools. These costs are included in cost of revenues.

The customer contracts in the digital imagery business represent binding agreements to provide digital effects to the customers’ specifications. The contracts contain subjective standards applicable to the delivered digital effects and objective specifications that relate to the technical format for the digital effects delivered to customers. In all instances, the customer receives complete ownership rights in and to the digital effects as the effort progresses. In the event of a termination of a contract, ownership in the digital effects transfers to the customer, and the Company or DD as the contractor is entitled to receive reimbursement of costs incurred up to that point and a reasonable profit. The contracts contain production schedules setting forth a timeline for production and a final delivery date for the completed digital effects.

Payments for the services are received over the term of the contract, including payments required to be delivered in advance of work to fund a portion of the costs to produce the digital effects. Cash received from customers in excess of costs incurred and gross profit recognized on the related projects are recorded as advance payments. Unbilled receivables represent revenues recognized in excess of amounts billed. The digital effects produced are delivered to the customer at the end of the contract and the customer is not required to deliver the final scheduled payment until receipt and acceptance of the digital effects.

A review of uncompleted contracts is performed on an ongoing basis. Amounts representing contract change orders or claims are included in revenues only when they meet the criteria set forth in FASB ASC Subtopic 605-35. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Changes in estimates of contract sales, costs and profits are recognized in the current period based on the cumulative effect of the changes on current and prior periods. Hence, the effect of the changes on future periods of contract performance is recognized as if the revised estimates had been the original estimates. A significant change in one or more projects could have a material adverse effect on the consolidated financial position or results of operations.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company utilized the following assumptions for determination of the fair value of warrant and other-debt related liabilities as of March 31, 2012 and December 31, 2011, respectively (fair value of liabilities stated in thousands):

	Comvest			Falcon			Comvest			Protective
	Common Stock			Notes			Capital II			Put			Galloping
	Conversion			Bridge			Protective			Redeemable			Horse
	Rights			Warrants			Put			Features			Put
March 31, 2012 (unaudited)
Fair value of liability	$	15,131		$	3,914		$	6,622		$	(4,939	)	$	1,917
Term in months	51			24			51			51			9
Risk free interest rate	0.84		%	0.34		%	0.84		%	0.84		%	0.17		%
Volatility	55.25		%	38.81		%	55.25		%	55.25		%	55.18		%
Dividend rate	—			—			—			—			—
December 31, 2011
Fair value of liability	$	17,748		$	3,914		$	5,730		—			—
Term in months	54			24			54			—			—
Risk free interest rate	0.71		%	0.24		%	0.71		%	—			—
Volatility	75.93		%	39.59		%	75.93		%	—			—
Dividend rate	—			—			—			—			—

During 2010, the Company acquired two parcels of land in connection with grants from governmental entities. These parcels of land were valued on May 25, 2010 and September 27, 2010 for $10.5 million and $9.8 million, respectively. The valuations were determined using Level 3 inputs. These amounts are included in Property and equipment-net and deferred land grant revenue in the consolidated balance sheet as of March 31, 2012.  The Company moved into its new headquarters building in December 2011 where one of these parcels of land is located.  Accordingly, the Company began the recognition of the grant revenue related to this land grant in 2012.  The Company recognized $0.1 million of such grant revenue in the three months ended March 31, 2012.

As of March 31, 2012, Goodwill and intangible assets other than goodwill relate to the acquisition of Digital Domain, which occurred on October 15, 2009 and the acquisition of In-Three, which occurred on November 22, 2010. The fair value of Goodwill and intangible assets other than goodwill is subjective and based on estimates rather than precise calculations. The fair value measurement for Goodwill and intangible assets other than goodwill uses significant unobservable inputs that reflect management’s assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. A combination of valuation techniques is used, including (i) an income approach, which utilizes a discounted cash flow analysis using the Company’s weighted-average cost of capital rate, and (ii) the market approach, which compares the fair value of the subject company to similar companies that have been sold whose ownership interests are publicly traded.

The Company as of March 31, 2012 received a valuation of the earn-out liability as of that date, from an independent valuation firm, considering it a Level 3 input. Based on this valuation, the Company reduced the earn-out liability by $0.5 million. This reduction is included in selling, general and administrative expenses on the condensed consolidated statement of operations for the three months ended March 31, 2012. The inputs used by the Company in determination of the $2.6 million of earn out liability at March 31, 2012 included a term of 153 months, a risk-free interest rate of 3.0% and no dividends.

Earnings Per Share — Basic earnings per share is computed based upon the weighted-average number of shares outstanding, including nominal issuances of common share equivalents, for each period presented. Fully-diluted, earnings per share is computed based upon the weighted-average number of shares and dilutive share equivalents outstanding for each period presented. Due to the Company’s net losses for the three months ended March 31, 2012 and 2011, respectively, the inclusion of the dilutive common share equivalents listed below in the calculation of diluted earnings per share would be anti-dilutive. These common stock equivalents include stock options, warrants, convertible debt securities and rights to exchange shares of DDI’s common stock for shares of the Company’s Common Stock. Thus, the common share equivalents have been excluded from the computation of diluted earnings per share for the three months ended March 31, 2012 and 2011, respectively.

The potential dilutive securities outstanding that were excluded from the computation of diluted net loss per share for the following periods, because their inclusion would have had an anti-dilutive effect, are summarized as follows:

	Three Months Ended March 31,
	2012	2011
Stock options issued under 2010 stock plan	6,137,499	3,137,499
Investor warrants	1,012,502	1,012,502
Convertible stock of subsidiary	1,661,400	—
Convertible note payable	533,452	4,911,266
Convertible preferred stock	—	6,266,572
Placement agent and other warrants	1,889,853	3,607,537
Total	11,234,706	18,935,376

Certain dilutive share equivalents including a warrant and convertible note are dilutive in the calculation of diluted earnings per share. The effects of these dilutive share equivalents on loss per share, are summarized as follows:

	Three Months Ended
	2012			2011
	(Unaudited)
Reconciliation of diluted loss per share:
Loss before non-controlling interests	$	(15,565	)	$	(38,928	)
Adjustment for effect of as-if converted securities, net of tax:
Convertible note	(3,474		)	—
	(19,039		)	(38,928		)
Net loss attributable to non-controlling interests	733			(197		)
Net loss attributable to Common Stockholders	$	(18,306	)	$	(39,125	)
Weighted average number of common shares outstanding:
Basic	39,977,777			14,184,609
Adjustment for effect of as-if converted securities, net of tax:
Convertible note	2,861,788			—
Diluted	42,839,565			14,184,609
Diluted loss per share:
Loss before non-controlling interests	$	(0.45	)	$	(2.75	)
Net loss attributable to non-controlling interests	0.02			(0.01		)
Diluted loss per share attributable to Common Stockholders	$	(0.43	)	$	(2.76	)

Segment Reporting — Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s reportable segments are Feature Films, Commercials, and Animation. The management approach is used as the conceptual basis for identifying reportable segments and is based on the way that management organizes within the enterprise for making operating decisions, allocating resources, and monitoring performance, which is primarily based on the sources of revenue.

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 2,452	$ 29,413
Cash, held in trust - short-term	2,490	2,449
Contracts and other receivable, net	9,893	3,110
Tax credits receivable	2,365	2,365
Prepaid expenses and other assets	4,500	5,335
Total current assets	21,700	42,672
Cash, held in trust - long-term	4,153	4,233
Restricted cash	71	71
Property and equipment - net	80,626	80,141
Trade name	15,410	15,410
Unpatented technology - net	19,459	20,106
Other intangible assets - net	6,889	7,105
Goodwill	18,081	18,081
Deferred debt issuance costs - net	2,363	3,022
Film inventory	21,341	6,925
Other assets	101	75
Total assets	190,194	197,841
Current liabilities:
Accounts payable and accrued liabilities	22,316	21,474
Advance payments and deferred revenue	11,121	8,442
Deferred grant revenue from governmental agencies, short-term	2,988	2,988
Deferred land grant revenue, short-term	525	525
Government lease obligation, short-term	4,382	3,399
Short-term convertible and other notes payable - net	6,182	17,612
Warrant and other debt-related liabilities, short-term	5,831	6,462
Earn out liability, short-term	494	400
Unearned revenue, short-term	395	361
Current portion of capital lease obligations	896	763
Total current liabilities	55,130	62,426
Capital lease obligations, net of current portion	390	530
Warrant and other debt-related liabilities	16,814	20,930
Deferred grant revenue from governmental agencies	11,050	9,547
Long-term convertible and other notes payable - net	18,126	455
Deferred income tax liability	6,189	6,189
Deferred revenue land grant, net of current portion	19,644	19,775
Earn out liability, net of current portion	2,131	2,774
Government lease obligation - net	34,787	36,155
Unearned revenue, net of current portion	3,082	3,172
Other long-term liabilities	3,083
Total liabilities	170,426	161,953
Commitments and contingencies
Convertible preferred stock, $0.01 par value, 25,000,000 shares authorized at March 31, 2012 and December 31, 2011, respectively; including Preferred Stock A series 100,000 designated, no shares issued or outstanding at March 31, 2012 and December 31, 2011, respectively
Stockholders' equity:
Common stock, $0.01 par value at March 31, 2012 and December 31, 2011, respectively - 100,000,000 shares authorized, 41,553,702 and 39,515,326 shares issued, and 41,015,749 and 39,384,003 outstanding as of March 31, 2012 and December 31, 2011, respectively	406	396
Additional paid-in capital	216,553	213,651
Comprehensive income	71	34
Accumulated deficit	(198,634)	(183,802)
Treasury stock, at cost	(3,307)	(829)
Total stockholders' equity before non-controlling interests	15,089	29,450
Non-controlling interests	4,679	6,438
Total stockholders' equity	19,768	35,888
Total liabilities, preferred stock and stockholders' equity	$ 190,194	$ 197,841

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COMPANY BACKGROUND AND OVERVIEW

3 Months Ended

Mar. 31, 2012

COMPANY BACKGROUND AND OVERVIEW

COMPANY BACKGROUND AND OVERVIEW

1. COMPANY BACKGROUND AND OVERVIEW

Description of Business — Digital Domain Media Group, Inc., formerly known as Digital Domain Holdings Corporation and Wyndcrest DD Florida, Inc., a Florida corporation incorporated on January 7, 2009 (the “Inception Date”), and subsidiaries (collectively, “Digital Domain Media Group” or the “Company”)  is a digital production and animation company focused on the creation of original content animation feature films and the development of computer-generated imagery, including three-dimensional stereoscopic (“3D”) imagery, for large-scale feature films and transmedia advertising.

The common stock is listed on the New York Stock Exchange under the ticker symbol “DDMG”.

Liquidity and Capital Resources — The Company has a history of losses, including a $15.6 million and $144.2 million net loss before non-controlling interests, respectively, for the three months ended March 31, 2012 and the year ended December 31, 2011, respectively. The Company has a limited operating history, had negative working capital of $33.4 million and stockholders’ equity of $19.8 million as of March 31, 2012, and used $21.8 million to fund cash flows from operations during the three months ended March 31, 2012. For the year ended December 31, 2011, the Company used $44.4 million in cash flows from operations. The Company has worked to improve its working capital and its cash flow shortfalls through equity and debt funding and through the completion of its investment in the co-production of the feature film Ender’s Game. The Company raised gross proceeds of $19.5 million in equity capital in a private placement in February and March 2011, gross proceeds of $26.0 million in another private placement consummated in August 2011, and gross proceeds of $41.8 million in its initial public offering completed in November 2011. Furthermore, the Company invested $11.4 million in Ender’s Game during the three months ended March 31, 2012. Additionally, upon completion of the IPO, $94.0 million of convertible debt and warrant liabilities reflected on the Company’s balance sheet were automatically converted or exercised, as applicable, into the Company’s common stock.

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STOCK OPTION EXPENSE

3 Months Ended

Mar. 31, 2012

STOCK OPTION EXPENSE

STOCK OPTION EXPENSE

17. STOCK OPTION EXPENSE

The Company recognized $1.9 million and $4.4 million in stock option compensation during the three months ended March 31, 2012 and 2011, respectively.

During the three months ended March 31, 2011, the Company granted stock options to the former Chief Executive Officer of the Company’s subsidiary Digital Domain to purchase shares of the Company’s Common Stock which vested immediately resulting in a charge of $3.3 million for that period. Stock option compensation expense for other participants were $1.9 million and $1.1 million for the three months ended March 31, 2012 and 2011, respectively.

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COLLABORATIVE ARRANGEMENTS

3 Months Ended

Mar. 31, 2012

COLLABORATIVE ARRANGEMENTS

COLLABORATIVE ARRANGEMENTS

2. COLLABORATIVE ARRANGEMENTS

Joint Marketing VFX Services Agreement

On July 8, 2011 Digital Domain Productions, Inc. (“DDPI”), a wholly owned subsidiary of our subsidiary Digital Domain Inc., (“Digital Domain” or “DD”), entered into a Joint Marketing and Production VFX Services Agreement with RelianceMediaWorks Limited (“RMW”), a film and entertainment services company headquartered in Mumbai, India. The term of this agreement is three years, subject to Digital Domain Productions, Inc.’s option to extend for a fourth year. Pursuant to the terms of this agreement, RMW is responsible for creating and staffing studio facilities in both Mumbai and London, England, through which DDPI is to provide VFX services to its clients worldwide. In consideration of RMW’s obligation to provide Digital Domain Productions, Inc. with turnkey studio facilities in these two cities, DDPI has agreed, pursuant to the terms of the agreement, to guarantee to RMW specified minimum monthly levels of production revenues generated at these facilities from DDPI’s VFX projects, in the following estimated annual amounts, based on the U.S. dollar/British pound exchange rate as of March 31, 2012, as applied to those payments under the agreement denominated in British pounds: $18.0 million for the first year of the term of the agreement, $27.5 million for the second year of such term, and $27.0 million for the third year of such term.

From the inception of these agreements through March 31, 2012, the Company recognized $6.2 million in expense, including $3.5 million expensed during the three months ended March 31, 2012.  Through that date, we had paid $2.3 million to RMW and the remaining $3.9 million is included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheet.

Co-Production in Feature Film Project

On February 15, 2012, the Company entered into an Investment and Production Agreement with Ender’s Game Holdings LLC (“EGH”) and OddLot Entertainment LLC (“OLE”) effective as of April 18, 2011, to provide financing and production services to co-produce the VFX action movie Ender’s Game. Principal photography for Ender’s Game began February 27, 2012, in New Orleans. The picture has a production budget slightly in excess of $100 million and is scheduled for theatrical release in the fall of 2013. Distribution services are to be provided by Summit Entertainment. As of March 31, 2012 the Company had provided $13.6 million in financing, which is included in film inventory on the condensed consolidated balance sheet. See Note 10 for further discussion.

Digital Domain Galloping Horse Studio

On March 30, 2012, the Company entered into an Amended and Restated Formation and Joint Venture Agreement (“the Agreement”) with Beijing Galloping Horse Film Co., Ltd. (“GH”), a corporation organized under the laws of the People’s Republic of China (the “PRC”) and a shareholder of the Company. Pursuant to the Agreement, the parties have agreed to form a joint venture company for the purpose of creating, owning and operating a studio to be located in the PRC to (i) provide computer-generated animation and digital visual effects (including high-quality 3D content and conversion into 3D of existing film and TV libraries originally created in 2D) (collectively, “VFX”) services (the “VFX Business”) in the PRC, Taiwan, Hong Kong and Macau (the “Territory”) for film projects originating in the Territory, and (ii) develop a range of media and entertainment services, including, without limitation, proprietary technologies and entertainment properties, as may be agreed upon by the parties (the “China Studio”). The Company and GH are each initially to own 50% of the equity interests in the Joint Venture.

Pursuant to the Agreement, (A) GH is obligated to (i) contribute and assign to the Joint Venture certain specified VFX contracts awarded to it, (ii) provide the land for the China Studio to the Joint Venture, under a nominal cost lease, (iii) fund the construction and build-out costs for the China Studio, in an amount not to exceed $50,000,000, and (iv) provide temporary professional facilities for the use of the China Studio under a nominal cost lease to the Joint Venture; and (B) the Company is obligated to (i) grant to the Joint Venture, for the term thereof, a royalty-free site license to use only in the Territory in connection with the VFX Business of the Joint Venture the intellectual property rights of the Company and its subsidiaries relating to the VFX Business, (ii) design and supervise the build-out of the China Studio’s professional facilities, and (iii) provide, training for the professional personnel to be employed by the Joint Venture. Pursuant to the Agreement, each of the Company and GH has agreed that the other party will be its exclusive partner for all VFX-related services that it performs in the Territory, the Company has agreed not to compete with the VFX Business of the Joint Venture in the Territory, and GH has agreed not to compete with the VFX Business of the Joint Venture in any location worldwide, including the Territory.

Additionally, the Company granted to GH the contractual right to require the Company (or its designee), with respect to the period commencing October 1, 2012 (or earlier, under certain specified circumstances) and ending December 31, 2012 (the “Measurement Period”), to purchase from GH, at a price of $8.50 per share (subject to adjustment in the event of stock splits, reverse stock splits and similar corporate events) (the “Exercise Price”), all or any portion of the 588,236 shares of the Company’s common stock currently owned by GH that are owned by GH on the date that it exercises this contractual right; provided, that, and only if, the rolling 15-day average closing price of such common stock on the New York Stock Exchange is less than the Exercise Price at any time during the Measurement Period, and subject to GH’s delivery of a valid exercise notice in writing to the Company on or before January 10, 2013.

As of March 31, 2012, the Company included $5.0 million in contracts and other receivables, $1.9 in warrant and other debt-related liabilities and $3.1 million in other long-term liabilities on the condensed consolidated balance sheet related to this transaction.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Convertible preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Convertible preferred stock, shares authorized	25,000,000	25,000,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	41,553,702	39,515,326
Common stock, shares outstanding	41,015,749	39,384,003
Series A Preferred Stock
Convertible preferred stock, shares authorized	100,000	100,000
Convertible preferred stock, shares issued	0	0
Convertible preferred stock, shares outstanding	0	0

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INCOME TAXES

3 Months Ended

Mar. 31, 2012

INCOME TAXES

INCOME TAXES

12. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and for income tax purposes. A deferred income tax asset is recognized if realization of such asset is more likely than not, based upon the weight of available evidence which includes historical operating performance and the Company’s forecast of future operating performance. The Company evaluates the realizability of its deferred income tax assets and a valuation allowance is provided, as necessary. During this evaluation, the Company reviews its forecasts of income in conjunction with the positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is needed.

The Company recognized income tax expense of $ nil and $0.3 million for the three months ended March 31, 2012 and 2011, respectively for foreign income taxes based on the then expected effective income tax rate.  No federal, state and local tax benefit was recorded during the three month periods ended March 31, 2012 and 2011, respectively, for the Company’s pretax loss, because the future realizability of such benefits was not considered to be more likely than not.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 10, 2012
Document and Entity Information
Entity Registrant Name	Digital Domain Media Group, Inc.
Entity Central Index Key	0001490930
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		41,677,149
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1

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NOTES PAYABLE AND RELATED FINANCING TRANSACTIONS

3 Months Ended

Mar. 31, 2012

NOTES PAYABLE AND RELATED FINANCING TRANSACTIONS

NOTES PAYABLE AND RELATED FINANCING TRANSACTIONS

13. NOTES PAYABLE AND RELATED FINANCING TRANSACTIONS

Summaries of convertible and other notes payable as of March 31, 2012 (unaudited) and December 31, 2011 are as follows (in thousands):

	March 31, 2012 (Unaudited)
	Comvest			Comvest			Comvest			Other
	Convertible			Lender			Revolver			Notes			Net
	Note Payable			Note Payable			Payable			Payable			Debt
Face amount	$	8,134		$	12,000		$	7,438		$	3,000		$	30,572
Unamortized discount	(4,937		)	(830		)	(497		)	—			(6,264		)
Net debt	3,197			11,170			6,941			3,000			24,308
Less current portion	(938		)	(1,386		)	(858		)	(3,000		)	(6,182		)
Long-term portion	$	2,259		$	9,784		$	6,083		$	—		$	18,126

	December 31, 2011
	Comvest			Comvest			Comvest
	Convertible			Lender			Revolver			Net
	Note Payable			Note Payable			Note Payable			Debt
Face amount	$	8,000		$	12,000		$	7,400		$	27,400
Unamortized discount	(7,545		)	(1,120		)	(668		)	(9,333		)
Net debt	455			10,880			6,732			18,067
Less current portion	—			(10,880		)	(6,732		)	(17,612		)
Long-term portion	$	455		$	—		$	—		$	455

Principal maturities of debt at March 31, 2012 (unaudited) are as follows (in thousands):

Remaining 2012	$	4,273
2013	7,636
2014	7,636
2015	7,636
2016	3,391
Total face amount	30,572
Less amounts representing debt discount	(6,264		)
Net debt	$	24,308

The changes in net debt for the three months ended March 31, 2012 (unaudited) and the year ended December 31, 2011 are as follows (in thousands):

	Comvest			Comvest			Comvest			Other
	Convertible			Lender			Revolver			Notes		Total
	Note Payable			Note Payable			Note Payable			Payable		Net Debt
Net debt, December 31, 2011	$	455		$	10,880		$	6,732		$	—	$	18,067
New borrowings	—			—			—			3,000		3,000
Recognition of discounts and deferred issue costs	(44		)	(65		)	(41		)	—		(150		)
Amortization of discounts and deferred issue costs	272			355			213			—		840
Capitalized interest	134			—			37			—		171
Debt restructuring	2,380			—			—			—		2,380
Net debt, March 31, 2012 (unaudited)	$	3,197		$	11,170		$	6,941		$	3,000	$	24,308

Interest and Financing Expense (Credit)— The components of interest expense (credit) for the three months ended March 31, 2012 and 2011 are as follows (unaudited, in thousands):

	Three Months Ended March 31,
	2012			2011
Changes in fair value of warrant and other debt-related liabilities	$	(4,284	)	$	28,965
Amortization of discount and issuance costs on notes payable	1,599			3,013
Interest expense on notes payable	670			502
Interest expense on capital and governmental lease obligations	670			318
Net interest expense (credit)	$	(1,345	)	$	32,798

Debt transactions in the three months ended March 31, 2012 — On February 23, 2012, the convertible note with Comvest was restructured.  This restructuring included amending a protective put right of Comvest (see Note 14) from $4.50 per share to $6.00 per share.  Additionally, certain loan covenants were amended or removed and Comvest forgave certain penalty interest payments due Comvest for breaches of loan covenants.  Among these, the Company’s minimum EBITDA covenant, as defined, was removed and a minimum cash covenant was instituted.  The Company also received a redemption feature to allow the Company to redeem 50% of the post-conversion shares of the convertible note at the purchase price of $6.00 per share prior to the expiration of the protective put.  The effect of this restructuring was to increase the carrying value of the Comvest convertible note by $2.4 million and decrease warrant liabilities by the same amount.  The increase to the carrying value of the convertible note is being amortized over the remaining life of the loan using the effective interest rate method.  The convertible note was exchanged for a subordinated convertible note on May 7, 2012, as discussed later in this section.

On March 19, 2012, the Company borrowed $3.0 million from Legend Pictures Funding, LLC (“Legend Pictures”).  This note bears simple interest at a rate of 8% per annum.  The maturity date of this note is July 18, 2012.  However, the note becomes due in full plus accrued interest earlier than that date upon an occurrence of an Event of Default (as defined) or if Legend Pictures at its sole discretion converts the note into shares of the Company’s common stock. This note is convertible into 533,452 shares of the Company’s common stock at March 31, 2012. Additionally, this note is personally guaranteed by the Company’s Chief Executive Officer.

On March 30, 2012, the Company recognized $0.2 million as additional debt discount and was allocated to the three Comvest notes based on the face value of the notes at that time.

The Comvest convertible note gives the Company the option to pay the interest expense each month in cash of in-kind by adding the monthly interest to the face amount of the note.  The Company elected this option for the months of February and March, 2012.  The Company pays monthly interest at the 10% per annum related to the Comvest revolver note payable.  Beginning January 1, 2012, the Company incurred an additional interest expense each month of 2% per annum for the Comvest revolver rate payable, which is added to the revolver note face value.  The total amount of capitalized interest recorded for these two loans during the three months ended March 31, 2012 aggregated $0.2 million.

Sale and Issuance of Convertible Notes and Warrants

On May 6, 2012, Digital Domain Media Group, Inc. (the “Company”) entered into a securities purchase agreement (the “Purchase Agreement”) with a group of institutional investors (the “Purchasers”) pursuant to which the Company issued and sold to the Purchasers senior secured convertible notes in the aggregate original principal amount of $35.0 million (the “Senior Notes”) and warrants (the “Warrants”) to purchase up to 1,260,288 shares of the Company’s common stock for an aggregate purchase price of $35.0 million (the “Offering”).  The initial conversion price of the Senior Notes is $9.72, subject to adjustment as provided in the Senior Notes.  The initial exercise price of the Warrants is $9.72 per share, subject to adjustment as provided in the Warrants.  Such issuance and sale were consummated on May 7, 2012.

The indebtedness evidenced by the Senior Notes bears interest at 9.0% per annum, compounded quarterly, payable quarterly in arrears, and matures on the fifth anniversary of the issuance date. Upon the occurrence of an Event of Default (as such term is defined in the Senior Notes), the interest rate shall be adjusted to a rate of 15.0% per annum. The Purchasers may require the Company to redeem all or any portion of the Senior Notes upon the occurrence of an Event of Default (as such term is defined in the Senior Notes) or a Change of Control (as such term is defined in the Senior Notes).  The Senior Notes also contain, among other things, certain affirmative and negative covenants, including, without limitation, limitations on indebtedness, liens and restricted payments and certain financial covenants.

The Senior Notes will amortize in equal monthly installments commencing on the earlier of (i) the effective date of the initial registration statement filed in accordance with the terms of the Registration Rights Agreement (as defined below) or (ii) the six-month anniversary of the closing date. The Senior Notes may be converted into shares of the Company’s common stock, at the option of the holders thereof, at any time following issuance of the Senior Notes.  The Senior Notes are redeemable at the option of the Company if the Company’s common stock trades at a level equal to 175% of the initial conversion price for any 30 consecutive trading days commencing on the date of issuance of the Senior Notes.

On certain Adjustment Dates (as such term is defined in the Senior Notes), the conversion price applicable to the Senior Notes will be adjusted to the lesser of (a) the then-current conversion price and (b) the market price of the Company’s common stock on such date. The Senior Notes have anti-dilution protection in the event that the Company issues securities at an equivalent value less than the conversion price, and the conversion price is also subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions. The Company has agreed to pay each amortization payment in shares of the Company’s common stock, provided that certain conditions are met. The conversion rate applicable to any amortization payment in shares of the Company’s common stock will be the lower of (a) the conversion price then in effect and (b) a price equal to 85.0% of (i) the aggregate of the volume-weighted average prices of the Company’s shares of common stock for each of the ten lowest trading days during the 20 consecutive trading day period ending on the applicable amortization payment date, divided by (ii) 10. The Company is generally prohibited from issuing shares of common stock upon conversion of the Senior Notes if such conversion would cause the Company to breach its obligations under the rules or regulations of the New York Stock Exchange, or such other stock market on which the Company’s common stock is then traded.

The obligations of the Company under the Senior Notes are secured pursuant to the terms of a security and pledge agreement (the “Security Agreement”) and a Canadian security and pledge agreement (the “Canadian Security Agreement”) covering all of the assets of the Company and its subsidiaries (other than inactive subsidiaries) (the “Collateral”) and conferring on the Purchasers, subject to Permitted Liens (as such term is defined in the Purchase Agreement), a first-priority security interest in the Collateral.  The Security Agreement also contains customary representations, warranties and covenants.  In addition, all of the obligations of the Company under the Senior Notes are guaranteed by certain of the Company’s subsidiaries pursuant to the terms of a guaranty (the “Guaranty”).

Under the terms of the Warrants, the holders thereof are entitled to exercise the Warrants to purchase up to an aggregate of 1,260,288 shares of the Company’s common stock at an initial exercise price of $9.72 per share, during the five-year period beginning on the closing date. On certain Adjustment Dates (as defined in the Warrants), the exercise price applicable to the Warrants will be adjusted to the lesser of (a) the then-current exercise price and (b) the market price of the Company’s common stock on such date. The exercise price of the Warrants is also subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions. The Company is generally prohibited from issuing shares of common stock upon exercise of the Warrants if such exercise would cause the Company to breach its obligations under the rules or regulations of the New York Stock Exchange, or such other stock market on which the Company’s common stock is then traded.

In connection with the financing transaction described above, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) pursuant to which it agreed to file a registration statement with the Securities and Exchange Commission (the “Commission”) relating to the offer and sale by the Purchasers of the shares of the Company’s common stock issuable upon the conversion of the Senior Notes and the exercise of the Warrants. Pursuant to the terms of the Registration Rights Agreement, the Company is required to file the registration statement within 30 days of the closing date and to use its reasonable best efforts for the registration statement to be declared effective 90 days after the closing date.

The Senior Notes and the Warrants were issued pursuant to an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving a public offering.  In connection with these transactions, the Company paid a placement agent fee of $2.4 million to the sole placement agent for the offering of the Senior Notes and the Warrants.

As a condition to the sale of the Senior Notes and the Warrants, two persons who are directors, executive officers and greater than 5% shareholders of the Company, who beneficially own an aggregate of 11,937,984 shares of the Company’s common stock, entered into a voting agreement (the “Voting Agreement”), pursuant to which they agreed not to sell, pledge, hypothecate or otherwise transfer their shares during the six-month period commencing on the closing date of the financing transaction, subject to certain exceptions for estate planning and similar purposes.

Exchange of Outstanding Debt with Existing Lender

On May 6, 2012, concurrently with the execution and delivery of the Purchase Agreement, the Company entered into an Omnibus Consent and Agreement re Restructuring (the “Omnibus Agreement”) with Comvest, pursuant to which, among other things, the Company agreed to (i) use a portion of the proceeds received by it in connection with the financing transaction described above to make payments to Comvest with respect to the outstanding loans to the Company held by Comvest, such that the aggregate outstanding principal balance thereof was reduced to $8.0 million, and (ii) repurchase all but 145,000 shares (the “Retained Shares”) of the Company’s common stock received by Comvest upon full exercise of an outstanding warrant to purchase shares of the Company’s common stock held by Comvest. The aggregate amount paid to Comvest in satisfaction of outstanding indebtedness and in repurchasing such shares, as described above, was $22.5 million, plus certain fees and expenses that the Company agreed to pay.

In connection with the foregoing, the Company and Comvest entered into a Debt Exchange Agreement (the “Debt Exchange Agreement”), pursuant to which, among other things, the Company exchanged the remaining outstanding original principal balance under its outstanding loans held by Comvest for a new secured convertible note in favor of Comvest with an original principal amount of $8.0 million (the “Subordinated Note”), which Subordinated Note, inclusive of any and all accrued interest on the Subordinated Note and other fees, costs and amounts owing thereunder, is convertible into shares of the Company’s common stock, in accordance with the terms thereof. The debt exchange transaction was consummated on May 7, 2012.

The indebtedness evidenced by the Subordinated Note bears interest at 10.0% per annum, compounded quarterly, payable quarterly in arrears, and matures on June 30, 2016. Upon the occurrence of an Event of Default (as such term is defined in the Subordinated Note), the interest rate shall be adjusted to a rate of up to 21.0% per annum, with the actual rate of such penalty interest to be contingent upon the nature of the Event of Default.  Comvest may require the Company to redeem all or any portion of the Subordinated Note upon the occurrence of an Event of Default (as such term is defined in the Subordinated Note).  The Subordinated Note also contains, among other things, certain affirmative and negative covenants, including, without limitation, limitations on indebtedness, liens and restricted payments and certain financial covenants.

The initial conversion price under the Subordinated Note is (i) $2.50 per share for payment of any portion of the original principal amount and (ii) $5.50 per share for payment of any other amounts owing thereunder, subject to adjustment as provided in the Subordinated Note. The Subordinated Note has anti-dilution protection in the event that the Company issues securities at an equivalent value less than the applicable conversion price, and the conversion price is also subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions. The Company is generally prohibited from issuing shares of common stock upon conversion of the Subordinated Note if such conversion would cause the Company to breach its obligations under the rules or regulations of the New York Stock Exchange, or such other stock market on which the Company’s common stock is then traded.

The obligations of the Company under the Subordinated Note are secured pursuant to the terms of a security and pledge agreement (the “Comvest Security Agreement”) and a Canadian security and pledge agreement (the “Comvest Canadian Security Agreement”) covering all of the Collateral and conferring on Comvest, subject to Permitted Liens (as such term is defined in the Debt Exchange Agreement), a security interest in the Collateral.  The Comvest Security Agreement also contains customary representations, warranties and covenants.  In addition, all of the obligations of the Company under the Subordinated Note are guaranteed by certain of the Company’s subsidiaries pursuant to the terms of a guaranty (the “Comvest Guaranty”).  The Company also entered into a subordination and intercreditor agreement (the “Subordination Agreement”) with Comvest and the collateral agent for the Senior Notes, setting forth the seniority and respective rights to collateral among Comvest and the holders of the Senior Notes.

In connection with the debt exchange transaction, the Company entered into a registration rights agreement with Comvest (the “Comvest Registration Rights Agreement”) pursuant to which it agreed to file a registration statement with the Commission relating to the offer and sale of the shares of the Company’s common stock issuable upon conversion of the Subordinated Note and the Retained Shares. Pursuant to the agreement, the Company is required to file the registration statement within 30 days of the closing date and to use its reasonable best efforts for the registration statement to be declared effective 90 days after the closing date of the debt exchange transaction.

As the Comvest debt was replaced with debt maturing in 2017, the Company reclassified $14.9 million of net debt from current liabilities to long-term liabilities as of March 31, 2012, in accordance with ASC 470-10-45-14. The Company has yet to determined the effects of these transactions on its consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Revenues:
Production revenues	$ 30,158	$ 37,904
Grant revenues from governmental agencies	878	653
Licensing revenue	90
Tuition revenue	15
Total revenues	31,141	38,557
Costs and expenses:
Cost of revenues, excluding depreciation and amortization	32,922	30,922
Depreciation expense	3,631	2,870
Selling, general and administrative expenses	10,979	10,849
Amortization of intangible assets	863	863
Total costs and expenses	48,395	45,504
Operating loss	(17,254)	(6,947)
Interest and finance (expense) credit:
Issuance of and changes in fair value of warrant and other debt-related liabilities	4,284	(28,965)
Amortization of discount and issuance costs on notes payable	(1,599)	(3,013)
Interest expense on notes payable	(670)	(502)
Interest expense on capital and governmental lease obligations	(670)	(318)
Other income (expense), net	353	1,067
Loss before income taxes	(15,556)	(38,678)
Income tax expense	9	250
Net loss before non-controlling interests	(15,565)	(38,928)
Net loss (income) attributable to non-controlling interests	733	(197)
Net loss attributable to common stockholders	(14,832)	(39,125)
Statements of Comprehensive Loss
Net loss attributable to common stockholders	(14,832)	(39,125)
Unrealized gain from foreign currency translation	37	63
Comprehensive loss	$ (14,795)	$ (39,062)
Weighted average number of common shares outstanding:
Basic (in shares)	39,977,777	14,184,609
Diluted (in shares)	42,839,565	14,184,609
Basic loss per share:
Loss before non-controlling interests (in dollars per share)	$ (0.39)	$ (2.75)
Net loss (income) attributable to non-controlling interest (in dollars per share)	$ 0.02	$ (0.01)
Basic loss per share attributable to Common Stockholders (in dollars per share)	$ (0.37)	$ (2.76)
Diluted loss per share:
Loss before non-controlling interests (in dollars per share)	$ (0.45)	$ (2.75)
Net loss (income) attributable to non-controlling interests (in dollars per share)	$ 0.02	$ (0.01)
Diluted loss per share attributable to Common Stockholders (in dollars per share)	$ (0.43)	$ (2.76)

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GRANTS AND TAX INCENTIVES FROM GOVERNMENTAL ENTITIES

3 Months Ended

Mar. 31, 2012

GRANTS AND TAX INCENTIVES FROM GOVERNMENTAL ENTITIES

GRANTS AND TAX INCENTIVES FROM GOVERNMENTAL ENTITIES

7. GRANTS AND TAX INCENTIVES FROM GOVERNMENTAL ENTITIES

In November 2009, as amended on February 22, 2010, the Company entered into a Grant Agreement and a Lease Agreement with the City of Port St. Lucie, Florida (‘‘the City’’) calling for the City to provide to the Company a $10.0 million cash grant (‘‘City Cash Grant’’) and approximately $50.0 million in the form of a land donation and construction financing assistance (the ‘‘Building and Land Grant’’). These awards were granted as an incentive to locate operations in the State of Florida and specifically in Port St. Lucie, and to incent hiring activities, among other things, both of which will provide economic advantages to the general community.

In connection with the Building and Land Grant discussed above, the City issued bonds of $39.9 million on April 27, 2010 for the purpose of financing the construction of a building and installation of related equipment and certain associated expenses. The funds received under the bond issuance were deposited in a construction fund, which is used to fund construction expenses and equipment purchases.

The proceeds from the bonds were recorded in Cash, held in trust, and the obligation as Government lease obligation in the condensed consolidated balance sheet as of March 31, 2012. Through March 31, 2012 (unaudited) and December 31, 2011, the following activities have been recognized (in thousands):

	Cash Held in Trust			Payments From Operating Cash			Property & Equipment, Net		Government Lease Obligation, Net			Accrued Interest on Bonds			Interest Expense		Accrued Construction Expenses to be Funded by Cash, Held in Trust
Balance at December 31, 2010	$	31,219		$	—		$	7,686	$	(38,301	)	$	(661	)	$	57	$	—
Construction in progress - paid by December 31, 2011	(18,644		)	—			18,644		—			—			—		—
Construction costs held in retainer	—			—			1,789		—			—			—		(1,789		)
Recognition of interest expense, capitalized and expensed, net	—			—			1,859		(413		)	(1,973		)	527		—
Purchase of property and equipment place into service	(3,920		)	—			3,920		—			—			—		—
Amortization of OID and issuance costs	—			—			117		(117		)	—			—		—
Issuance cost made available for construction uses	—			—			63		(63		)	—			—		—
Payment of accrued interest, net	(1,973		)	—			—		—			1,973			—		—
Balance at December 31, 2011	6,682			—			34,078		(38,894		)	(661		)	584		(1,789		)
Construction in progress - paid by March 31, 2012	(1,789		)	—			—		—			—			—		1,789
Payment to the City	2,740			(2,740		)	—		—			—			—		—
Recognition of interest expense, capitalized and expensed, net	—						—		(110		)	(495		)	605		—
Payment by the City for interest	(990		)	—			—		—			990			—		—
Balance at March 31, 2012 (unaudited)	$	6,643		$	(2,740	)	$	34,078	$	(39,004	)	$	(166	)	$	1,189	$	—

In addition to the amounts disclosed above, the Company incurred $0.7 million of primarily internal costs associated with the building project that are capitalized in accordance with ASC 310-20, and will pay approximately $0.4 million of costs over-runs accrued in the Company’s Consolidated Balance Sheet as of December 31, 2011, and March 31, 2012. The Company also incurred $3.0 million for leasehold improvements related to the building project. These cost are not included in the table above.

Upon completion of the project in December 2011, the Company evaluated the transaction under FASB ASC Subtopic 360-20 to determine whether a sale transaction had occurred such that the Company would record a sale-leaseback under FASB ASC 840-40. As the Company has retained substantially all the benefits and risks incident to ownership of the property sold and the Company has the option to purchase the building and equipment at the end of the lease term ASC 360-20-40-38 dictates that the transaction must be accounted for as a financing transaction.

In accordance with being considered the owner of the asset under construction during the construction phase of the project and continues to be deemed the owner upon occupancy of the building, the Company accounts for the building and equipment, related depreciation, lease obligations, accrued interest, and cash held in trust, on its consolidated balance sheets and in its statements of operations. Interest expense associated with the bonds is being recognized using an effective rate of 7.6% based on the Company’s cash flows to service the bonds requirements pursuant to the lease agreement. In accordance with FASB ASC 310-20, the Company considered the initial amounts held to service interest during the construction phase and the debt service reserve, as fees paid at the inception of the loan.

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CONTRACTS AND OTHER RECEIVABLE

3 Months Ended

Mar. 31, 2012

CONTRACTS AND OTHER RECEIVABLE

CONTRACTS AND OTHER RECEIVABLE

6. CONTRACTS AND OTHER RECEIVABLE

The following shows the elements of accounts receivable from contracts as of March 31, 2012 (unaudited) and December 31, 2011 (in thousands):

	March 31,			December 31,
	2012			2011
	(unaudited)
Costs incurred on uncompleted contracts	$	46,178		$	46,700
Accrued profit on uncompleted contracts	11,687			15,412
	57,865			62,112
Less billings to date	(65,001		)	(68,404		)
Unbilled receivables and advance payments on uncompleted contracts	$	(7,136	)	$	(6,292	)
Unbilled Receivables:
Unbilled receivables	$	2,348		$	513
Advance payments	(9,484		)	(6,805		)
	$	(7,136	)	$	(6,292	)
Summary:
Billed:
Completed contracts	$	776		$	900
Contracts in process	896			1,033
Retained	—			—
	1,672			1,933
Unbilled	2,348			513
	$	4,020		$	2,446

In addition to contract receivables, the Company had other receivables of $5.9 million as of March 31, 2012. Of that amount, $5.0 million of other receivables is for a joint venture agreement with Beijing Galloping Horse Film Co., Ltd. for future distribution rights within certain territories of the People’s Republic of China. See Note 2 for further discussion.  Additionally, other receivables include $0.6 million in foreign tax receivables and $0.3 million in grant and royalty receivables.

At March 31, 2011, the Company had other receivables of $0.2 million related to grant and royalty revenues.

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SUBSEQUENT EVENTS

3 Months Ended

Mar. 31, 2012

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

18. SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date on which the consolidated financial statements have been issued. The following subsequent events occurred:

Exchange Agreement

On April 5, 2012, certain shareholders of DDI exchanged 2,000,000 shares of common stock of DDI for an aggregate of 1,661,400 shares of the Company’s common stock, pursuant to an exchange option agreement entered into among DDI, DDMG, and such shareholder.

Comvest Waiver

On April 15, 2012, the Company and Comvest entered into an agreement which anticipated the senior convertible note financing described below.

Sale and Issuance of Convertible Notes and Warrants

On May 7, 2012, DDMG completed a $35 million senior convertible note offering to a group of institutional investors and issued an $8 million subordinated convertible note to Comvest to refinance existing debt held by Comvest. These transactions retired existing senior notes that would otherwise have been due in 2012.  The new senior convertible notes are convertible into the Company’s common stock at an initial conversion price of $9.72 per share, mature in five years and carry an interest rate of nine percent. The investors in the senior convertible note offering also received warrants to acquire 1.26 million shares of the company’s common stock at an initial exercise price of $9.72 for a term of five years. The new subordinated convertible note with stated interest of 10%, issued to Comvest replaces an existing convertible note held by Comvest that was issued in 2011 and is convertible into substantially the same number of shares of the company’s common stock as the original note. The new Comvest note also reduced the company’s fixed repayment obligations from $16 million due later this year under the original note to $8 million due in mid-2016.  See Footnote 13 “Notes Payable and Related Financing Transactions” for additional disclosure.

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WARRANTS, OPTIONS AND OTHER DEBT-RELATED LIABILITIES

3 Months Ended

Mar. 31, 2012

WARRANTS, OPTIONS AND OTHER DEBT-RELATED LIABILITIES

WARRANTS, OPTIONS AND OTHER DEBT-RELATED LIABILITIES

14. WARRANTS, OPTIONS AND OTHER DEBT-RELATED LIABILITIES

Summaries of warrant and other debt-related liabilities as of March 31, 2012 (unaudited) and December 31, 2011 are as follows (unaudited, in thousands):

	March 31,			December 31,
	2012			2011
Short-term warrant liabilities:
Comvest Capital II fee warrants	$	—		$	2,548
Galloping Horse put	1,917			—
Digital Domain Bridge Warrants	3,914			3,914
Total short-term warrant liabilities	5,831			6,462
Long-term warrant liabilities:
Comvest Capital II fee warrants	2,422
Comvest Capital II conversion warrants	12,709			15,200
Comvest Capital II protective put	6,622			5,730
Comvest redeemable feature	(4,939		)	—
Total long-term warrant liabilities	16,814			20,930
Total warrant liabilities	$	22,645		$	27,392

The following table summarizes the warrant and other debt-related liabilities transactions from December 31, 2011 through March 31, 2012 (unaudited, in thousands):

	Comvest Capital II			Galloping Horse Put		Digital Domain Bridge Warrants		Total
Balance, December 31, 2011	$	23,478		$	—	$	3,914	$	27,392
Debt restructuring (see Note 15)	(2,380		)	—		—		(2,380		)
Recognition of put liability	—			1,917		—		1,917
Changes in fair value of warrants	(4,284		)	—		—		(4,284		)
Balance, March 31, 2011 (unaudited)	$	16,814		$	1,917	$	3,914	$	22,645

As discussed in Note 13, the Company reclassified the Comvest debt from current liabilities to long-term liabilities as of March 31, 2012.  The Company also reclassified the Comvest fee warrants aggregating $2.4 million from current liabilities to long-term liabilities on that date as well.

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FILM INVENTORY

3 Months Ended

Mar. 31, 2012

FILM INVENTORY

FILM INVENTORY

10. FILM INVENTORY

Film inventory as of March 31, 2012 (unaudited) and December 31, 2011 are summarized as follows (in thousands):

	March 31, 2012		December 31, 2011
	(unaudited)
In-production:
Animation	$	6,932	$	3,926
Live-action	13,580		2,205
Total in-production	20,512		6,131
In-development	829		794
Total film inventory	$	21,341	$	6,925

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PROPERTY AND EQUIPMENT

3 Months Ended

Mar. 31, 2012

PROPERTY AND EQUIPMENT

PROPERTY AND EQUIPMENT

8. PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2012 (unaudited) and December 31, 2011 consisted of the following (in thousands):

	March 31,			December 31,
	2012			2011
	(Unaudited)
Building	$	27,590		$	27,590
Land	21,330			21,330
Computer equipment	25,691			23,763
Computer software	14,875			13,017
Leasehold improvements	7,013			6,902
Machinery and equipment	2,843			2,823
Office equipment, furniture and fixtures	5,063			4,864
Total property and equipment - cost	104,405			100,289
Less accumulated depreciation and amortization	(23,779		)	(20,148		)
Total property and equipment - net	$	80,626		$	80,141

Computer software in the table above includes capitalized costs related to internally developed computer software. There were no additions to such capitalized costs for the three months ended March 31, 2012 and 2011, respectively. The gross carrying amount of capitalized costs associated with internally developed computer software as of March 31, 2012 (unaudited) and December 31, 2011 were each $4.5 million. As of March 31, 2012 (unaudited) and December 31, 2011, the accumulated depreciation on the capitalized costs associated with internally developed computer software was $2.0 million and $1.8 million, respectively.

As of March 31, 2012 (unaudited) and December 31, 2011, the gross carrying amount of property and equipment recorded under capital leases were each $4.5 million. As of these dates, the accumulated depreciation on these leased assets was $3.3 million and $3.0 million, respectively.

Depreciation and amortization expense on property and equipment totaled $3.6 million, and $2.9 million, for the three months ended March 31, 2012 and 2011, respectively (unaudited).

On January 12, 2011, the Company acquired $8.5 million in equipment from an unrelated third party. During the three months ended March 31, 2012, the Company financed the first installment payment of $2.5 million through City of Port St. Lucie bond proceeds, paid $2.0 million from its general funds and paid $4.0 million using proceeds from equipment financing transactions.

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INTANGIBLE ASSETS AND GOODWILL

3 Months Ended

Mar. 31, 2012

INTANGIBLE ASSETS AND GOODWILL

INTANGIBLE ASSETS AND GOODWILL

9. INTANGIBLE ASSETS AND GOODWILL

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually and more frequently if events or changes in circumstances indicate the assets may be impaired. The Company determined there were no events or changes in circumstances that indicate that carrying values of Goodwill, indefinite-lived intangible assets, or other intangible assets subject to amortization may not be recoverable as of March 31, 2012 and December 31, 2011.

The following table provides information regarding changes in Goodwill and indefinite-lived intangible assets during the three months ended March 31, 2012 (unaudited, in thousands):

	Goodwill		Trademark
Goodwill & intangible assets not subject to amortization:
Balance, December 31, 2011	$	18,081	$	15,410
Changes recognized upon acquisitions or impairment	—		—
Balance, March 31, 2012 (unaudited)	$	18,081	$	15,410

The following tables present information regarding intangible assets with finite lives, all of which were recorded upon the acquisitions of Digital Domain and In-Three, at March 31, 2012 (unaudited) and December 31, 2011 (dollars in thousands):

	March 31, 2012 (Unaudited)
								Remaining
	Gross Carrying		Accumulated					Lives
	Amount		Amortization			Net Amount		(Months)
Unpatented technology	$	25,910	$	(6,451	)	$	19,459	105
Patents	420		(35		)	385		165
Titanic participation rights	1,800		(300		)	1,500		150
Customer relationships	300		(50		)	250		150
Proprietary software	5,900		(1,146		)	4,754		210
Total identified intangible assets	$	34,330	$	(7,982	)	$	26,348

	December 31, 2011
								Remaining
	Gross Carrying		Accumulated					Lives
	Amount		Amortization			Net Amount		(Months)
Unpatented technology	$	25,910	$	(5,804	)	$	20,106	108
Patents	420		(28		)	392		168
Titanic participation rights	1,800		(270		)	1,530		153
Customer relationships	300		(45		)	255		153
Proprietary software	5,900		(973		)	4,927		213
Total identified intangible assets	$	34,330	$	(7,120	)	$	27,210

Amortization expense for intangible assets with finite lives was $0.9 million for the three months ended March 31, 2012 and 2011, respectively.

The estimated future amortization expense as of March 31, 2012 (unaudited) is as follows (in thousands):

	March 31,
	2012
	(Unaudited)
2012 (remaining 2012 at March 31, 2012)	$	2,588
2013	3,451
2014	2,984
2015	2,984
2016	2,984
Thereafter	11,357
Total	$	26,348

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ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

3 Months Ended

Mar. 31, 2012

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities as of March 31, 2012 (unaudited) and December 31, 2011 are summarized as follows (in thousands):

	March 31, 2012		December 31, 2011
	(unaudited)
Accounts payable	$	5,036	$	6,491
Accrued wages and employee benefits	6,921		4,954
Accrued professional fees	200		1,302
Accrued outsource labor	4,837		2,149
Accrued tax credits	2,365		2,365
Other accrued expenses	2,957		4,213
Total accounts payable and accrued liabilities	$	22,316	$	21,474

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COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2012

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

16. COMMITMENTS AND CONTINGENCIES

Litigation

Wyndcrest DD Florida, Inc., et al adv. Carl Stork   On March 29, 2010, the Company (under the former name “Wyndcrest DD Florida, Inc.”) sued former Digital Domain Chief Executive Officer and director Carl Stork in Brevard County Florida Circuit Court to enforce a February 2010 stock purchase agreement pursuant to which the Company purchased Mr. Stork’s Digital Domain shares. The case was voluntarily dismissed on December 16, 2010. On September 8, 2010, Mr. Stork filed suit against the Company in Los Angeles County Superior Court seeking rescission of the agreement and compensatory and punitive damages. The case was removed to the United States District Court for the Central District of California. Mr. Stork has been paid the purchase price in full under the agreement. The Company is vigorously defending against the claims. The case is in discovery, and as such the Company cannot reliably predict the outcome. Trial has been set for June 2012.

JK-DD, LLC and Jeffrey Kukes v. John C. Textor, et al   On August 12, 2010 the plaintiffs, who are stockholders of Digital Domain, filed suit against the defendants in Palm Beach County, Florida, Circuit Court seeking rescission of a 2007 settlement agreement that resolved a prior partnership dispute between Mr. Kukes and Mr. Textor pursuant to which the plaintiffs obtained their shares of Digital Domain common stock. The plaintiffs also seek damages for alleged dilution of the value of such shares. The defendants believe the Complaint is an attempt to reverse a valid, binding settlement agreement and are aggressively defending against the claims. On September 27, 2010, the defendants filed a motion to dismiss the plaintiffs’ claims. The plaintiffs subsequently dismissed two of the three counts in their original complaint, mailed defendants a draft amended complaint naming the Company as a defendant, and filed a separate new action against Mr. Textor and his wife, individually. The plaintiffs’ draft amended complaint against the Company has not been filed. Both cases are in discovery, and as such the Company cannot reliably predict the outcome. No trial date has been set in either case.

4580 Thousand Oaks Boulevard Corporation v. In Three, Inc., et al.   On April 21, 2011, the plaintiff, the former commercial landlord of In-Three, Inc., filed suit in California Superior Court (Ventura County) seeking approximately $4.6 million in unpaid rent and operating expenses allegedly owed pursuant to a lease agreement between the plaintiff and In-Three. The subject lease pre-dated our acquisition of certain assets of In-Three and was specifically not assumed by us in that transaction. Notwithstanding, the plaintiff originally named the Company and its subsidiaries Digital Domain Productions and Digital Domain Stereo Group, Inc. (“DDSG”), formerly DD3D, Inc, a subsidiary of the Company, as defendants but voluntarily dismissed its claims against all Digital Domain defendants on June 24, 2011. Subsequently, on October 5, 2011, the plaintiff’s counsel sent a letter to us requesting that the Company voluntarily stipulate to a court order permitting the filing of an amended complaint which would have added us back into the lawsuit as a defendant. The Company has refused to stipulate to the filing of an amended complaint on the grounds that such an amendment would be futile as, in the Company’s judgment, no lawful basis exists for advancing any claims against the Company. The plaintiff responded by conducting additional discovery pertinent to the asset purchase transaction to determine whether sufficient evidence exists to support the proposed amended complaint.

In-Three has responded to such discovery, and the plaintiff, thus far, has chosen not to seek leave of court to file the proposed amended complaint. In consequence, we are not defendants in this litigation. The case is currently in trial only as to In-Three. In-Three has acknowledged its contractual indemnity obligation to us pursuant to the asset purchase transaction and, accordingly, will represent us in defense of this action if necessary.

Digital Domain Stereo Group, Inc. v. Prime Focus North America, Inc. and Prime Focus VFX USA, Inc.   DDSG currently holds the assets the Company purchased from In-Three, filed a complaint in the United States District Court for the Central District of California against Prime Focus in November 2011 for damages associated with Prime Focus’ infringement upon DDSG’s stereo 3D conversion patents. Prime Focus answered on February 17, 2012 denying DDSG’s claims, asserting various affirmative defenses and seeking a declaratory judgment of no infringement and patent invalidity, the standard defenses asserted by defendants in patent infringement cases. The case is in its initial stages and as such we cannot reliably predict the outcome. No trial date has been set for this case.

Other—The Company is involved from time to time in routine litigation arising in the ordinary course of conducting our business. In the opinion of management, no pending routine litigation will have a material adverse effect on our consolidated financial condition or results of operations.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flows from operating activities:
Net loss before non-controlling interests	$ (15,565)	$ (38,928)
Adjustments to reconcile net loss before non-controlling interests to net cash used in operating activities:
Depreciation and amortization of property and equipment and intangible assets	4,494	3,733
Amortization of discount on and issuance costs of notes payable	1,599	3,013
Interest added to principal on notes payable	171
Changes related to fair value of warrant and other debt - related liabilities	(4,284)	28,965
Stock-based compensation	1,878	4,409
Interest on government obligations	(121)	19
Decrease in earn out liability	(549)
Changes in operating assets and liabilities:
Contracts receivable	(1,779)	(8,272)
Prepaid expenses and other assets	483	(1,149)
Film inventory	(14,415)	(322)
Accounts payable and accrued liabilities	2,305	(510)
Advance payments and deferred revenue	2,620	(8,080)
Deferred revenue from governmental entities	1,372	(584)
Unearned revenue	(57)
Net cash used in operating activities	(21,848)	(17,706)
Cash flows from investing activities:
Purchases of property and equipment	(2,889)	(3,727)
Changes in restricted cash		(5)
Net cash used in investing activities	(2,889)	(3,732)
Cash flows from financing activities:
Proceeds from sale of common stock		19,501
Proceeds from issuance of notes payable	3,000
Payments of stock issuance costs		(2,096)
Deferred offering costs paid		(756)
Repayments on notes payable		(554)
Payments on capital and governmental lease obligations	(2,037)	(434)
Payments of debt issuance costs	(50)
Purchase of treasury stock	(3,212)
Net cash provided by (used in) financing activities	(2,299)	15,661
Effect of exchange rates on cash and cash equivalents	75	84
Net decrease in cash and cash equivalents	(26,961)	(5,693)
Cash and cash equivalents at beginning of period	29,413	11,986
Cash and cash equivalents at end of period	2,452	6,293
Supplemental disclosure of cash flow information - cash paid during the period for:
Interest	539	501
Non-cash investing and financing activities:
Increase in debt from debt restructuring	2,380
Deferred offering costs included in accounts payable and accrued liabilities at period end	50
Purchase of property and equipment in accounts payable at period end	1,891	4,301
Purchase of property and equipment with assets held in trust		3,902
Amortization of discount on bond obligation	195	19
Bond interest capitalized to construction-in-progress		495
Shares issued from exchange of subsidiary shares	$ 1,034	$ 15

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NON-CONTROLLING INTERESTS

3 Months Ended

Mar. 31, 2012

NON-CONTROLLING INTERESTS

NON-CONTROLLING INTERESTS

5. NON-CONTROLLING INTERESTS

Changes in the non-controlling interest amounts of our subsidiaries for the three months ended March 31, 2012 (unaudited) were as follows (in thousands):

Balance at December 31, 2011	$	6,438
Issuance of common stock upon exchange of stock in subsidiary	(1,034		)
Net loss attributable to non-controlling interests	(733		)
Comprehensive income	8
Balance at March 31, 2012 (unaudited)	$	4,679

During the three months ended March 31, 2012, the Company’s subsidiary Digital Domain realized a net loss of $5.2 million. Pursuant to the requirements under FASB ASC Topic 810, Consolidation, the Company allocates Digital Domain’s earnings to non-controlling interests based on the percentage of common stock of Digital Domain not owned by the Company. Intercompany transactions are eliminated in consolidation but impact the net earnings of each of the respective entities and as such affect amounts allocated to non-controlling interests. During the three months ended March 31, 2012, $4.5 million of Digital Domain’s net loss was allocated to accumulated deficit representing the Company’s proportionate holdings in Digital Domain common stock outstanding (an average of 86.7%) and the remaining 13.3% of Digital Domain’s net loss, amounting to $0.7 million, was allocated to non-controlling interests.  During the three months ended March 31, 2011, $0.8 million of Digital Domain’s net income was allocated to accumulated deficit representing the Company’s proportionate holdings in Digital Domain common stock outstanding (an average of 81.0%), and the remaining 19.0% of Digital Domain’s net income, amounting to $0.2 million, was allocated to non-controlling interests.

In a similar manner, the Company’s subsidiary Digital Domain Institute, Inc. “(DDI”) incurred a net loss of $0.5 million during the three months ended March 31, 2012. Of this amount, $0.4 million was allocated to the accumulated deficit and $0.1 million was allocated to non-controlling interests.  During the three months ended March 31, 2012, certain stockholders of DDI exchanged 1,250,000 shares of DDI stock for 1,038,376 shares of the Company’s common stock.  Upon these exchanges, the Company reclassified $1.0 million of equity attributable to non-controlling interests to additional paid in capital.

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SEGMENT INFORMATION

3 Months Ended

Mar. 31, 2012

SEGMENT INFORMATION

SEGMENT INFORMATION

15. SEGMENT INFORMATION

Segment financial information for the three months ended March 31, 2012 and 2011, respectively, is as follows (unaudited, in thousands):

	Three Months Ended
	March 31,
	2012			2011
	(Unaudited)
Revenues:
Digital Production:
Feature Films	$	27,588		$	31,605
Commercials	2,660			6,299
Animation	—			—
Corporate/Other	893			653
Total revenues	31,141			38,557
Costs and expenses:
Digital Production:
Feature Films	30,146			26,231
Commercials	3,131			5,144
Animation	—			—
Corporate/Other	15,118			14,129
Total costs and expenses	48,395			45,504
Operating (loss) income:
Digital Production:
Feature Films	(2,558		)	5,374
Commercials	(471		)	1,155
Animation	—			—
Corporate/Other	(14,225		)	(13,476		)
Net operating loss	$	(17,254	)	$	(6,947	)
Revenues:
United States	$	22,602		$	31,212
Canada	8,539			7,345
Total	$	31,141		$	38,557