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. Included are the following consolidated financial statements:

As a result of the Company's purchase on October 15, 2009 of the Predecessor's Series C Preferred Stock, in which it obtained control by acquiring a majority voting interest in the Predecessor, the Company has accounted for the transaction as an acquisition, and has included the Predecessor's consolidated financial statement results in the Company's consolidated financial statements as of September 30, 2009 for reporting purposes. The differences in the assets and operations at Digital Domain between September 30, 2009 and the Acquisition Date are not material.

The accompanying consolidated financial statements include the accounts of Digital Domain Media Group, its majority-owned subsidiaries, Digital Domain and Digital Domain Institute, and its wholly-owned subsidiaries, DD3D, DDH Land Holdings, DDH Land Holdings II and Digital Domain International. 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.

Change in Control—In October 2009, the Company acquired a controlling interest in the Predecessor by providing $7.0 million in return for the issuance of Series C Preferred Stock of the Predecessor. The Company also purchased certain residual royalty rights to the movie Titanic for an additional $1.0 million (see Note 2). During 2010, the Company provided Digital Domain $2.0 million of additional equity capital in the form of purchases of additional Series C Preferred Stock (see Note 18). During the year ended December 31, 2011, five shareholders of Digital Domain's common stock exchanged their entire holdings, or 4,600,001 shares of Digital Domain's common stock, for 2,866,045 shares of the Company's Common Stock (see Notes 2, 18, 19, 22 and 24).

Stock Split (Successor)—On February 19, 2010, the Successor's Board of Directors approved a 2.26-to-1 stock split of the Company's Common Stock. All common share and per common share amounts in the accompanying consolidated financial statements of the Successor have been retroactively adjusted for all periods presented to give effect to the stock split.

Discontinued Operations—During the year ended December 31, 2008, the Predecessor committed to a plan to sell The Foundry, which included the net assets relating to the Predecessor's compositing software product Nuke (collectively, "Discontinued Operations"). The Foundry was acquired in March 2007 and began selling and marketing Nuke in April 2007. The Foundry was sold on June 2, 2009 (see Note 23).

In accordance with FASB ASC Topic 360, Property, Plant and Equipment, with effect as of January 1, 2008, the assets and liabilities of the Discontinued Operations were classified as held for sale and its operations reported as discontinued operations. As a result, the Predecessor has reclassified its accompanying consolidated statements of operations for all periods presented to reflect the Discontinued Operations as discontinued operations. In the consolidated statements of cash flows, the cash flows of discontinued operations are not separately classified or aggregated, and are reported in the respective categories with those of continuing operations.

All discussions and amounts in the accompanying consolidated financial statements and related notes, except for cash flows, for all periods presented relate to continuing operations only, unless otherwise noted. The Discontinued Operations are discussed further in Note 23.

Foreign Currency Translation—Digital Domain has a subsidiary that operates in Canada. The functional currency is the Canadian dollar. The functional currency of The Foundry was the British pound sterling. Assets and liabilities were translated into US dollars using exchange rates in effect on the date of the balance sheets, and revenue and expenses were translated into US dollars using average exchange rates for the years then ended. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders' equity (deficit).

Use of Estimates—US GAAP requires management to make estimates and assumptions in the preparation of these 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 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; 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 and Predecessor 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 the Company, or the Predecessor, 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 Predecessor 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.

Royalty Income—Royalty income is recognized as revenue when earned, estimable and collection is reasonably assured, which is generally when royalty statements become available. Royalty income was $88,000, $112,000, $28,000 and $80,000, during the years ended December 31, 2011 and 2010, the 2009 Consolidated Period and the 2009 Predecessor Period, respectively. Royalty income is included within Other income in the Company's consolidated statements of operations.

Licensing Income—Digital Domain Stereo Group, Inc., a wholly owned subsidiary of the Company, hold certain patents for 3D technology used in the conversion of 2D content into 3D. During the year ended December 31, 2011, the Company began offering non-exclusive licensing of this technology to third parties. The licensing payments received are being amortized into revenue over the life of each individual licensing agreement.

Grants and Other Financial Assistance from Governmental Entities—The Company is the recipient of government stimulus financing, including cash, donations of land, building and equipment financing and tax incentives from multiple governmental entities. See further disclosure in Note 7.

In recognizing the benefit of grants and other awards into the Company's consolidated results of operations in accordance with US GAAP, it considers intended use of and restrictions of the awards, the timing of payments, and requirements for the receipt of funds. In addition, factors are considered such as whether or not the incentive is for immediate financial support, or to encourage activities such as hiring and retention of employees, building facilities, or the achievement of other contractual milestones. In doing this, all potential contingencies on the grants, the objectives as stated in the grant agreements and the provisions related to any potential carve-back of grant monies, and its ability to meet those requirements, are considered.

Each grant is evaluated to determine the propriety of classification on the statements of operations and balance sheets. Those grants that are substantively reimbursements of specific costs are matched with those costs and recorded as a reduction in expenses. Those benefits that are more general in nature or driven by business performance measures are classified as revenue. As of December 31, 2011 and 2010, all grants recognized in the consolidated statements of operations have been classified as revenue.

Grants are sometimes received as part of a package of financial or fiscal aids to which a number of conditions are attached. In these instances, revenue is recognized when there is reasonable assurance that the Company will be able to comply with the conditions attaching to the grant and that the grant proceeds will be received. The timing of recognition varies, but is based on a systematic basis over the periods in which the activities for which the grant is intended to compensate are recognized. In order to do this, the Company is required to exercise judgment in the consideration of the expected activities, the grant periods and terms, and the stated objectives of the grant.

In other circumstances, a government grant may be awarded for the purpose of giving immediate financial support to the Company rather than as an incentive to undertake specific activities or expenditures. In these instances, the grant is recognized into the consolidated results of operations when the conditions of receipt are satisfied.

Comprehensive Income—Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of stockholders' equity but are excluded from net income. For the years ended December 31, 2011 and 2010, and the 2009 Consolidated Period, respectively the amounts that were classified as other comprehensive income were not material.

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

Financial instruments, including Cash and cash equivalents; 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.

The Company's loans are carried at the principal amount less unamortized discounts.

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.

Cash equivalents as well as Cash, held in trust are measured at fair value using Level 1 inputs.

Warrant 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 the Company) or market approach and 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 Common Stock by the number of shares of Common Stock into which the warrants are convertible.

The table presented below summarizes the change in carrying value of Warrants and other debt-related liabilities for the years ended December 31, 2011 and 2010 (in thousands):

	Total Warrants and Other Debt Related Liabilities (Level 3)

Balance, December 31, 2009	$	9,796
Put liability recorded as debt discount		512
Preferred stock warrant issued recorded as deferred debt issue costs		917
Preferred stock warrant issued recorded as debt discount		17,915
Preferred stock warrant issued recorded as interest expense		9,571
Common stock conversion warrant issued recorded as interest expense		5,817
Changes in fair value of warrants		5,205

Balance, December 31, 2010		49,733
Exercise of Series B Preferred Stock put		(5,000	)
Common stock conversion warrant issued recorded as debt discount		9,259
Common stock conversion warrant issued recorded as interest expense		5,398
Common stock conversion warrant issued recorded as deferred debt issue costs		3,930
Common stock conversion warrant issued recorded as additional paid in capital		16,364
Changes in fair value of warrants		30,422
Conversion of debt to stockholders' deficit		(82,714	)

Balance, December 31, 2011	$	27,392

As of December 31, 2011 and 2010, the estimated fair value of convertible and other notes payable approximates the carrying value of such notes payable as the interest rate is variable and market-based. The face and paid-in-kind interest amount of the debt at December 31, 2011, 2010 and 2009 was $27.4 million, $31.0 million and $23.4 million, respectively. Unamortized debt discount and debt issue costs at these dates were $9.3 million, $21.6 million and $6.4 million, respectively.

The Company utilized the following assumptions for determination of the fair value of Warrant and other-debt related liabilities as of December 31, 2011, 2010 and 2009 respectively (as stated, except for fair value of liability with dollars in thousands):

				Private Equity Funds 1 and 2 Series A Preferred Stock Conversion Rights Recorded at Average of									Private Equity Fund 3 Series A Preferred Stock Conversion Rights

																Common Stock Conversion Rights			Falcon Notes Bridge Warrants			Comvest Capital II Protective Put
	Commercial Lender Put Liability			Five Year			Seven Year			Ten Year						Common Stock Conversion Rights			Falcon Notes Bridge Warrants			Comvest Capital II Protective Put
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		—			—			—			—			—			—			—			—
2010:
Fair value of liability	$	628		$	31,403		$	31,758		$	32,008		$	3,290		$	5,480		$	3,612		$	—
Term in months		24			60			84			120			108			21			12			—
Risk free interest rate		0.40	%		2.01	%		2.71	%		3.30	%		3.30	%		0.53	%		0.29	%		—
Volatility		53.10	%		45.88	%		46.92	%		50.10	%		48.93	%		38.40	%		33.40	%		—
Dividend rate		—			—			—			—			—			—			—			—
2009:
Fair value of liability	$	—		$	—		$	—		$	—		$	—		$	—		$	4,796		$	—
Term in months		—			—			—			—			—			—			12.00			—
Risk free interest rate		—			—			—			—			—			—			0.5	%		—
Volatility		—			—			—			—			—			—			45.0	%		—
Dividend rate		—			—			—			—			—			—			—			—

During 2010, the Company acquired two parcels of land in connection with grants from governmental entities (see Note 7). 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 in the accompanying consolidated balance sheet as of December 31, 2010.

As of December 31, 2009, Goodwill and intangible assets other than goodwill relate to the acquisition of the Predecessor, which occurred on October 15, 2009. The fair value of Goodwill and intangible assets other than goodwill was deemed to equal the amount recorded at the Acquisition Date given the close proximity of time to the fiscal year end. The fair value measurement 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.

Cash and Cash Equivalents—Cash and cash equivalents consists of cash on deposit and highly liquid investment securities with an original maturity of three months or less at the time of purchase.

At times, significant amounts of cash and cash equivalents are held at financial institutions that are in excess of federally insured limits, which potentially subjects the Company to concentration of credit risk. The Company has not experienced any losses related to these balances and believes that there is minimal risk.

Cash, held in trust—Cash, held in trust consists of proceeds under a bond issuance by the City of Port St. Lucie, Florida for the purpose of financing the construction of a building and installation of related equipment and certain associated expenses where the Company will relocate its Florida operations. The funds were deposited in a construction fund, which is used to fund construction expenses and equipment purchases (see Note 7). In accordance with ASC 210-10-45, amounts to be used to satisfy short term obligations payable from the fund are recorded as cash, held in trust-short term.

Restricted Cash—Restricted cash consists of restricted cash and accounts for credit card payments.

Contract Receivables—Contract receivables consist of amounts due on completed and uncompleted contracts. An allowance is provided for specifically identified uncollectible accounts. No allowances were deemed necessary for any of the periods presented.

Tax Credits Receivable—The Company has contractually agreed to file for tax credits for work done by the Canadian subsidiary of Digital Domain. Such amounts are recorded as tax credits receivable when it becomes more likely than not that the tax credit will be realized. If the project is in progress, the tax credits to be retained by the Company are recorded as a reduction in production costs to be recognized over the life of a project. If the project is complete, such amount is recorded as reduction in production costs, or in circumstances where the monies are to be contractually remitted to a third party recorded as an offsetting current liability.

Concentration of Credit Risk—Credit is extended to customers based on an evaluation of the customer's financial condition and collateral is generally not required.

For the years ended December 31, 2011 and 2010, the 2009 Consolidated Period and the 2009 Predecessor Period, different customers accounted for more than ten percent of Feature Film or Commercial revenues. A summary of customers who represent greater than ten percent of revenues for feature film and commercial segments by period is as follows:

	Successor																		Predecessor

	Year Ended December 31, 2011						Year Ended December 31, 2010						For the Period from January 1, 2009 (the inception date) through December 31, 2009						For the Nine Months Ended September 30, 2009
	Commercial			Feature			Commercial			Feature			Commercial			Feature			Commercial			Feature
Customer A		—			—			—			57	%		16	%		45	%		—			38	%
Customer B		—			—			—			15	%		—			—			—			—
Customer C		—			—			—			11	%		—			—			—			—
Customer D		—			—			14	%		—			10	%		—			—			—
Customer E		16	%		—			18	%		—			—			—			—			—
Customer F		—			—			—			—			—			—			16	%		—
Customer G		—			—			—			—			—			—			12	%		—
Customer H		—			—			—			—			—			—			—			22	%
Customer I		—			12	%		—			—			—			—			—			17	%
Customer J		—			—			—			—			—			54	%		—			14	%
Customer K		—			—			—			—			11	%		—			—			—
Customer L		—			—			—			—			19	%		—			—			—
Customer M		—			28	%		—			—			—			—			—			—
Customer N		—			26	%		—			—			—			—			—			—
Customer O		11	%		—			—			—			—			—			—			—
Customer P		—			—			—			—			—			—			—			—
Customer Q		—			12	%		—			—			—			—			—			—

As of December 31, 2011 and December 31, 2010, six customers accounted for the following percentages of contract receivables:



Customer I	31	%	—
Customer II	12	%	—
Customer III	11	%	—
Customer IV	—		36	%
Customer V	—		16	%
Customer VI	—		13	%

Deferred Offering Costs—Deferred offering costs consist of legal and accounting fees and printing costs related to the preparation of a planned initial public offering of Common Stock. Deferred offering costs totaling $3.6 million were expensed to operations during 2008 relating to a public offering previously contemplated by the Predecessor that was abandoned.

Deferred offering costs totaling $0.1 million were capitalized as of December 31, 2010 related to the IPO and is a component of other assets in the accompanying consolidated balance sheet as of that date. In 2011, the Company expensed $0.4 million of offering costs related to the IPO, which is a component of selling, general and administrative expenses in the accompanying consolidated statements of operations for 2011. The Company capitalized $5.5 million of additional offering costs during 2011. Upon the completion of the IPO, the Company reclassified $5.6 million of deferred offering costs to stockholders' equity.

Property and Equipment—Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and property held under capital leases are amortized over the shorter of their estimated useful lives or the remaining lease terms. Upon retirement or disposal, the asset cost and related accumulated depreciation are removed from the accounts and any gain or loss on disposition is included in Selling, general and administrative expenses.


Building		20 years
Computer equipment		3 years
Computer software		1 - 6 years
Machinery and equipment		3 - 5 years
Leasehold improvements		2 - 20 years
Office equipment, furniture and fixtures		3 - 5 years
Automobiles		3 - 5 years

Expenditures for renewals or betterments that materially extend the useful life of an asset or increase its productivity are capitalized. Expenditures for maintenance and repairs that do not extend asset lives or improve productivity are charged to the appropriate expense account as incurred.

Capitalized Film Development Costs—Development costs are accounted for pursuant to FASB ASC Topic 926, Entertainment—Films. The development costs for films, including direct costs, production overhead and interest, are capitalized and amortized using the individual-film-forecast computation method under which such costs are amortized for each project in the ratio that revenue earned in the current period for such project bears to management's estimate of the ultimate revenues to be realized from all media and markets for such project. Management regularly reviews, and revises when necessary, its ultimate revenue estimates on a project-by-project basis, which may result in a change in the rate of amortization applicable to such project and/or a write-down of the value of such project to estimated fair value. These revisions can result in significant quarter-to-quarter and year-to-year fluctuations in project write-downs and rates of amortization. If a total net loss is projected for a particular project, the associated film costs are written down to estimated fair value. During 2011, the Company wrote off $4.7 million of costs for a film project with no future value. Capitalized film development costs as of December 31, 2011 and 2010 totaled $4.7 million and $0.7 million, respectively.

Capitalized Software Costs—Under the provisions of FASB ASC Subtopic 350-40, Internal-Use Software, costs associated with customized internal-use software that have reached the application development stage and meet recoverability tests are capitalized. Such capitalized costs include external direct costs utilized in developing or obtaining the applications, internally developed code, purchased software licenses, implementation costs, programmed enhancements and new releases for certain projects that qualify for capitalization. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and ready for its intended purpose. Capitalized costs related to internally developed software costs are included in computer software within Property and equipment, net.

Goodwill and Acquisition-Related Intangible Assets—The difference between the purchase price and the fair market value of net assets acquired is classified as goodwill. Intangible assets are classified apart from goodwill if the assets have contractual or other legal rights or if the assets can be separated and sold, transferred, licensed, rented or exchanged.

The carrying value of goodwill and intangible assets not subject to amortization are evaluated for impairment as of the first day of the fourth quarter of each calendar year or whenever events or changes in circumstances indicate that the carrying value of goodwill or intangible assets not subject to amortization may not be recoverable. For the evaluation of intangible assets not subject to amortization, the fair value of these intangible assets is compared to their carrying amount. If the carrying amount of these intangible assets exceeds their fair value, an impairment loss would be recognized in an amount equal to that excess.

For the evaluation of goodwill and indefinite-lived assets, the two-step process required by FASB ASC Topic 350, Intangibles—Goodwill and Other, is applied. Reporting units are identified and the carrying value of each reporting unit is determined by assigning the assets and liabilities to those reporting units in order to assess goodwill for impairment. In the first step of a two-step impairment test, the fair value of these reporting units is determined. The Company has determined that in accordance with FASB ASC Topic 280, Segment Reporting, the Company has three reportable segments and two reporting units (which are defined as Feature Films and Commercials). The fair value for each reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired and no further testing is required. If the fair value does not exceed the carrying value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of that reporting unit's goodwill with its carrying amount. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment loss would be recognized in an amount equal to that excess.

Impairment of Long-Lived Assets—As required by FASB ASC Topic 360, Property, Plant and Equipment, long-lived assets other than goodwill and identifiable intangible assets with indefinite lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in which case a write-down is recorded to reduce the related asset to its estimated fair value.

Deferred Debt Issue Costs—Costs associated with the placement of short and long-term debt and related warrant liabilities are recorded as an asset in deferred debt issue costs and amortized over the life of the related financings using the effective interest method. During 2011 and 2011, we capitalized $4.4 million and $5.4 million, respectively, of deferred debt issue costs. During these same respective periods, we amortized $3.4 and $0.4 million of costs to interest expense. In 2011, we recognized $3.0 of losses upon the write off of deferred debt issue costs in connection with debt extinguishments. The net book value of unamortized deferred debt issue costs as of December 31, 2011 and 2010 were $3.0 million and $5.0 million, respectively.

Advance Payments—Advance payments represent cash received from customers in excess of costs incurred and gross profit recognized on the related contracts. Billings to customers are in accordance with the terms of the related contract and generally follow a payment schedule.

Deferred Revenue—The receipt of economic benefits from cash, donations of land, and other economic assistance, for which the conditions to recognize earnings into the consolidated results of operations have not been met, are classified as deferred revenue.

Warrant and Other Debt-Related Liabilities—Warrant and other debt-related liabilities represent (i) the fair value of certain conversion features of long-term debt, (ii) a put feature issued to a lender to call the loan under certain circumstances if an Initial Public Transaction (as defined) was completed, and (iii) warrants. Such warrant and other debt-related liabilities were evaluated under the hierarchy of FASB ASC Subtopic 480-10, FASB ASC Paragraph 815-25-1 and FASB ASC Subparagraph 815-10-15-74 addressing embedded derivatives. Certain of the warrants were issued with a feature whereby the holder can put the warrant to the Company for cash. The fair value of such warrants is estimated using the Black-Scholes option pricing model. The warrant liability is classified in accordance with the FASB Staff Position (FSP) No. 150-5, Issuer's Accounting under Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable ("FSP No. 150-5", now incorporated into and superseded by FASB ASC 480-10-25-9 and 25-13, Obligations to Repurchase Issuer's Equity Shares by Transferring Assets). Pursuant to FSP No. 150-5, freestanding warrants for shares that are either puttable or warrants for shares that are redeemable are classified as liabilities on the consolidated balance sheet at fair value. Subsequent changes in fair value of warrant, debt contingent put features, and other debt-related liabilities are recognized as interest expense or income in the accompanying consolidated statements of operations.

Stock-Based Compensation—The Company has three active stock-based compensation plans ("Stock-Based Compensation Plans"), which are described more fully in Note 19. The Stock-Based Compensation Plans consist primarily of options granted to employees and members of the Company's Board of Directors for the purchase of Common Stock. Compensation costs for all awards granted are measured at their estimated fair values using the Black-Scholes-Merton option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the remaining requisite service period of the award, which is generally the option vesting term. The amount of expense recognized in the consolidated financial statements represents the expense associated with the stock options expected to ultimately vest based upon an estimated rate of forfeitures. Such compensation expense is included as a component of Selling, general and administrative expenses in the accompanying consolidated statements of operations.

This rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded. The Black-Scholes-Merton option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including the expected volatility of the Company's Common Stock and an option's expected life.

Options and warrants to purchase shares of the Company's Common Stock granted by the Company to non-employee service providers are accounted for as compensation for the services rendered in accordance with FASB ASC Subtopic 505-50, Equity-Based Payments to Nonemployees, and as equity in accordance with the provisions of FASB ASC Topic 815, Derivatives and Hedging. The fair value of these options and warrants is determined using the Black-Scholes-Merton option pricing model and requires the input of subjective assumptions including the measurement or performance period and the expected volatility.

Income Taxes—In accordance with FASB ASC Topic 740, Income Taxes, deferred income tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is recorded to reduce net deferred income tax assets to amounts that are more likely than not to be realized.

Sales tax amounts due to governmental authorities are collected from customers. These payments are remitted to the appropriate taxing authority and recorded in the consolidated statements of operations on a net basis.

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 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.

As of December 31, 2011, 120,154 shares of the Company's common stock had been repurchased under the program at a cost of approximately $0.7 million, which was recorded as Treasury Stock on the accompanying balance sheet as of that date. Subsequent to December 31, 2011, 406,630 additional shares of the Company's common stock was repurchased for approximately $2.5 million. All of the stock purchases were paid in cash subsequent to December 31, 2011.

Earnings Per Share—Basic earnings per share is computed based upon the weighted-average number of shares outstanding, including nominal issuances of common stock 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. The dilutive effect of lender stock options is computed using the treasury stock method for the 2009 Consolidated Period. Due to the Successor's net losses for the years ended December 31, 2011 and 2010, and the Predecessor's net losses for the 2009 Predecessor Period, the inclusion of dilutive common share equivalents in the calculation of diluted earnings per share would be anti-dilutive. These common stock equivalents include stock options and warrants. Thus, the common share equivalents have been excluded from the computation of diluted earnings per share for the years ended December 31, 2011 and 2010, and the 2009 Predecessor Period.

The dilutive effect of convertible debt securities is computed using the if-converted method for the years ended December 31, 2011 and 2010, respectively. Due to the Successor's net losses for the years ended December 31, 2011 and 2010, the inclusion of dilutive common share equivalents would be antidilutive and accordingly have been excluded from the computation of diluted earnings per share for the years ended December 31, 2011 and 2010, respectively.

The Predecessor applies the provisions of FASB ASC Paragraph 260-10-45, Other Presentation Matters, which established standards regarding the computation of earnings per share by companies with participating securities or multiple classes of common stock. The Predecessor's senior preferred stock issuances are participating securities due to their participation rights related to cash dividends declared by the Company as described in Note 18. FASB ASC Paragraph 260-10-45 requires net loss attributable to common stockholders for the period to be allocated to participating securities to the extent that the securities are required to share in the loss. The Predecessor's senior preferred stock does not have a contractual obligation to share in losses of the Predecessor. As a result, net loss is adjusted for preferred stockholders accretion deemed dividends, and income participation, for purposes of the determination of basic and diluted net loss per share.

During the years ended December 31, 2011 and 2010, Digital Domain's net losses were $22.2 million and $1.0 million, respectively. During these periods, the Company owned 86.9% and 81.0% of Digital Domain's common stock, respectively. The net losses of Digital Domain attributable to non-controlling interests for the years ended December 31, 2011 and 2010 were $3.4 million and $2.7 million, respectively.

Weighted average number of common shares outstanding used to calculate basic and diluted net loss per common share was the same for the years ended December 31, 2011 and 2010 and the 2009 Predecessor Period, as the impact of all potentially dilutive securities outstanding was anti-dilutive.

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:

	Successor						Predecessor

					For the Period from January 7 (the inception date) through December 31, 2009
	For the Year Ended December 31,
	For the Year Ended December 31,						For the Nine Months Ended September 30, 2009
	2011		2010				For the Nine Months Ended September 30, 2009
Securities
Stock options		5,606,178		2,805,762		—		1,239,263
Stock options in subsidiary(a)		—		—		—		441,000
Restricted stock awards—unvested		—		—		—		217,860
Lender stock options and warrants		3,473,393		8,065,980		—		3,079,725
Investor warrants		1,012,502		—		—		—
Placement agent warrants		1,606,841		—		—		—
Convertible stock of subsidiary		2,699,776		—		—		—
Convertible preferred stock		—		5,963,041		—		—

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.