Summaries of notes payable as of December 31, 2011 and 2010 are as follows (in thousands):

	December 31, 2011

	Comvest Convertible Note Payable			Comvest Note Payable			Comvest Revolver Payable			Net 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

	December 31, 2010 Convertible Notes Payable

	Palm Beach Capital Fund 1 Convertible Note Payable			Palm Beach Capital Fund 2 Convertible Note Payable			Palm Beach Capital Fund 3 Convertible Note Payable			Total
Face amount	$	9,715		$	6,000		$	2,200		$	17,915
Unamortized discount		(8,984	)		(5,800	)		(2,200	)		(16,984	)

Net convertible notes payable		731			200			—			931
Less current portion		—			—			—			—

Long-term portion	$	731		$	200		$	—		$	931

	December 31, 2010 Other Notes Payable

	Commercial Lender Note Payable			Other Notes Payable			Total			Total Debt December 31, 2010
Face amount	$	12,000		$	1,054		$	13,054		$	30,969
Unamortized discount		(4,627	)		—			(4,627	)		(21,611	)

Net notes payable		7,373			1,054			8,427			9,358
Less current portion		—			(1,054	)		(1,054	)		(1,054	)

Long-term portion	$	7,373		$	—		$	7,373		$	8,304

Principal maturities of debt at December 31, 2011 are as follows (in thousands):

The changes in net debt for the years ended December 31, 2011 and 2010 are as follows (in thousands):

	Convertible Notes Payable

	Palm Beach Capital Fund 1 Convertible Note Payable			Palm Beach Capital Fund 2 Convertible Note Payable			Palm Beach Capital Fund 3 Convertible Note Payable			Comvest Convertible Note Payable			Total Convertible Notes Payable
Net debt, December 31, 2009	$	—		$	—		$	—		$	—		$	—
New borrowings		10,215			6,000			2,200			—			18,415
Repayments		(500	)		—			—			—			(500	)
Debt extinguishments		—			—			—			—			—
Recognition of discounts and deferred issue costs		(9,715	)		(6,000	)		(2,200	)		—			(17,915	)
Amortization of discounts and deferred issue costs		731			200			—			—			931

Net debt, December 31, 2010		731			200			—			—			931
New borrowings		—			—			2,000			8,000			10,000
Recognition of discounts and deferred issue costs		(1,090	)		(673	)		(2,000	)		(8,000	)		(11,763	)
Amortization of discounts and deferred issue costs		3,719			2,399			881			455			7,454
Capitalized interest		—			—			173			—			173
Debt extinguishments		5,355			3,457			2,226			—			11,038
Conversion of debt to stockholders' equity		(8,715	)		(5,383	)		(3,280	)		—			(17,378	)

Net convertible debt, December 31, 2011	$	—		$	—		$	—		$	455		$	455

	Commercial Lender Note Payable			Comvest Lender Note Payable			Comvest Revolver Note Payable			Falcon Notes			Other Notes Payable			Total Other Notes Payable			Total Net Debt

Net debt, December 31, 2009	$	7,904		$	—		$	—		$	9,160		$	—		$	17,064		$	17,064
New borrowings		2,000			—			—			—			2,900			4,900			23,315
Repayments		(4,000	)		—			—			(9,718	)		(1,846	)		(15,564	)		(16,064	)
Debt extinguishments		10,157			—			—			—			—			10,157			10,157
Recognition of discounts and deferred issue costs		(10,157	)		—			—			—			—			(10,157	)		(28,072	)
Amortization of discounts and deferred issue costs		1,857			—			—			289			—			2,146			3,077
Capitalized interest		—			—			—			269			—			269			269
Recognition of Commercial Lender Put		(512	)		—			—			—			—			(512	)		(512	)
Amortization of Commercial Lender Put		124			—			—			—			—			124			124

Net debt, December 31, 2010		7,373			—			—			—			1,054			8,427			9,358
New borrowings		—			—			7,400			—			2,000			9,400			19,400
Repayments		—			—			—			—			(3,054	)		(3,054	)		(3,054	)
Recognition of discounts and deferred issue costs		—			(1,779	)		(1,061	)		—			—			(2,840	)		(14,603	)
Amortization of discounts and deferred issue costs		973			659			393			—			—			2,025			9,479
Capitalized interest		—			—			—			—			—			—			173
Debt extinguishments		3,371			—			—			—			—			3,371			14,409
Conversion of debt to stockholders' equity		—			—			—			—			—			—			(17,378	)
Amortization of Commercial Lender Put		283			—			—			—			—			283			283
Purchase of Commercial Lender note payable by Comvest Capital II		(12,000	)		12,000			—			—			—			—			—

Net debt, December 31, 2011	$	—		$	10,880		$	6,732		$	—		$	—		$	17,612		$	18,067

Secured Promissory Note ("Lender Note")—On September 30, 2009, the Company entered into a $12.0 million secured promissory note agreement with a commercial lender (the "Commercial Lender"). On October 14, 2009, this loan agreement was amended (the "Loan Agreement") to increase the promissory note to $14.0 million (the "Secured Promissory Note"). Under the terms of the Loan Agreement, the proceeds were specifically designated to be used towards (i) the purchase of Common Stock of Digital Domain directly from the Company's Chairman and Chief Executive Officer (see Note 2), (ii) the purchase of Series C Preferred Stock from Digital Domain representing a 51% interest in Digital Domain (see Note 2) and to acquire the rights to the Titanic Agreement (see Note 2), and (iii) to fund the cash collateral account described below. Our Chairman and Chief Executive Officer guaranteed this loan (see Note 22). In connection with the Loan Agreement, the Company issued the Commercial Lender an option (the "Lender Stock Option") to purchase 2,157,549 shares of common stock, $0.01 par value. See Note 17 for further disclosure regarding the terms of the Lender Stock Option.

The gross cash proceeds from the transaction amounted to $14.0 million. Expenses for this financing transaction amounted to $0.1 million, resulting in net proceeds to the Company of $13.9 million. The allocation of the proceeds of the Secured Promissory Note was based on the fair values of the debt and Lender Stock Option at the time of issuance, resulting in the assigned value of $7.4 million for the Secured Promissory Note and $6.6 million for the value of the Lender Stock Option, which was treated as a debt discount. Additionally, issuance costs of $0.1 million allocated to the Secured Promissory Note were deferred and recorded as a reduction of the carrying amount of the Secured Promissory Note. The discount and issuance costs are being amortized over the term of the Secured Promissory Note (including the optional extension periods as described below) using the effective interest method.

The Secured Promissory Note (i) had an interest rate of the greater of 6.5% per annum or a floating rate of interest equal to the prime rate plus 200 basis points (5.25% at December 31, 2010 and 2009, respectively); (ii) required monthly interest payments in arrears; and (iii) was due on September 29, 2010; however, the Company could extend the due date by two additional 364-day periods provided that no event of default (as defined) had occurred and had not been cured. The balance due under the Secured Promissory Note could be prepaid at any time without penalty or premium. Pursuant to FASB ASC Topic 470, Debt, the Secured Promissory Note was recorded as long-term debt since the terms of the Loan Agreement allowed for the extension of, and management intended to extend, the due date by the two additional 364-day periods.

The Secured Promissory Note was originally collateralized by (i) substantially all of the assets of the Company, with the exception of real property owned or acquired, including real property that may be owned or acquired in connection with the grant agreements with the State of Florida and the City of Port St. Lucie (see Note 7); (ii) the shares of Digital Domain Common Stock purchased by the Company with the proceeds received under the Loan Agreement as discussed above; (iii) the shares of Digital Domain Series C Preferred Stock purchased by the Company with the proceeds received under the Loan Agreement discussed above; and (iv) 8,150,738 shares of Common Stock of the Company owned by the Company's Chairman and Chief Executive Officer. As discussed below, the collateral was modified in connection with the Private Equity Financing.

The Loan Agreement had a cash collateral covenant, as amended, whereby an interest-bearing restricted cash reserve balance of $0.9 million was maintained in an account held by the Commercial Lender recorded separately on the consolidated balance sheet as of December 31, 2010. Additionally, the Commercial Lender had a right to receive any interest, dividends, payments or distributions made upon or with respect to the Digital Domain Common Stock and Series C Preferred Stock purchased by the Company from the proceeds of the Secured Promissory Note, which shall be deposited into a trust account held at and for the benefit of the Commercial Lender, until the Secured Promissory Note was paid in full. In the event of default (as defined) under the Loan Agreement, the Commercial Lender had the voting rights with respect to such shares. Upon receipt of additional loans in an amount equal to or in excess of $1.7 million, all of the funds then held in the cash reserve account were released upon the repayment of the Falcon Notes in November 2010 (see discussion of Falcon repayment below). The Company shall thereafter cause 20% of all further proceeds of additional equity investments in the Company to be deposited into the cash reserve account until it equals $1.0 million.

Modification of Loan with the Commercial Lender—On March 31, 2010, the Loan Agreement was modified and the principal balance was increased by $2.0 million, bringing the principal balance of the loan to $16.0 million (the "Replacement Note"). The proceeds of this modification were used primarily to acquire 666,667 shares of Series C Preferred Stock of Digital Domain on April 1, 2010 (see Note 18 for discussion of this purchase). The cash collateral pledge agreement was also modified to require any monies received from the Titanic Agreement to be deposited in the collateral account held at the Commercial Lender. The modification also required a $4.0 million principal installment to be paid on September 30, 2010, which was paid on that date. All other material terms of the loan with the Commercial Lender were unchanged. The Company's Chairman and Chief Executive Officer provided a personal guaranty related to the increased loan amount. Additionally, the Replacement Note is secured by the shares of the Digital Domain Series C Preferred Stock purchased on March 31, 2010. In consideration for the personal guaranty, the Company paid in cash to its Chairman and Chief Executive Officer 7% of the increased loan amount ($140,000) (see Note 22 for discussion of related parties), which was recorded as interest expense.

Pursuant to the requirements of FASB ASC Subparagraph 470-50-40-13, the modification on March 31, 2010 was accounted for as a debt extinguishment since the present value of the future cash flows under the modified terms (the "fair value") of the loan varied in excess of 10% of the carrying amount (net of unamortized debt issuance costs) of the loan. The amortization of the unamortized debt discount and issuance costs aggregating to $5.9 million as of that date was accelerated, which was recorded as Loss on debt extinguishment. A new discount for $5.9 million was established using the Company's estimated cost of capital of 34% to adjust the loan amount to fair value, which was recorded as a reduction of the Loss on debt extinguishment. Therefore, there was no net gain or loss from the debt extinguishment. The discount was being amortized over the term of the Secured Promissory Note (including the optional extension periods as described above) using the effective interest method.

Warrants Issued to Potential Lenders and Business Partners—In February of 2010, warrants were issued to two third parties to purchase an aggregate of 283,012 shares of the Company's Common Stock, $0.01 par value. The warrants are subject to anti-dilution provisions. The fair value of the warrants at date of issue was $1.6 million, which was recorded as interest expense and Additional paid in capital. The Company utilized the Black-Scholes-Merton option pricing model to determine the fair value of these warrants, which used the following assumptions: term of 4.63 years, risk-free rate of return of 2.28%, volatility of 45.0% and no dividends. The underlying terms of the warrants are discussed in Note 17.

Private Equity Financing—On September 30, 2010, the Company entered into an Amended and Restated Loan Agreement ("Amended Agreement") with the Commercial Lender and an affiliate of Palm Beach Capital (the "Palm Beach Capital Fund 1"). The Amended Agreement allowed for a maximum financing of $15.0 million through December 31, 2010 from Palm Beach Capital Fund 1 and $12.0 million from the Commercial Lender. On September 30, 2010, the Company borrowed $7.0 million from Palm Beach Capital Fund 1 in the form of Secured Convertible Promissory Notes (discussed below). The proceeds of this borrowing were used to pay the $4.0 million principal installment due on September 30, 2010 under the loan with the Commercial Lender as discussed above. Additional uses of the proceeds included a $2.0 million quarterly principal installment due under the Falcon Notes (see below) paid on October 1, 2010. The remaining proceeds were used to pay the expenses of the Amended Agreement aggregating $0.5 million and for general corporate purposes. These loans were guaranteed by the Company's Chairman and Chief Executive Officer, who was also granted a warrant to purchase 839,105 shares of Common Stock pursuant to the 2010 Stock Plan (see Note 19) in exchange for this guarantee. The guarantee, valued at $3.8 million, was classified as deferred debt issuance costs and Additional paid-in-capital is being amortized to interest expense over the remaining term of the Amended Agreement (including the optional extension period as described below) using the effective interest method. The Company utilized the Black-Scholes-Merton option pricing model to determine the fair value of this warrant, which used the following assumptions: term of 10 years, risk-free rate of return of 2.53%, volatility of 51.67% and no dividends. During February and March 2011, the Company's Chairman and Chief Executive Officer exercised the warrant and was issued 839,105 shares of the Company's Common Stock. The underlying terms of the warrant are discussed in Note 17 and the related party transaction is disclosed in Note 22.

As contemplated by the Amended Agreement, on November 24, 2010, an additional $2.7 million was funded by Palm Beach Capital Fund 1 and $6.0 million was funded by another private equity lender ("Palm Beach Capital Fund 2"). The terms of these borrowings are consistent with the loan described above for Palm Beach Capital Fund 1, including conversion rights, purchase options and granting of warrants. The percentage of the warrants for Palm Beach Capital Fund 1 increased due to the additional financing in accordance with the formula discussed above. Palm Beach Capital Fund 1 also received additional warrants as a fee for assisting in the financing with Palm Beach Capital Fund 2. The Company utilized $2.7 million of the proceeds to repay in full amounts due under the Falcon Notes (see below) and the remainder for general corporate purposes.

A provision included in the Amended Agreement permitted the Commercial Lender to call its portion of the loan upon the completion of an Initial Public Offering that results in market capitalization of at least $100.0 million and net proceeds of at least $40.0 million (the "Commercial Lender Put Right"). The initial fair value of the Commercial Lender Put as of September 30, 2010 was $0.5 million and was based on the difference between the fair value of the debt with and without the Commercial Lender Put Right. This amount was recorded as additional discount and a warrant and other debt-related liability as of that date in anticipation of an initial public offering in the near term. The debt issuance costs are amortized to interest expense. The put right liability was adjusted to fair value each reporting period as described in Note 4.

The loans with the Commercial Lender, Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 (i) had an interest rate at the greater of 6.5% per annum or a floating rate of interest equal to the prime rate plus 200 basis points (5.25% at December 31, 2010); (ii) required monthly interest payments in arrears; and (iii) were due on September 29, 2011; however, the Company could extend the due date by an additional 364-day period provided that no event of default (as defined) has occurred and had not been cured. The balances due Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 could be prepaid at any time without penalty or premium. Pursuant to FASB ASC Topic 470, Debt, these loans were recorded as long-term debt since the terms of the Amended Agreement allow for the extension of, and management intends to extend, the due date by the additional 364-day period.

The loans with Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 were issued through the sale of convertible notes (the "Convertible Notes"). Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 had the right to convert all or a portion of the unpaid amount of the Convertible Notes into shares of Common Stock of the Company at any time prior to the termination date of the loan. The number of common shares into which the Convertible Notes were convertible is equal to the product of an amount equal to the number of shares of the diluted Common Stock deemed outstanding on the date of conversion multiplied by a fraction. The numerator of this fraction was the aggregate unpaid amount of the Convertible Notes being converted and the denominator of which is the sum of $100.0 million plus the aggregate unpaid amount of the Convertible Note being converted (the "Conversion Feature"). On December 31, 2010, these convertible fractions were 8.9% and 5.7% for Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2, respectively.

The Convertible Notes, the early prepayment features, the underlying debt agreements and the Conversion Features 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. As the Conversion Feature survives any prepayment of debt until the end of the loan term in September 2012 and effectively would allow the holder to convert all debt, whether prepaid or not, at the holder's option, these arrangements were viewed as debt with a Conversion Feature akin to a warrant. Accordingly, the Conversion Feature was bifurcated at inception and recorded at a fair value of $5.4 million. As the Convertible Notes were fully discounted (see below), the entire amount was recorded as interest expense and classified as Warrant and other debt-related liabilities. The bifurcated instrument is adjusted to fair value each reported period as described in Note 4.

As part of the incentive for Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 to enter into these loans, these funds were also granted warrants in addition to the Conversion Feature. These warrants allow these funds to purchase shares of Series A Preferred Stock equal to a percentage of the diluted Common Stock deemed outstanding on the date of any exercise of the warrant at a purchase price of $0.01 per share. The amount of the shares of Series A Preferred Stock issuable upon exercise of the warrant is determined by subtracting the amount of the diluted Common Stock deemed outstanding from the result of dividing the amount of the diluted Common Stock deemed outstanding on the date of exercise by the sum of one minus the Funded Percentage. This Funded Percentage for Palm Beach Capital Fund 1 is defined as 8.5% plus 1.2% for each $1.0 million funded by Palm Beach Capital Fund 1 subsequent to October 1, 2010. The Funded Percentage for Palm Beach Capital Fund 1 as of December 31, 2010 was 11.8%, which would have resulted in 3,513,049 shares of Common Stock if the warrant had been exercised on that date. The Funded Percentage for Palm Beach Capital Fund 2 as of December 31, 2010 was 6.5%, which would have resulted in 1,936,091 shares of Common Stock if the warrant had been exercised on that date. The underlying terms of the warrant are discussed in Note 17.

The gross cash proceeds from the loans with Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 amounted to $15.7 million. Expenses for these financing transactions amounted to $0.6 million, resulting in net proceeds to the Company of $15.1 million. The fair value of the warrants issued to Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 aggregated $30.5 million, which were recorded as warrant liabilities. Of this amount, $15.7 million was recognized as debt discounts and $0.9 million was recognized as deferred debt issue costs, both of which are being amortized over the term of the Secured Promissory Note (including the optional extension period as described above) using the effective interest method. The remaining $13.9 million was recognized as interest expense. The warrant liabilities will be adjusted to fair value each reporting period as described in Note 4.

The loans with the Commercial Lender, Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 were collateralized by all assets then or hereafter owned by the Company, with the exception of real property owned or acquired by the Company in connection with the grant agreements with the State of Florida and grant agreements with local authorities.

On December 30, 2010, the Company entered into a Junior Convertible Promissory Note and Option Agreement (the "Junior Debt") with Palm Beach Capital Fund 3, a private equity lender, for $4.2 million. On that date, $2.2 million was funded. This loan bore interest at 8% and was due September 30, 2012. The Junior Debt had conversion rights, purchase options and granting of warrants provisions similar in nature to the lending agreements discussed above, except the Junior Debt was convertible into Common Stock at a $200.0 million valuation, as defined. Palm Beach Capital Fund 3 received a warrant to purchase 570,996 shares of the Company's common stock and had the right to convert the debt into 342,598 shares of common stock.

On that date, Palm Beach Capital Fund 3 entered into a Subordination Agreement with the Commercial Lender, Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 (the "Senior Lenders") whereby these parties agreed that the Junior Debt is subordinate to the loans with the Senior Lenders. The percentage of warrants and conversion options for the Senior Lenders increased with the borrowing from Palm Beach Capital Fund 3 in accordance with the provisions of the agreements with the Senior Lenders.

The gross proceeds of the loan with Palm Beach Capital Fund 3 were $2.2 million on December 30, 2010. Expenses of this borrowing amounted to $0.1 million, resulting in net proceeds to the Company of $2.1 million. The fair value of the warrants issued to Palm Beach Capital Fund 3 aggregated $3.3 million, which was recorded as a warrant liability. Of this amount, $2.2 million was recognized as a debt discount, which is being amortized to the termination date of June 30, 2011 using the effective interest method. The remaining $1.1 million was recognized as interest expense. The warrant liabilities were adjusted to fair value each reporting period as described in Note 4.

Concurrently with this borrowing, Palm Beach Capital Fund 3 paid $0.2 million to the Company's Chairman and Chief Executive Officer for an option to purchase 509,156 shares of the Company's common stock owned by this individual. Additionally, Palm Beach Capital Fund 3 paid $0.1 million to the Company's President and Chief Financial Officer for an option to purchase 169,719 shares of the Company's common stock owned by this individual. Palm Beach Capital Fund 3 exercised these options subsequent to December 31, 2010 at a weighted average exercise price of $2.21 per share.

In connection with the private equity borrowing, the Company issued 375,000 additional warrants to the Commercial Lender to purchase shares of the Company's common stock. The Company utilized the Black-Scholes-Merton option pricing model to determine the fair value of these warrants, which used the following assumptions: term of 4.63 years, risk-free rate of return of 2.28%, volatility of 45.0% and no dividends. The underlying terms of the warrants are discussed in Note 17. Pursuant to the requirements of FASB ASC Subparagraph 470-50-40-13, the modification on December 30, 2010 was accounted for as a debt extinguishment since the present value of the future cash flows under the modified terms (the "fair value") of the loan varied in excess of 10% of the carrying amount (net of unamortized debt issuance costs) of the loan. The amortization of the unamortized debt discount and issuance costs aggregating to $4.2 million as of that date was accelerated, which was recorded as Loss on debt extinguishment. A new discount for $4.2 million was established using the Company's estimated cost of capital of 34% to adjust the loan amount to fair value, which was recorded as a reduction of the Loss on debt extinguishment. Therefore, there was no net gain or loss from the debt extinguishment. The discount is being amortized over the term of the Secured Promissory Note (including the optional extension periods as described above) using the effective interest method.

On March 31, 2011 the Company obtained from the commercial lender and Palm Beach Capital Fund 1 an irrevocable waiver of certain events of default for the period ended March 31, 2011.

In April 15, 2011, Palm Beach Capital Fund 3 exercised its option to invest the final $2.0 million from the remaining capacity of the Company's Junior Debt agreement. On May 23, 2011, the Company entered into an equipment finance agreement for $2.0 million in equipment financing. This loan bears interest at 8%, which is adjusted to 12% if the loan is unpaid after 90 days of issuance. The proceeds of these two loans were used to repay in full amounts owed related to property and equipment purchased during the year ended December 31, 2011.

Modification and conversion of convertible note payable with Palm Beach Capital Fund 3 —Effective June 30, 2011, the convertible note payable with Palm Beach Capital Fund 3 was modified to extend the voluntary conversion feature from June 30, 2011 to December 31, 2011. This modification was accounted for as a debt extinguishment. The principal amount of the loan on June 30, 2011 was $4.3 million and the unamortized discount on the loan on that date was $3.4 million. Therefore, the carrying value of the loan before the modification was $0.9 million. Upon modification, the fair value of the loan was $3.1 million. Consequently, the Company recognized a loss on debt extinguishment of $2.2 million to adjust the carrying value of the loan to fair value.

The convertible note with Palm Beach Capital Fund 3 contained a mandatory conversion feature that was triggered upon the Company completing (1) an initial public transaction where the Company was publicly traded with a market capitalization of not less than $100 million or (2) a private placement of capital stock where the enterprise value of the Company was no less than $100 million and the Company receiving net proceeds of at least $20 million from such private placement. In July and August, 2011, the Company completed such a private placement, which triggered the mandatory conversion. This debt was converted into 726,594 shares of the Company's common stock. The Company recognized a loss of $1.1 million upon this conversion.

Private Equity Financing Transactions on July 1, 2011—As of July 1, 2011, the Company entered into a credit agreement with Comvest Capital, LP ("Comvest"), whereby it (i) sold to Comvest a convertible note in the aggregate principal amount of $8.0 million (the "Convertible Note"), the proceeds of which were used by the Company to acquire all of the rights of the Commercial Lender under the terms of the Company's stock option agreement with such lender, and (ii) entered with Comvest as lender into a revolving credit facility in an initial principal amount of up to $15.0 million (the "Revolving Credit Facility").

The Convertible Note (i) carries an interest rate of 10.0% per annum; (ii) requires quarterly interest payments in arrears due on December 31, March 31, June 30, and September 30, commencing September 30, 2011; and (iii) is due and payable in full on September 30, 2016. On each interest payment due date, the Company may, at its discretion, in lieu of the payment in whole or in part of interest due on the Convertible Note, pay such amount by adding such amount to the outstanding principal amount of the Convertible Note. In addition to certain conversion rights set forth in the Convertible Note, pursuant to which Comvest has the right from time to time to convert all of the amount owing under the Convertible Note into shares of the Company's Common Stock at a specified conversion ratio (subject to adjustment), upon the consummation of a qualified initial public offering of the Company's Common Stock ("QIPO") that raises gross proceeds to the Company of not less than $75 million, the outstanding interest and principal amount under the Convertible Note will be automatically converted into such number of shares of the Company's Common Stock as is equal to the product of (x) an amount equal to the number of shares of the Company's Common Stock outstanding (on a fully converted, fully diluted basis (taking into account the shares of the Company's Common Stock issuable upon such conversion), subject to adjustment [this adjustment includes Permitted Dilution Events in an identical fashion to the Company's other PBCC loans that include Permitted Dilutive Events]) on the date of conversion, multiplied by (y) a fraction, (i) the numerator of which is the outstanding interest and principal amount under the Convertible Note on such date and (ii) the denominator of which is the sum of (A) 103,132,159 and (B) the outstanding interest and principal amount under the Convertible Note on such date. The Convertible Note also has a put option feature that becomes exercisable on December 31, 2012, whereby the Company is required upon the holder's exercise to purchase the shares of its Common Stock issued upon the conversion of the Convertible Note at a price of (x) $4.00 per share if the notice informing the Company of the exercise of the put right is delivered to the Company before June 30, 2013, or (y) $4.50 per share if such notice is delivered to the Company on or after June 30, 2013. This put option feature terminates upon the consummation of a QIPO. Upon the consummation of a QIPO, the Company is required to use the proceeds thereof to pay all amounts owing under the Convertible Note.

Under the Revolving Credit Facility, the Company is obligated to pay interest on the unpaid principal amount of each revolving loan under such facility on the first day of each calendar month, beginning with August 1, 2011, at the rate of (i) 12% per annum payable in cash and (ii) 2% per annum payable in kind as an increase to the outstanding principal amount under such loan. As of November 1, 2011, the Company had drawn down $7.4 million under the Revolving Credit Facility. Subject to certain specified limitations, the proceeds of the revolving loans may be used by the Company to: (A) repurchase put rights from Falcon Mezzanine Partners II, LP in an amount not to exceed $4.0 million, (B) pay fees and expenses to be paid by the Company in connection with the closing of the credit agreement and the transactions contemplated thereby, and (C) provide for working capital needs. The Revolving Credit Facility will terminate on the earliest to occur of (a) September 30, 2012, (b) the termination in whole of all revolving loan commitments under the Revolving Credit Facility pursuant to the terms thereof, or (c) the date upon which the Company consummates a QIPO that raises net proceeds to the Company of not less than $75 million. Upon the consummation of a QIPO, the Company is required to use the proceeds thereof to pay all amounts owing under the Revolving Credit Facility.

In connection with the Company entering into the credit agreement with Comvest, it issued to Comvest a warrant for the purchase of shares of the Company's Common Stock in an aggregate amount equal to up to 2% of the shares of the Company's Common Stock outstanding on an as-converted, fully diluted basis, subject to adjustment on the date of any exercise of the warrant (taking into account the shares of the Common Stock issuable upon such exercise), subject to dilution only for certain specified permitted dilution events, for an aggregate exercise price of $10.00. Comvest's right to exercise the warrant vested as to 50% of the number of underlying shares of the Company's Common Stock when the Company made its initial drawdown under the Revolving Credit Facility. If, prior to December 31, 2011, it draws down an aggregate of $7.5 million or more under the Revolving Credit Facility, on December 31, 2011 Comvest's right to exercise the warrant shall vest in full.

In addition, Comvest paid in full all amounts of principal and interest owed by the Company to the Commercial Lender in exchange for our issuance of a promissory note to Comvest in the aggregate principal amount of $12.0 million. This new note was an amendment and restatement of our prior note with the Commercial Lender, subject to the modifications described below. Consistent with the prior note with the Commercial Lender, the promissory note (i) carries an interest rate equal to the greater of 6.5% per annum or a floating rate of interest equal to the prime rate plus 200 basis points; (ii) requires monthly interest payments in arrears; (iii) is due on September 30, 2012, and (iv) retains the put right previously described.

As the amount drawn under the Revolving Credit Facility as of December 31, 2011 was less than the $7.5 million threshold, Comvest's vested warrants amount to 1% of the fully diluted Common Stock outstanding. The fair value of the warrants on that date was $2.5 million, of which $2.2 million was recorded as a debt discount and $0.3 million was recorded as interest expense.

In addition, Comvest paid in full all amounts of principal and interest owing from the Company to the Commercial Lender in exchange for the Company's issuance of a promissory note to Comvest in the aggregate principal amount of $12.0 million. The promissory note (i) carries an interest rate equal to the greater of 6.5% per annum or a floating rate of interest equal to the prime rate plus 200 basis points; (ii) requires monthly interest payments in arrears; and (iii) is due on September 29, 2011; provided, however, that the Company could extend the due date by an additional 364-day period provided that no specified event of default had occurred and had not been cured as of such initial due date. Upon the consummation of a qualified initial public offering of our Common Stock that raises net proceeds to the Company of not less than $40 million, the Company is required to use the proceeds thereof to pay all amounts owing under the promissory note. As of the date of this transaction, the unamortized debt discount on the loan with the Commercial Lender was $3.4 million. The Company recognized this amount as a loss on debt extinguishment. Upon the Company completing its initial public offering as discussed in Note 1, Comvest released the common stock of the Company owned by the Chief Executive Officer which had been pledged as collateral for the loans.

Pursuant to amendatory instruments entered into on October 31, 2011 and November 1, 2011, the Company and Palm Beach Capital Funds 1 and 2, in their capacity as senior convertible debt holder of the Company, agreed to a modification of their respective loan agreements. This modification, among other things, lowered the threshold triggering automatic conversion of the entire outstanding unpaid principal balance of this convertible debt into shares of the Company's common stock, in connection with a registered offering of the Company's common stock, from a resultant market capitalization of not less than $250 million and net proceeds to the Company of not less than $75 million, to a resultant market capitalization of not less than $200 million and net proceeds to the Company of not less than $20 million. The same threshold was modified in the same manner with respect to the automatic exercise of warrants held by these lenders and their affiliates that are exercisable into shares of the Company's Series A Preferred Stock and common stock. As compensation for these modifications, these lenders and their affiliates received additional warrants, having an exercise price of $0.01 per share and otherwise identical in tenor with the amended warrants, to purchase up to an additional 130,000 shares of the Company's common stock. Upon the Company completing its initial public offering as discussed in Note 1, these convertible notes and warrants were automatically converted into 15,103,083 shares of the Company's common stock in November 2011.

Pursuant to FASB ASC 470-50-40, the Company concluded that the quantitative value of the warrant in relation to the debt amount and the significant individual qualitative changes to the terms of the debt under the Second Amended Agreement resulted in a substantial modification triggering a debt extinguishment. The Company wrote off $3.0 million of unamortized deferred debt issue costs and $8.8 million of unamortized debt discounts. These write offs were partially offset by recording a new discount of $1.8 million at the Company's estimated cost of capital of 20% that resulted in a net charge to the Company's results of operations of $10.0 million.

Conversion of Debt to Equity—As the net proceeds of the initial public offering exceeded the amended thresholds discussed above, the loans with Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 were mandatorily converted to equity on the date of the initial public offering. These loans, net of unamortized debt discounts, amounted to $14.1 million as of that date. The Company recognized a loss from this conversion of $1.6 million from the write-off of unamortized debt discounts.

Comvest Waiver and Loan Modifications February 23, 2012—The loans with Comvest were subject to financial and other loan covenants. Subsequent to December 31, 2011, the Company entered into a waiver and loan modification agreement with Comvest to clarify certain items in the Company's loan agreements including certain Waived Items. Comvest agreed to waive any non-compliance due to the Waived Items and any default interest that would have accrued due to the waived items.

Furthermore, these agreements provided that the following events could trigger mandatory prepayments of portions of the Comvest loans (terms as defined):

The agreements removed all future financial covenants and implemented certain provisions regarding minimum cash balances. These provisions include that the Company and the U.S. Subsidiary Guarantors must collectively have at least a cash balance of (i) $7.5 million on each of April 1, 2012, May 1, 2012 and June 1, 2012, and (ii) $10.0 million on each of July 1, 2012 and the first day of each calendar month thereafter (and in any event at least $2.5 million at all times), in each case, of unrestricted cash and cash equivalents on hand on deposit in an account in the United States.

In addition to agreeing to make a $2.5 million payment to reduce the Revolving Loan on or before March 31, 2012, the Company agreed to certain post-closing covenants. Besides delivering certain fully executed subsidiary security agreements and guarantees shortly after the First Amendment Effective Date, the Company agreed to make a payment to Comvest on or before March 31, 2012 in an amount equal to $2.5 million in cash as a repurchase of the Comvest Warrant.

The Comvest convertible note was modified so that on the maturity date (September 30, 2016), the outstanding interest and principal of the Note shall automatically convert into shares of the Company's common stock.

Prior to this agreement, Comvest had a put right whereby the Company would purchase the Comvest warrants at a price of $4.50 per share. In connection with this agreement, this price was modified to $6.00 per share; provided, however, that if all of the loans made under the First Lien Loan Agreement and all of the Revolving Loans are, in each case, repaid in full in cash on or before March 31, 2012, the purchase price for each share shall be decreased to $5.00 per share.

The Company also received the right to repurchase 50% of the original principal balance of the Note by paying, on the date the Company exercise such a right, in cash to Comvest the greater of (i) the Purchase Price and (ii) such portion of the principal balance of this Note then being repurchased plus all accrued and unpaid interest thereon.

Other Notes Payable—In May 2011, the Company entered an equipment finance agreement for $2.0 million with Palm Beach Capital Fund 3. This loan bore interest at 8%. The Company paid this loan in full on November 23, 2011.

During the year ended December 31, 2010, the Company purchased an aggregate of 4,566,666 shares of Digital Domain Common Stock from two former officers of Digital Domain (see Note 22 for discussion of related parties) as well as unrelated parties. An aggregate amount of $1.1 million was paid in cash and promissory notes of $0.4 million and $2.0 million were issued to the two former officers. The promissory note of $0.4 million was repaid during 2010, as well as $1.4 million of the additional promissory note. The outstanding principal balance of the additional promissory note was paid in full subsequent to December 31, 2010.

In October 2010, a wholly-owned subsidiary of the Company purchased 4 acres of land adjacent to the site on which the Company is constructing a new headquarters building in Port St. Lucie, Florida. To help fund this purchase, this subsidiary entered into an annually renewable revolving line of credit with a commercial bank (the "Bank") and borrowed $0.5 million. The line of credit with the Bank bears interest at 3.5% over the 30-day LIBOR rate. The line of credit's interest rate was 3.7575% on December 31, 2010. The line of credit is collateralized by the real property.

Legend Pictures Funding LLC Agreement and Release—The Company incurred certain expenses in connection with the development of the movie Paradise Lost, which was being produced by Legend Pictures Funding, LLC ("LPF"). Through December 31, 2011, the Company had capitalized $4.8 million of costs in this project. Subsequent to that date, it was determined that this was not a feasible project. Therefore, the Company wrote off its investment as of December 31, 2011. However, it is in negotiations with LPF in 2012 to recover a portion or all of its investment.

On March 19, 2012, the Company entered into certain agreements with LPF. In connection with these agreements, the Company borrowed $3.0 million from LPF in the form of a convertible note. This note matures on July 18, 2012 and bears simple interest at a rate of 8% per annum. At the option of LPF, all of the unpaid principal and interest, but not less than all, may be converted into common stock of the Company at any time on or prior to the maturity date at $5.64 per share, which was the closing price of the Company's stock on the date of the agreements. The loan is guaranteed by the Company's Chief Executive Officer.

In consideration for this loan, the Company released LPF from any future claim against LPF and its related parties related to the recovery of the Company's investment.

Subsidiary—Digital Domain Senior Secured Notes and Series B Notes ("Falcon Notes") —Senior Secured Notes—On July 21, 2006, Digital Domain entered into a purchase agreement (the "Agreement") with Falcon, whereby Digital Domain agreed to sell Falcon $12.5 million in Senior Secured Notes (the "Senior Secured Notes"). In addition, Digital Domain agreed to sell (i) 1,000,000 shares of Digital Domain's 8% senior cumulative convertible preferred stock ("Senior Preferred Stock"), par value $0.0001 per share, and (ii) stock purchase warrants ("Put Warrants") for the purchase of 1,220,512 shares of Digital Domain's Common Stock. See Amendment No. 2 described below regarding modification of the Put Warrants, Note 17 for further disclosure regarding the terms of the Put Warrants, and Note 18 for further disclosure regarding the terms of the Senior Preferred Stock.

A partner of Falcon Investment Advisors, LLC, a private investment firm, which is an affiliate of Falcon, was a member of Digital Domain's Board of Directors as of December 31, 2009. This individual resigned from the Board of Directors of Digital Domain in 2010.

The gross cash proceeds from the transaction amounted to $13.5 million. Expenses for this financing transaction amounted to $3.0 million, of which $0.8 million was non-cash compensation issued to legal advisors and the placement agent in the form of warrants to purchase Common Stock (see Note 17). The Put Warrants were recorded at their estimated fair value of $6.6 million on July 21, 2006. The residual amount of net proceeds from the transaction of $3.9 million was allocated to the Senior Secured Notes and Senior Preferred Stock based on the relative fair value of these securities. The proceeds from the transaction were allocated as follows (in thousands):

Of the $6.6 million Put Warrant valuation, $6.2 million was allocated to the Senior Secured Notes, resulting in a discount of $6.2 million from the $12.5 million face value of the Senior Secured Notes. Additionally, issuance costs of $2.8 million allocated to the Senior Secured Notes were deferred and recorded as a reduction of the carrying amount of the Senior Secured Notes. The discount and issuance costs were being amortized over the term of the Senior Secured Notes using the effective interest method.

The Senior Secured Notes had an interest rate of 15% per annum (17% per annum effective October 30, 2008 pursuant to Amendment No. 2 described below) and require quarterly interest payments in arrears.

On each interest payment date, Digital Domain may, at its option, in lieu of the payment in whole or in part of interest due on the Senior Secured Notes, which is in excess of 12% per annum, pay such amount in excess of 12% per annum on the Senior Secured Notes by adding such amount to the principal amount of the Senior Secured Notes. In order to prepay the Senior Secured Notes, the Company is required to pay the holders, in addition to the repayment amount, a redemption premium thereof as the maturity date of the Senior Secured Notes approaches as follows: from July 21, 2008 to July 20, 2009, 110.0% of the outstanding principal amount; from July 21, 2009 to July 20, 2010, 105.0% of the outstanding principal amount; and from July 21, 2010 to July 20, 2011, 102.5% of the outstanding principal amount.

Digital Domain is required to extend an offer to repurchase all or part of the Senior Secured Notes from each note holder upon a change in ownership or the receipt of proceeds from a debt offering or casualty event. The payment to each note holder will include up to 100% of the outstanding principle plus a change in control premium.

The Senior Secured Notes are collateralized by substantially all of the assets of Digital Domain and had certain financial covenants covering minimum qualified cash and limitations on capital expenditures beginning June 30, 2006. At September 30, 2009 and December 31, 2008, Digital Domain was required, among other items, to maintain cash balances of $2.0 million and $5.0 million, respectively. As of December 31, 2008, Digital Domain was not in compliance with certain covenants. Amendment No. 2 described below irrevocably waived these covenant defaults as of December 31, 2008.

Under the terms of the Senior Secured Notes, Digital Domain is also subject to covenants as modified by Amendment No. 1 to the Amended Agreement (as defined in Series B Notes below), requiring it (i) not to exceed a specified total leverage ratio, (i.e., the ratio of Digital Domain's consolidated indebtedness as of the last day of the applicable test period (each, a "Test Date") to its consolidated earnings before interest, taxes, depreciation and amortization, and all other non-cash charges to consolidated net income ("Consolidated EBITDA") for the four prior fiscal quarters) as modified by Amendment No. 1 to the Amended Agreement (as defined in the succeeding paragraph), (the "Total Leverage Ratio Covenant"), and (ii) to maintain a specified fixed charge coverage ratio, (i.e., the ratio of Digital Domain's Consolidated EBITDA (less unfinanced capital expenditures) for the prior four fiscal quarters to interest expense and other fixed charge payments made in the prior four fiscal quarters (the "Fixed Charge Coverage Ratio Covenant"), except that, in the case of the initial Test Date of April 30, 2009, applicable to each such covenant the test period is the twelve month period ended on that date (taken as one accounting period).

Series B Notes—On May 16, 2007, Digital Domain entered into an Amended and Restated Purchase Agreement (the "Amended Agreement") with Falcon, whereby Digital Domain agreed to sell Falcon $7.0 million in Series B Notes ("Series B Notes") due in 2011. In addition, Digital Domain agreed to issue Falcon stock purchase warrants ("Put Warrants") for the purchase of 416,666 shares of Digital Domain's Common Stock. See Amendment No. 2 described below regarding modification of the Put Warrants and Note 17 for further disclosure regarding the terms of the Put Warrants.

The proceeds from the transaction amounted to $6.6 million, net of transaction costs of $0.4 million. The Put Warrants were initially recorded at their estimated fair value of $3.4 million, which was treated as a discount from the face value of the Series B Notes. The residual amount of net proceeds from the transaction of $3.2 million was allocated to the Series B Notes. The discount and issuance costs were being amortized over the term of the Series B Notes using the effective interest method.

The Series B Notes (i) carry an interest rate of 15% per annum (17% per annum effective October 30, 2008, pursuant to Amendment No. 2), (ii) require quarterly interest payments in arrears, and (iii) were due on July 21, 2011.

The Series B Notes contain the same financial covenants as the Senior Secured Notes. The Amended Agreement was amended on February 22, 2008, pursuant to Amendment No. 1 thereto, as a result of which certain of these financial covenants were modified.

Amendment No. 2—On January 6, 2009, Digital Domain entered into Amendment No. 2, Consent and Waiver ("Amendment No. 2"), to the Purchase Agreement dated July 21, 2006 (as amended on May 16, 2007, and further amended pursuant to Amendment No. 1 dated February 22, 2008). Amendment No. 2 irrevocably waived two covenant defaults as of December 31, 2008, revised the previously existing financial covenants and established two new covenants. The new covenants required Digital Domain to raise additional equity capital of at least $6.0 million, net of financing costs, by June 30, 2009, (the "Equity Raise Covenant") and to sell The Foundry for net cash proceeds of at least $15.0 million by June 30, 2009. Under Amendment No. 2, Digital Domain was required on a monthly basis to comply with minimum targets under any two of the following three test metrics: (i) monthly and cumulative gross revenue on a consolidated basis, (ii) monthly and cumulative consolidated EBITDA, and (iii) cash and cash equivalents, as determined in accordance with US GAAP.

In addition to the amended financial covenants, the interest rate applied to the accrued balance of the Notes was increased by 2% per annum during the period beginning on October 30, 2008 and concluding upon the date of repayment of at least $15.0 million aggregate principal amount of Notes.

In connection with Amendment No. 2, the Put Warrants held by Falcon were exchanged for an identical number of new warrants, with the same exercise price per share as the warrants. Each of the new warrants is exercisable into one share of a newly created series of Convertible Preferred Stock of Digital Domain. The Series B Preferred Warrants have a $4.50 per share liquidation preference and rank in liquidation behind both the existing Senior Preferred Stock (extinguished in June 2009 in connection with the sale of The Foundry as discussed in Note 23), and also rank behind the Series C Preferred Stock, as described in Note 18. The new warrants also contain a put feature. Because the warrants have a put option, they are recorded as a liability and are adjusted to fair value at each reporting date as described in Note 4. The Company has the right to purchase Falcon's Series B Preferred Warrants through April 2011 for $5.0 million, subject to a 5 day preemption clause. Accordingly, the warrant is recorded at $5.0 million. On April 15, 2011, the Company purchased Falcon's Series B Preferred Warrants for $5.0 million in cash. See Note 17 regarding the new warrants.

Effective on January 6, 2009, an extinguishment of debt was deemed to have occurred, resulting in a remeasurement of carrying value, since the present value of the future cash flows under the modified terms (the "fair value") of the Senior Secured Notes and Series B Notes pursuant to Amendment No. 2 varied in excess of 10% of the carrying amount (net of unamortized debt issuance and debt discount amounts) of the respective Notes. Fair value of the Senior Secured Notes and Series B Notes amounted to $11.9 million and $6.5 million, respectively, which was calculated based on the modified repayment terms taking into account principal, interest and redemption premium payments, discounted at Digital Domain's estimated discount rate as of January 6, 2009 of approximately 23% (such rate representing what Digital Domain believes it could obtain elsewhere for debt with similar terms). The aggregate net carrying value of the Senior Secured Notes and Series B Notes was $12.0 million ($20.9 million face value net of $6.7 million in unamortized debt issuance costs and $2.2 million in debt discount amounts). Digital Domain recorded an interest charge of $8.9 million related to the write-off of the unamortized balances of the debt discount and issuance costs when the debt was extinguished, offset by a gain of $2.6 million to record the debt at fair value, resulting in a net change of $6.3 million which has been classified as Loss on debt extinguishment. The debt discount amounts, as remeasured, are being amortized over the term (as modified under Amendment No. 2) of the respective Notes using the effective interest method.

Amendment No. 3—In June 2009, Digital Domain entered into Amendment No. 3, Consent, Waiver and Agreement ("Amendment No. 3"), to the Purchase Agreement dated July 21, 2006 (as amended on May 16, 2007, and further amended pursuant to Amendment No. 1 dated February 22, 2008 and Amendment No. 2 dated December 31, 2008). In connection with the sale of The Foundry, Amendment No. 3 releases various security interests and a guarantee obligation relating to The Foundry that Digital Domain had provided to the note holders. Amendment No. 3 approved the sale of The Foundry for consideration of $12.0 million, and revised the Equity Raise Covenant to $9.0 million, to be completed by July 31, 2009, provided Digital Domain is in good faith negotiation with an investor by June 30, 2009. The funds received from the sale of The Foundry were primarily used to pay down the Senior Secured Notes by $5.2 million and Series B Notes by $4.8 million.

Pursuant to the requirements of FASB ASC Topic 470, Debt, Amendment No. 3 did not meet the accounting definition of a debt extinguishment. However, on a prospective basis, the effective interest rate was adjusted to approximately 20% to amortize the remaining debt discount amount using the effective interest method based on the remaining cash flows under the respective notes.

Amendment No. 4—On August 6, 2009, Digital Domain entered into Amendment No. 4, Consent, Waiver and Agreement ("Amendment No. 4"), to the Purchase Agreement dated July 21, 2006 (as amended on May 16, 2007, and further amended pursuant to Amendment No. 1 dated February 22, 2008, Amendment No. 2. dated December 31, 2008, and Amendment No. 3 dated June 2, 2009). Pursuant to Amendment No. 4, Digital Domain borrowed $0.3 million and $0.5 million from Falcon on August 6, 2009 and August 13, 2009, respectively (the "Series C" and "Series D" Notes, respectively). The Series C and Series D Notes (i) carried an interest rate of 15% per annum; (ii) required quarterly interest payments in arrears; and (iii) were due on July 21, 2011 prior to repayment on October 15, 2009. Along with the Series C and Series D Notes, Falcon received warrants to purchase the greater of 800,000 shares of Common Stock or the number of shares of Common Stock equal at the time of exercise of such warrants (or at the time that Digital Domain consummates an issuance of Common Stock or alternative equity generating gross proceeds of at least $10.0 million) to 5.0% of the fully diluted number of shares of Common Stock, assuming full conversion or exercise of all outstanding rights, warrants or options outstanding (the "Common Warrants") (see Note 17 for further disclosure regarding the terms of the Put Warrants). The proceeds from the transaction amounted to $0.8 million, net of transaction costs. The fair value of the Common Warrants at the date of issuance was $4.4 million, of which $0.8 million was recorded as debt discount (such amount limited to the amount of cash received under the respective notes), to be amortized over the term of the respective note, and $3.6 million was recognized on date of issuance of the respective notes as changes related to fair value of Warrant and other debt-related liabilities.

Senior Secured Notes—Amendment No. 5—Digital Domain was not able to execute an equity raise by July 31, 2009 as required by Amendment No. 3. In connection with the sale of Series C Preferred Stock in October 2009, effective October 15, 2009, Digital Domain entered into Amendment No. 5, Consent, Waiver and Agreement ("Amendment No. 5"), to the Purchase Agreement dated July 21, 2006 (as amended on May 16, 2007, and further amended pursuant to Amendment No. 1 dated February 22, 2008, Amendment No. 2 dated December 31, 2008, Amendment No. 3 dated June 2, 2009, and Amendment No. 4 dated August 6, 2009).

Amendment No. 5 contains provisions for the modification of terms and conditions under both the Senior Secured Notes and Series B Notes relating to (i) minimum principal installment payments and interest payments, (ii) redemption premiums, and (iii) financial covenants and waiver of breach of certain financial covenants.

In connection with the proceeds from the sale in October 2009 of Series C Preferred Stock, Digital Domain used $3.0 million to pay down debt, which included repaying the entire principal balances due of $0.8 million under the Series C and Series D Notes, $2.1 million of the outstanding balance under the Series B Notes, related accrued interest on such Notes, and a 4% prepayment premium amounting to $0.1 million.

Under the terms of Amendment No. 5, the Falcon Notes (i) had an interest rate of 17% per annum; (ii) had a stated maturity date of April 1, 2011; (iii) required monthly interest payments in arrears; and (iv) required minimum principal installment payments (allocable, at the option of Falcon, to either or both the Senior Secured Notes and Series B Notes) on each note installment date as follows: $1.0 million on January 1, 2010; $2.0 million on each of April 1, 2010, July 1, 2010, October 1, 2010 and January 1, 2011; and $2.0 million or lesser of the amount then outstanding on April 1, 2011.

On each interest payment date, Digital Domain may, at its option, in lieu of the payment in whole or in part of interest due, which is in excess of 12% per annum, pay such amount in excess of 12% per annum on the Falcon Notes by adding such amount to the principal of the Falcon Notes. During the year ended December 31, 2010, the period from January 7, 2009 (the Inception Date) through December 31, 2009, the 2009 Predecessor Period, and the year ended December 31, 2008, the Company capitalized $0.3 million, $0.1 million, $0.6 million and $0.7 million, respectively, of such interest.

Amendment No. 5 was deemed an extinguishment of debt, resulting in a remeasurement of carrying value, since the present value of the future cash flows under the modified terms (the "fair value") of the Senior Secured Notes and Series B Notes pursuant to Amendment No. 5 varied in excess of 10% of the carrying amount of the respective Notes. The cumulative fair value of the Senior Secured Notes and Series B Notes amounted to $9.0 million, which was calculated based on the modified repayment terms taking into account principal, interest and redemption premium payments, discounted at the Company's estimated discount rate as of October 15, 2009 of approximately 22% (such rate representing what the Company believes it could obtain elsewhere for debt with similar terms). The aggregate net carrying value of the Senior Secured Notes and Series B Notes was $9.0 million (as modified based on the debt extinguishment recorded in January 2009 resulting from Amendment No. 2 as discussed above), and thus the debt extinguishment did not result in any further effect on the consolidated results of operations.

In May 2010, Falcon notified Digital Domain of a default in failing to provide audited financial statements within 120 days of Digital Domain's year ended December 31, 2009. The default was cured in June 2010 by the delivery of Digital Domain's audited financial statements to Falcon.

Using a portion of the proceeds of the Successor debt transactions and investment described above, the balance of the Falcon Notes was paid off as of November 24, 2010. Subsequent to December 31, 2010, the Company acquired the Put Warrants from Falcon for $5.0 million (see Note 17).

Interest and Financing Expenses—The following table presents interest expense for each of the respective periods as follows (in thousands):

	Successor						Predecessor

					For the Period from January 7 (the inception date) through December 31, 2009
	For the Year Ended						For the Nine Months Ended September 30, 2009
	December 31, 2011		December 31, 2010				For the Nine Months Ended September 30, 2009
Interest and financing expense:
Issuance of and changes in fair value of warrant and other debt related liabilities	$	35,820	$	24,321	$	296	$	11,932
Amortization of discount and issuance costs on notes payable		13,201		3,633		644		599
Loss on debt extinguishment		18,256		—		—		6,311
Interest expense on notes payable		3,495		2,790		530		1,971
Interest expense on capital lease obligations		302		245		—		223

	$	71,074	$	30,989	$	1,470	$	21,036