COMPANY BACKGROUND AND OVERVIEW

12 Months Ended

Dec. 31, 2011

COMPANY BACKGROUND AND OVERVIEW

COMPANY BACKGROUND AND OVERVIEW

1. COMPANY BACKGROUND AND OVERVIEW

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

        In October 2009, the Company acquired a controlling interest in Digital Domain, formerly Wyndcrest DD Holdings, Inc., and its subsidiary, Digital Domain Productions, Inc. (collectively, "Digital Domain" or, before the acquisition, the "Predecessor"). Digital Domain is a Delaware corporation incorporated on April 28, 2006 for the specific purpose of acquiring Digital Domain Productions, Inc. ("Digital Domain Productions"). Digital Domain Productions, Inc., also a Delaware corporation, was incorporated in April 1993. Digital Domain creates state-of-the-art digital imagery for feature films ("Feature Films"), television advertising ("Commercials"), interactive visual media and the video game industry ("Animation Studio").

        Since inception, Digital Domain has provided visual effects ("VFX") and animation for feature films, including Thor; TRON: Legacy; Transformers; The Curious Case of Benjamin Button; Titanic and Apollo 13.

        In November 2010, the Company acquired substantially all of the tangible and intangible assets of In-Three, Inc. ("In-Three"), a Nevada corporation. The results of operations have been included in the consolidated financial statements since that date. In-Three is a provider of proprietary Dimensionalization® solutions for the conversion of two dimensional ("2D") content into high quality 3D stereo imagery, including a software product, known as Intrigue, that converts entertainment media from 2D to 3D. In-Three's product offerings enable the Company to offer a digital production and stereo conversion solution to studios and filmmakers. By integrating In-Three's technology and team, the Company plans to use, and offer its clients the use of, an expanded set of creative and development capabilities.

        In October 2010, the Company founded Digital Domain Institute, Inc. ("DDI"), a for-profit post-secondary educational institution in partnership with Florida State University ("FSU"). In December 2010, the City of West Palm Beach granted the Company title to land for DDI's headquarters and primary campus facility. In April 2011, the Company entered into agreements with FSU establishing a public-private education partnership whereby DDI graduates will receive fully-accredited four-year Bachelor degrees from FSU. Working with FSU's College of Motion Picture Arts and the Florida Department of Education, the Company has designed a curriculum for DDI that will produce graduates possessing both traditional motion picture arts and technical animation and visual effects CG skills.

        The Company's core business focuses include co-producing feature films with major motion picture studios, operating a family animation feature film studio, developing an institute of higher education focused on digital animation and related disciplines, and launching new market initiatives such as the extension of its core digital production and animation services to clients outside the entertainment industry. As part of these initiatives, the Company is the recipient of grant awards and other incentives (further detailed in Note 7) totaling $135 million in the form of cash, future donations of land, building and equipment financing, and tax incentives.

Initial Public Offering ("IPO")

        The Company completed its IPO on November 18, 2011. In the IPO, the Company sold 4,920,000 new shares of common stock at an offering price of $8.50 per share. The gross proceeds of the IPO were $41.8 million. The net proceeds of the IPO after payment of underwriting fees and other related expenses were $33.2 million. In accordance with ASC 815-40-35-9, the Company recognized a charge to additional paid in capital of $16.4 million for existing warrants that became a liability upon the Company becoming a public company. The senior convertible debt aggregating $14.1 million and related warrant liabilities aggregating $79.9 million were converted into equity at the date of the IPO, which increased stockholders' equity by $94.0 million. Therefore, the net increase in stockholders' equity from the IPO was $110.8 million.

        Liquidity and Capital Resources—The Predecessor has a history of losses, including a $26.4 million loss for the nine months ended September 30, 2009 ("2009 Predecessor Period"). The Successor has a limited operating history, had a deficit of working capital of $18.8 million as of December 31, 2011 and had a $140.7 million loss and used $42.2 million to fund cash flows from operations for the year ended December 31, 2011. The Company has worked to improve its working capital, including improving its cash flows from operations and securing funding from Palm Beach Capital Funds 1, 2 and 3 and, subsequent to June 30, 2011, Comvest Capital ("Comvest") as described in Note 16.

        Digital Domain will continue to rely upon its ability to win awards of new major film and commercial projects as well as funding from the Company. However, if it does not enter into an adequate number of contracts for new films and commercial projects and is unable to obtain funding from the Successor, Digital Domain may need to do one or more of the following to raise additional resources or reduce cash requirements:

• •

  secure additional short-term debt financing;

  •

  secure additional long-term debt financing;

  •

  secure additional equity financing;

  •

  further reduce operating expenditures; or

  •

  increase sales to current customers and markets

        The consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amounts of the recorded assets or the amount of liabilities that might result from the outcome of this uncertainty.