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EXCEL - IDEA: XBRL DOCUMENT - Digital Cinema Destinations Corp.Financial_Report.xls
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Digital Cinema Destinations Corp.e610505_ex31-1.htm
EX-32.1 - CERTIFICATIONS PURSUANT TO - Digital Cinema Destinations Corp.e610505_ex32-1.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Digital Cinema Destinations Corp.e610505_ex31-2.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: December 31, 2012
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
______________________________________
 
Commission File Number: 333-178648

Digital Cinema Destinations Corp.
(Exact Name of Registrant as Specified in its Charter)
_____________________________________
 
Delaware  
27-31646577
(State or Other Jurisdiction of Incorporation
or Organization)
(I.R.S. Employer Identification No.)

250 East Broad Street, Westfield, New Jersey 07090
(Address of Principal Executive Offices, Zip Code)
 
(908-396-1360)
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See the definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting Company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o                         
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting Company)
Smaller reporting Company x
 
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
As of February 14, 2013, 5,134,656 shares of Class A Common Stock, $0.01 par value, and 900,000 shares of Class B Common Stock, $0.01 par value, were outstanding.
 
 
 

 
 
 DIGITAL CINEMA DESTINATIONS CORP.
CONTENTS TO FORM 10-Q
     
PART I --
FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (Unaudited)
 
 
1
 
 
 
2
 
3
 
4
Item 2.
24
Item 3.
44
Item 4.
44
PART II --
OTHER INFORMATION
 
Item 1.
44
Item 2.
45
Item 3.
45
Item 4.
45
Item 5.
45
Item 6.
45
 
45
 
46
Index
   
 
 
 

ITEM 1.  FINANCIAL STATEMENTS

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
   
December 31,
   
June 30,
 
   
2012
   
2012
 
ASSETS
 
(Unaudited)
       
CURRENT ASSETS
           
Cash and cash equivalents
  $ 3,129     $ 2,037  
Accounts receivable
    600       238  
Inventories
    162       78  
Deferred financing costs, current portion
    267       -  
Prepaid expenses and other current assets
    486       381  
Total current assets
    4,644       2,734  
Property and equipment, net
    29,859       15,432  
Goodwill
    4,343       980  
Intangible assets, net
    4,152       4,114  
Security deposit
    8       3  
Deferred financing costs, long term portion, net
    1,039       -  
Other assets
    80       14  
TOTAL ASSETS
  $ 44,125     $ 23,277  
LIABILITIES AND EQUITY
               
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
  $ 3,674     $ 1,939  
Payable to vendor for digital systems
    -       3,334  
Notes payable, current portion
    688       1,000  
Capital lease, current portion
    17       -  
Earn out from theater acquisitions, current portion
    79       79  
Deferred revenue
    513       31  
Total current liabilities
    4,971       6,383  
NONCURRENT LIABILITIES
               
Notes payable, long term portion
    9,300       -  
Capital lease, net of current portion
    79       -  
Earn out from theater acquisitions, long term portion
    550       -  
Unfavorable leasehold liability, long term portion
    176       190  
Deferred rent expense
    173       83  
Deferred tax liability
    89       39  
TOTAL LIABILITIES
    15,338       6,695  
COMMITMENTS AND CONTINGENCIES
               
STOCKHOLDERS' EQUITY
               
Preferred Stock, $.01 par value, 10,000,000 shares authorized as of December 31, 2012 and June 30, 2012, 6 and 0 shares of Series B Preferred Stock issued and outstanding as of December 31, 2012 and June 30, 2012, respectively
    -       -  
Class A Common stock, $.01 par value: 20,000,000 shares authorized and 5,134,656 and 4,519,452 shares issued and outstanding as of December 31, 2012 and June 30, 2012, respectively
    51       45  
Class B Common stock, $.01 par value, 900,000 shares authorized and issued and outstanding as of December 31, 2012 and June 30, 2012
    9       9  
Additional paid-in capital
    25,381       19,285  
Accumulated deficit
    (4,561 )     (2,757 )
TOTAL STOCKHOLDERS' EQUITY OF DIGITAL CINEMA DESTINATIONS CORP.
    20,880       16,582  
Noncontrolling interest
    7,907       -  
TOTAL LIABILITIES AND EQUITY
  $ 44,125     $ 23,277  
 
 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
1


 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
REVENUES
                       
        Admissions
  $ 4,752     $ 650     $ 7,761     $ 1,392  
        Concessions
    1,929       202       3,128       401  
        Other
    189       68       327       106  
                Total revenues
    6,870       920       11,216       1,899  
COSTS AND EXPENSES
                               
Cost of operations:
                               
Film rent expense
    2,417       270       3,855       598  
Cost of concessions
    317       28       482       68  
Salaries and wages
    710       144       1,224       288  
Facility lease expense
    811       128       1,334       248  
Utilities and other
    1,141       172       1,881       329  
General and administrative
    1,208       352       1,946       673  
Depreciation and amortization
    1,098       132       1,947       262  
Total costs and expenses
    7,702       1,226       12,669       2,466  
                                 
OPERATING LOSS
    (832 )     (306 )     (1,453 )     (567 )
                                 
OTHER EXPENSE
                               
Interest expense
    (272 )     -       (294 )     -  
Non-cash interest expense
    (75 )     -       (78 )     -  
Other expense
    (8 )     -       (8 )     -  
LOSS BEFORE INCOME TAXES
    (1,187 )     (306 )     (1,833 )     (567 )
                                 
Income tax expense
    47       15       64       20  
NET LOSS
  $ (1,234 )   $ (321 )   $ (1,897 )   $ (587 )
                                 
Net loss attributable to non-controlling interest
    93       -       93       -  
Net loss attributable to Digital Cinema Destinations Corp.
  $ (1,141 )   $ (321 )   $ (1,804 )   $ (587 )
                                 
Preferred stock dividends
    (5 )     (80 )     (6 )     (153 )
Net loss attributable to common stockholders
  $ (1,146 )   $ (401 )   $ (1,810 )   $ (740 )
                                 
                                 
Net loss per Class A and Class B common share- basic and diluted attributable to common stockholders
  $ (0.21 )   $ (0.28 )   $ (0.33 )   $ (0.51 )
                                 
Weighted average common shares outstanding:
    5,511,765       1,469,166       5,465,356       1,469,166  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
2

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
   
Six Months Ended
 
   
December 30,
 
   
2012
   
2011
 
Cash flows from operating activities
       
Net loss
  $ (1,897 )   $ (587 )
Adjustments to reconcile net loss to net cash used in operating activities:
 
        Depreciation and amortization
    1,947       262  
        Deferred tax expense
    50       20  
        Stock-based compensation
    69       33  
        Amortization of deferred financing costs included in interest expense
    17          
        Amortization of unfavorable lease liability
    (14 )     -  
        Paid-in-kind interest added to notes payable
    78       -  
Changes in operating assets and liabilities:
         
        Accounts receivable
    (446 )     (114 )
        Inventories
    (15 )     -  
        Prepaid expenses and other current assets
    (100 )     (228 )
        Other assets
    (57 )     -  
        Accounts payable and accrued expenses
    1,734       47  
        Payable to vendor for digital systems
    (3,334 )     -  
        Deferred revenue
    482       22  
        Deferred rent expense
    90       20  
                Net cash used in operating activities
    (1,396 )     (525 )
Investing activities:
               
        Purchases of property and equipment
    (415 )     (269 )
        Capital contribution of Start Media, LLC to joint venture
    8,000       -  
        Theater acquisitions
    (14,122 )     -  
        Cash acquired in acquisitions
    40       -  
               Net cash used in investing activities
    (6,497 )     (269 )
Financing activities:
               
        Repayment of notes payable
    (1,006 )     -  
        Proceeds from notes payable
    10,000       -  
        Payment under capital lease obligations
    (4 )     -  
        Payment of financing costs
    (369 )     -  
        Proceeds from issuance of preferred stock
    450       400  
        Dividends paid on preferred stock
    (6 )     -  
        Costs associated with issuance of stock
    (80 )     (24 )
                Net cash provided by financing activities
    8,985       376  
Net change in cash and cash equivalents
    1,092       (418 )
Cash and cash equivalents, beginning of year
    2,037       1,068  
Cash and cash equivalents, end of period
  $ 3,129     $ 650  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
3

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

1.           THE COMPANY AND BASIS OF PRESENTATION
 
Digital Cinema Destinations Corp. (“Digiplex”) and together with its subsidiaries and joint venture (the “Company”) was incorporated in the State of Delaware on July 29, 2010. Digiplex is the parent of wholly owned subsidiaries, DC Westfield Cinema LLC, DC Cranford Cinema LLC, DC Bloomfield Cinema LLC, DC Cinema Centers LLC, and DC Lisbon Cinema LLC, and intends to acquire additional businesses operating in the movie exhibition industry sector.

On December 10, 2012, Digiplex, together with Start Media, LLC (“Start Media”), entered into a joint venture, Start Media/Digiplex, LLC (“JV” or “Affiliate”), a Delaware limited liability company, to acquire, refit and operate movie theaters.  On December 11, 2012, wholly owned subsidiaries of JV executed Asset Purchase Agreements, which were amended on December 13, 2012, to acquire seven movie theaters (six of which are located in southern California and one of which is near Phoenix, Arizona)  (collectively, the “Ultrastar Acquisitions”) with an aggregate of 74 fully digital screens from sellers affiliated with one another  (collectively the “Ultrastar Sellers”).

The Company has determined that JV is a variable interest entity (“VIE”), and that the Company is the primary beneficiary of JV’s operations.  Therefore, the Company is presenting JV’s financial statements on a consolidated basis with a non-controlling interest.

As of December 31, 2012, the Company, including the JV, owned an aggregate of 16 theaters (the “Theaters”) with 159 screens in New Jersey, Connecticut, Pennsylvania, California and Arizona, each of which is operated by the Company. As described in Note 3, Digiplex completed its acquisition of the Lisbon theater on September 29, 2012, and the JV completed the Ultrastar Acquisitions on four separate dates in December 2012.  The operating results of the acquisitions are included in the Company’s results of operations from the respective acquisition dates.
 
The accompanying unaudited condensed consolidated financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on 10-K for the fiscal year ended June 30, 2012 filed with the Securities and Exchange Commission (“ SEC”) on September 24, 2012 (the “Form 10-K”).  In the opinion of management, all adjustments, consisting of a normal recurring nature, considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.  The operating results for the interim periods presented herein are not necessarily indicative of the results expected for the full year ending June 30, 2013.
 
 
4

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation
 
The unaudited condensed consolidated financial statements of the Company include the accounts of Digiplex and its wholly-owned subsidiaries, and the JV, the VIE. All intercompany accounts and transactions have been eliminated in consolidation.

Initial Public Offering
 
On April 20, 2012, the Company completed its initial public offering (“IPO”) of 2,200,000 shares of Class A common stock at a price of $6.10 per share, for net proceeds of $11,400 after deducting underwriting discounts and offering expenses of $2.0 million. Upon completion of the IPO, all 1,972,500 shares of Series A preferred stock that were outstanding converted into 986,250 shares of Class A common stock (with the effect of the one-for-two reverse stock split). The Company also issued 66,191 shares of Class A common stock as payment of $265 of dividends on the Series A preferred stock through December 31, 2011 and in May 2012, paid cash dividends of $102 on the Series A preferred stock for the period from January 1, 2011 through April 20, 2012. As of April 20, 2012, the Company’s 2012 Stock Option and Incentive Plan also became effective.  (See Note 11).
 
 On May 7, 2012, the Company sold 323,900 shares of its Class A common stock upon exercise of the underwriters’ overallotment option, for net proceeds of $1,800, after deducting underwriting discounts and commissions of $176.
 
Use of Estimates
 
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, those related to film rent expense settlements, depreciation and amortization, impairments, income taxes and assumptions used in connection with acquisition accounting. Actual results could differ from those estimates.
 
Stock Split
 
In November 2011, the Company’s Board of Directors approved a one-for-two reverse stock split of the Class A and Class B common stock. All share amounts and per share amounts for the periods presented have been adjusted retroactively to reflect the one-for-two reverse stock split.
 
 
5


 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

Revenue Recognition
 
Revenues are generated principally through admissions on feature film displays and concessions sales, with proceeds received in cash or credit card at the Company’s point of sale terminal at the Theaters.  Revenue is recognized at the point of sale. Credit card sales are normally settled in cash within approximately three business days from the point of sale, and any credit card chargebacks have been insignificant. Other revenue consists of theater rentals for parties, camps, civic groups and other activities, advertising revenue under our advertising contract and our portion of game income, ATM fees and internet ticketing fees. Rental revenue is recognized at the time of the rental.  Advertising revenue is recorded based on an expected per-patron amount and the number of patrons over the contract period as the advertising is being delivered on screen. Other revenue items are recognized as earned in the period.  In addition to traditional feature films, the Company also displays concerts, sporting events, children’s programming and other non-traditional content on its screens (such content referred to herein as “alternative content”).  Revenue from alternative content programming also consists of admissions and concession sales. The Company also sells theater admissions in advance of the applicable event, and sells gift cards for patrons’ future use. The Company defers the revenue from such sales until considered redeemed.

Cash Equivalents
 
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2012 and June 30, 2012, the Company held substantially all of its cash in checking or money market accounts with major financial institutions, and had cash on hand at the Theaters in the normal course of business.
 
Accounts receivable
 
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reports accounts receivable net of any allowance for doubtful accounts to represent management’s estimate of the amount that ultimately will be realized in cash. The Company reviews collectability of accounts receivable based on the aging of the accounts and historical collection trends. When the Company ultimately concludes a receivable is uncollectible, the balance is written off.
  
Inventories
 
Inventories consist of food and beverage concession products and related supplies. The Company states inventories on the basis of the first-in, first-out method, stated at the lower of cost or market.
 
Property and Equipment
 
Property and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the respective assets are expensed currently.
 
The Company records depreciation and amortization using the straight-line method, over the following estimated useful lives:
 
 
6

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

Furniture and fixtures
5 years
Leasehold improvements
Lesser of lease term or estimated asset life
Building and improvements
17 years (end of initial lease term)
Digital systems and related equipment
10 years
Computer equipment and software
3 years

Goodwill
 
The carrying amount of goodwill at December 31, 2012 and June 30, 2012 was $4,343 and $980, respectively. The Company evaluates goodwill for impairment annually or more frequently as specific events or circumstances dictate. Under ASC Subtopic 350-20, Intangibles — Goodwill and Other — Goodwill, the Company has identified its reporting units to be the designated market areas in which the Company conducts its theater operations. The Company determines fair value by using an enterprise valuation methodology determined by applying multiples to cash flow estimates less any net indebtedness, which the Company believes is an appropriate method to determine fair value. There is considerable management judgment with respect to cash flow estimates and appropriate multiples and discount rates to be used in determining fair value and such management estimates fall under Level 3 within the fair value measurement hierarchy.
 
The changes in carrying amounts of goodwill are as follows:
 
 
 
Total
 
 Balance as of June 30, 2012
  $ 980  
 Goodwill resulting from the Lisbon acquisition
    789  
 Goodwill resulting from the Ultrastar Acquisitions
    2,574  
 Balance as of December 31, 2012
  $ 4,343  
 
Concentration of Credit Risk
 
Financial instruments that could potentially subject the Company to concentration of credit risk, if held, would be included in accounts receivable. Collateral is not required on trade accounts receivables. It is anticipated that in the event of default, normal collection procedures would be followed.
 
 Fair Value of Measurements
 
The fair value measurement disclosures are grouped into three levels based on valuation factors:
 
Level 1 – quoted prices in active markets for identical investments

Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs)

Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)
 
 
7

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)


Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.
 
The following tables summarize the levels of fair value measurements of the Company’s financial liabilities as of December 31, 2012:
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Earn-out from theater acquisitions
    -       -       629       629  
    $ -     $ -     $ 629     $ 629  
 
The following tables summarize the levels of fair value measurements of the Company’s financial liabilities as of June 30, 2012:
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Earn-out from theater acquisitions
    -       -       79       79  
    $ -     $ -     $ 79     $ 79  
 
Earn-out from acquisitions is a liability to the sellers of the Rialto, the Cranford and the Lisbon theaters and is based upon meeting certain financial performance targets.  Estimates of the fair value of the Lisbon earn-out was estimated by a forecast of theater level cash flow, as defined by the Lisbon asset purchase agreement. That measure is based on significant inputs that are not observable in the market, which are considered Level 3 inputs.
 
The following summarized changes in the earn-out during the three months ended December 31, 2012:
 
 
 
Total
 
 Balance as of June 30, 2012
  $ 79  
 Estimated earn-out from the Lisbon acquisition
    550  
 Balance as of December 31, 2012
  $ 629  
 
 Key assumptions underlying the Lisbon earn-out include a discount rate of 12.5 percent and that Lisbon will achieve its forecasted financial performance target in the one year earn-out period.  As of December 31, 2012, the amount recognized for all earn-outs, the range of outcomes, and the assumptions used to develop the estimated had not changed.
 
 
8


DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

Deferred Rent Expense
 
The Company recognizes rent expense on a straight-line basis, after considering the effect of rent escalation provisions resulting in a level monthly rent expense for each lease over its term.
 
Deferred Financing Costs
 
Deferred financing costs primarily consist of unamortized debt issuance costs and the fair value of warrants issued to Start Media, which are amortized on a straight-line basis over the term of the note payable. The straight-line basis is not materially different from the effective interest method.
 
Film Rent Expense
 
The Company estimates film rent expense and related film rent payable based on management’s best estimate of the ultimate settlement of the film costs with the film distributors. Generally, less than one-quarter of film rent expense is estimated at period-end, with the majority being agreed to under firm terms. The length of time until these costs are known with certainty depends on the ultimate duration of the film’s theatrical run, but is typically “settled” within one to two months of a particular film’s opening release. Upon settlement with the film distributors, film rent expense and the related film rent payable is adjusted to the final film settlement.
 
The film rent expense on the statement of operations of the Company for the three months ended December 31, 2012  and 2011was reduced by virtual print fees (“VPFs”) of $259 and $62, respectively, under a master license agreement exhibitor-buyer arrangement with a third party vendor.  VPFs included in film rent expense for the six months ended December 31, 2012 and 2011 were $504 and $132, respectively.  VPFs represent a reduction in film rent paid to film distributors. Pursuant to this master license agreement, the Company will purchase and own digital projection equipment and the third party vendor, through its agreements with film distributors, will collect and remit VPFs to the Company, net of a 10% administrative fee.  VPFs are generated based on initial display of titles on the digital projection equipment.

Stock-Based Compensation
 
The Company recognizes stock-based compensation expense to employees based on the fair value of the award at the grant date with expense recognized over the service period, which is usually the vesting period for employees, using the straight-line recognition method of awards subject to graded vesting.
 
The Company uses the Black-Scholes valuation model to determine the fair value of stock options and warrants.  The fair value of the restricted stock awards is determined by the stock value on the award date.  The Company recognizes an estimate for forfeitures of unvested awards.  These estimates are adjusted as actual forfeitures differ from the estimate.
 
The Company has also issued common stock to non-employees in exchange for services. The Company measures and records stock-based compensation at fair value at the earlier of the date the performance commitment is reached or when the performance is complete.  The expense recognized is based on the fair market value of the Company’s stock issued.
 
Segments
 
As of December 31, 2012, the Company managed its business under one reportable segment: theater exhibition operations. All Company operations are located in the United States.
 
 
9

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
 
Recently Adopted Standards

In June 2011, the FASB issued ASU 2011-5, “Presentation of Comprehensive Income”, which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The provisions of this guidance are effective for the Company beginning July 1, 2012 and are required to be applied retroactively. The Company adopted this standard on July 1, 2012.

In July 2012, the FASB issued a new accounting standard update, which amends guidance allowing an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite– lived intangible asset is impaired. This assessment should be used as a basis for determining whether it is necessary to perform the quantitative impairment test. An entity would not be required to calculate the fair value of the intangible asset and perform the quantitative test unless the entity determines, based upon its qualitative assessment, that it is more likely than not that its fair value is less than its carrying value. The update provides further guidance of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of an indefinite– lived intangible asset is less than its carrying amount. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. This update is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted. The Company  adopted the provisions of this guidance effective October 1, 2012.  The adoption of this guidance did not have a material impact on its financial position or results of operations. 
 
Recently Issued Standards
 
In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income". This update requires companies to present the effects on the line items of net income or loss of significant reclassifications out of accumulated other comprehensive income or loss if the amount being reclassified is required under U.S. generally accepted accounting principles to be reclassified in its entirety to net income or loss in the same reporting period. ASU 2013-02 is effective prospectively for the fiscal years or interim periods within those years, beginning after December 15, 2012. The Company does not expect the adoption of the amended guidance to have a significant impact on its consolidated financial statements.
 
3.           ACQUISITIONS

On September 29, 2012, the Company acquired certain assets and assumed certain liabilities of the Lisbon theater, with 12 screens located in Lisbon, Connecticut, from a third party seller for a purchase price of $6,564, which consisted of a cash payment of $6,014, a capital lease liability of $100, and an earn-out liability calculated based upon forecasted financial results over a 12- month period following the closing, which the Company recorded at a fair value of $550. The expected range of the earn-out liability was $0 to $1,144. Accordingly, the total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The goodwill of $789 represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired.  Goodwill is mainly attributable to the assembled work force and synergies expected to arise after acquisition of the business. The allocation of the provisional purchase price is based on management’s judgment after evaluating several factors, using assumptions for the income and royalty rate approaches and the discounted earnings approach, and projections determined by Company management. The Company incurred approximately $74 in acquisition costs which is expensed and included in general and administrative expenses in the consolidated statement of operations for the six months ended December 31, 2012.

As of September 30, 2012, the Company recorded the provisional allocation of the Lisbon purchase price based on management’s preliminary analysis.  During the three months ended December 31, 2012, the Company further revised the Lisbon purchase price allocation and is continuing to finalize the fair values of the assets acquired and liabilities assumed.
 
 
10

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

The provisional purchase price for the Lisbon theater was allocated as follows:
 
   
Lisbon
 
   
theater
 
ASSETS
     
Cash
  $ 10  
Prepaid expenses
    4  
Inventory
    6  
Property and equipment
    5,710  
Covenants not to compete
    145  
Goodwill
    789  
Total assets acquired
    6,664  
         
LIABILITIES AND OTHER
       
Capital lease obligation assumed
    100  
Earnout liability
    550  
Total purchase price paid in cash
  $ 6,014  
 
On December 21, 2012, the JV completed the Ultrastar Acquisitions for an aggregate purchase price of approximately $12.8 million (subject to closing adjustments), consisting of $8.1 million in cash plus 615,204 shares of Digiplex’s Class A common stock issued in December 2012. Digiplex expects to issue 272,419 additional shares related to post-closing that were verbally agreed upon in February 2013 (see note 18). The fair value of the addtional shares to be issued is included in the provisional purchase price allocation as of December 31, 2012. The fair value of all 887,623 shares issued or issuable was determined to be $4,714, based on the trading price of the Digiplex Class A common stock on the acquisition dates, less a 10% discount for restrictions on the sale of the stock. The stock issued is the subject of a six month lock-up agreement, with further restrictions beyond that point. The JV assumed the operating leases for the theater premises, subject to certain amendments of the leases and, in one case, executed a new lease with the landlord. The JV assumed only certain capital leases related to theater equipment.   All other liabilities are being retained by the sellers. The goodwill of $2,574 represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired.  Goodwill is mainly attributable to the assembled work force and synergies expected to arise after acquisition of the business. The allocation of the provisional purchase price is based on management’s judgment after evaluating several factors, using assumptions for the income and royalty rate approaches and the discounted earnings approach, and projections determined by Company management.  The Company is in the process of finalizing the fair values of the assets acquired and liabilities assumed including evaluations of operating leases and capital leases and capital lease obligations.  The Company incurred approximately $219 in acquisition costs which is expensed and included in general and administrative expenses in the consolidated statement of operations.
 
The provisional purchase price for the Ultrastar Acquisitions was allocated as follows:
 
 
11

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
 
   
Ultrastar
 
   
theaters
 
ASSETS ACQUIRED
     
Cash
  $ 30  
Prepaid expenses
    15  
Inventory
    63  
Property and equipment
    9,577  
Covenants not to compete
    563  
Goodwill
    2,574  
Total purchase price
    12,822  
         
Issuance of Class A common stock
    4,714  
Total purchase price paid in cash
  $ 8,108  

The results of operations of the theaters acquired in the Ultrastar Acquisitions and Lisbon theater are included in the consolidated statement of operations from the respective dates of acquisition. The following are the unaudited pro forma results of operations of the Company for the three and six months ended December 31, 2012 and 2011, respectively. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
    11,780     $ 7,020       22,921     $ 14,992  
Net loss attributable to Digital Cinema Destinations Corp.
    (1,227 )   $ (638 )     (1,960 )   $ (1,213 )
 
4.            JOINT VENTURE

Digiplex’s initial contribution to JV was 615,204 shares of Class A common stock, $0.01 par value per share, and Start Media contributed $8.0 million in cash.  These capital contributions were used for JV’s initial theater acquisitions from the Ultrastar sellers. Digiplex expects to contribute 272,419 additional shares to the JV to be issued Ultrastar sellers related to the post-closing adjustments that were verbally agreed upon in February 2013 (see note 18).  Digiplex’s interest in the JV will be adjusted accordingly.   JV is managed by a four person board of managers, two of whom Digiplex designates and two of whom are designated by Start Media.  Majority vote is required for JV actions. At December 31, 2012, Digiplex and Start Media owned 30% and 70% of the equity of JV, respectively.

JV has a first right of refusal to acquire any theaters which the Company wishes to acquire, except for any theaters within a ten mile radius of existing Digiplex owned theaters.  If JV does not exercise its right of first refusal, the Company has the right to make the acquisition independently. The right of first refusal does not apply to or restrict the Company’s ability to manage theaters owned by unaffiliated third-parties. Digiplex has entered   into agreements with JV (the “Management Agreements") to manage the theaters it acquires and receives 5% of the total revenue of the JV theaters’ operations annually as management fees. Management fees earned by Digiplex for both the three and six months ended December 31, 2012, was $52. JV records these fees as general and administrative expenses, and Digiplex records them as an offset to general and administrative expenses, however they eliminate in consolidation.
 
 
12

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
 
Under the Management Agreement, Digiplex has full day-to-day authority to operate the theaters owned by JV including: staffing, banking, content selection, vendor selection and all purchasing decisions. Digiplex is required to submit an annual operating budget to JV for each fiscal year ending June 30 for approval by the JV board of managers.  In the event of any disagreements regarding the budget, there are dispute resolution procedures contained in the operating agreement (“JV Operating Agreement”).

Digiplex’s and Start Media’s respective percentage ownerships in JV will depend upon their respective aggregate capital contributions, in each case denominated in units of membership interests.  Start Media has committed to contribute up to $20 million to JV, inclusive of its initial $8 million capital contribution, to fund theater acquisitions and budgeted expenses.  Start Media will receive additional membership units in consideration for capital contributions in excess of its initial contribution as additional capital is required, based on the fair market value of JV determined under a formula set forth in the JV Operating Agreement (the “Formula”).  Digiplex has a right, but not the obligation, to contribute additional capital to JV, which under certain circumstances may be made by the issuance and delivery of shares of Digiplex’s Class A common stock to sellers of theaters acquired by JV, and thereby acquire additional membership units based on the Formula, provided that our percentage interest does not exceed 50% as the result of our acquisition of additional units.

Distributions of JV cash flow from operations will be made to the members at such time as determined by the JV board of managers.   Start Media is entitled to a 6% preferred return on its capital contributions made to date, after which the Company receives a 6% preferred return on our capital contributions.  Thereafter, distributions of cash flow from operations will be made pro rata in accordance with the respective membership units of the members.  In the case of liquidating distributions, Start Media will receive a 6% preferred return on and the return of its capital contributions prior to our receipt of a 6% preferred return on and the return of our capital contributions, with further distributions pro rata to the respective membership units of  the members.
 
Digiplex and Start Media have agreed not to transfer their membership interests, except for certain permitted transfers for a three-year period and any subsequent transfers of membership interests are subject to the right of  JV and the other member to acquire the interests on such terms as a third party is willing to do so.  In the event the Company experiences a change in control, as defined in the JV Operating Agreement, Start Media has a right to require the Company to acquire its membership interest in JV.

Digiplex is considered the primary beneficiary of the JV because it controls the operation of each JV owned theater on a day to day basis in all material respects, including: the selection of content, all staffing decisions, all cash management and paying vendors, financial reporting, obtaining all necessary permits, insurances, and to plan and perform capital improvements, to the extent such expenditures do not exceed certain levels as specified in the management agreements. Digiplex is also the guarantor of six of the seven leases entered into with third party landlords in the JV-owned theaters, and is using its brand name to promote the theaters.  Because JV is a VIE, and Digiplex is deemed the primary beneficiary, the Company has consolidated the operations of JV from the date of acquisition through December 31, 2012.

Net income attributable to the non-controlling interest on the statement of operations represents the portion of earnings or loss attributable to the economic and legal interest in JV held by Start Media.
 
 
13

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

5.           ACCOUNTS RECEIVABLE
 
Accounts receivable consisted of the following:
 
   
December 31,
   
June 30,
 
   
2012
   
2012
 
VPFs
  $ 454     $ 155  
Advertising
    81       60  
Other
    65       23  
        Total
  $ 600     $ 238  
 
6.           PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
Prepaid expenses and other current assets consisted of the following:
 
   
December 31,
   
June 30,
 
   
2012
   
2012
 
Insurance
  $ 71     $ 231  
Projector and other equipment maintenance
    98       34  
Real estate taxes
    47       27  
Financing and acquisition-related deposits
    -       10  
Due from former theater owners
    165       42  
Other expenses
    105       37  
        Total
  $ 486     $ 381  
 
7.           PROPERTY AND EQUIPMENT
 
Property and equipment, net was comprised of the following:
 
   
December 31,
   
June 30,
 
   
2012
   
2012
 
Furniture and fixtures
  $ 2,740     $ 1,577  
Leasehold improvements
    16,638       8,275  
Building and improvements
    4,608       -  
Digital projection equipment
    5,805       5,235  
Computer equipment and software
    2,178       1,180  
      31,969       16,267  
Less: accumulated depreciation and amortization
    (2,110 )     (835 )
Total property and equipment, net
  $ 29,859     $ 15,432  
 
 
14


 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

8.           INTANGIBLE ASSETS
 
Intangible assets, net consisted of the following as of December 31, 2012:
 
   
Gross
               
Useful
 
   
Carrying
 
Accumulated
 
Net
   
Life
 
   
Amount
 
Amortization
 
Amount
 
(years)
 
Trade names
  $ 3,016     $ 825     $ 2,191       3-5  
Covenants not to compete
    1,201       218       983       3  
Favorable leasehold interest
    1,084       106       978    
Remaining lease term
 
    $ 5,301     $ 1,149     $ 4,152          
 
Intangible assets, net consisted of the following as of June 30, 2012:
 
   
Gross
               
Useful
 
   
Carrying
 
Accumulated
 
Net
   
Life
 
   
Amount
 
Amortization
 
Amount
 
(years)
 
Trade names
  $ 3,016     $ 369     $ 2,647       3-5  
Covenants not to compete
    491       77       414       3  
Favorable leasehold interest
    1,084       31       1,053    
Remaining lease term
 
    $ 4,591     $ 477     $ 4,114          
 
The weighted average remaining useful life of the Company’s trade names, covenants not to compete, and favorable leasehold interests is 4.07 years, 2.57 years and 6.80 years, respectively, as of  December 31, 2012.  
 
Remaining amortization of intangible assets over the next five fiscal years is as follows:
 
December 31,
 
Total
 
2013 (remaining six months)
  $ 738  
2014
    1,466  
2015
    1,168  
2016
    296  
2017
    145  
2018 (six months)
    72  
 
 
15

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

9.           LEASES
 
The Company accounts for all of its leases as operating leases. Minimum rentals payable under all non-cancelable operating leases with terms in excess of one year as of December 31, 2012 are summarized for the following fiscal years (in thousands):
 
December 31,
 
Total
 
2013 (remaining six months)
  $ 2,814  
2014
    5,371  
2015
    5,227  
2016
    5,065  
2017
    4,435  
2018 (six months)
    1,940  
Thereafter
    26,999  
Total
  $ 51,851  
 
Rent expense under non-cancelable facility operating leases was $719 and $128 for the three months ended December 31, 2012 and 2011, respectively. Rent expense for the six months ended December 31, 2012 and 2011 was $1,200 and $275, respectively. All of the Company’s facility leases require the payment of additional rent if certain revenue targets are exceeded. Additional rent expense of $92 and $0 was recorded in the three months ended December 31, 2012 and 2011, respectively.  Additional rent expense of $138 and $0 was recorded in the six months ended December 31, 2012 and 2011, respectively.

CAPITAL LEASES

The Company leases certain theatre equipment under a capital lease that expires in 2017, with an imputed interest rate of  8.0% per annum. The asset is being amortized over the shorter of its lease terms or its estimated useful life. The applicable amortization is included in depreciation and amortization expense in the accompanying consolidated financial statements. Amortization of assets under capital leases charged to expense during the three and six months ended December 31, 2012 was $5, compared to $0 for the three and six months ended December 31, 2011.

The following is a summary of property held under capital leases included in property and equipment:
 
   
December 31,
   
June 30,
 
   
2012
   
2012
 
Equipment
  $ 100     $ -  
Less: accumulated depreciation and amortization
    (4 )     -  
Net
  $ 96     $ -  
 
 
16

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
 
Future maturities of capital lease payments as of December 31, 2012 for each of the next five years and in the aggregate are:

   
Total
 
2012 (remaining six months)
  $ 12  
2013
    24  
2014
    24  
2015
    24  
2016
    24  
2017
    8  
Total minimum payments
    116  
Less:  amount representing interest
    (20 )
Present value of minimum payments
    96  
Less:  current portion
    (17 )
    $ 79  
 
10.           COMMITMENTS AND CONTINGENCIES
 
The Company believes that it is in substantial compliance with all relevant laws and regulations, and is not aware of any current, pending or threatened litigation that could materially impact the Company.
 
The Company has entered into employment contracts, to which we refer to as the “employment contracts”, with four of its current executive officers. Under the employment contracts, each executive officer is entitled to severance payments in connection with the termination of the executive officer’s employment by the Company “without cause”, by the executive officer for “good reason”, or as a result of a “change in control” of the Company (as such terms are defined in the employment contracts). Pursuant to the employment contracts, the maximum amount of payments and benefits in the aggregate, if such executives were terminated (in the event of a change of control) would be approximately $1,860.

A. Dale Mayo, the Company’s Chief Executive Officer (“CEO”), is entitled to additional compensation based on the amount of revenues the Company generates, as specified in his employment contract. For the three months ended December 31, 2012 and 2011, respectively, the Company recorded $60 and $0 of compensation expense under this arrangement.  For the six months ended December 31, 2012 and 2011, respectively, the Company recorded $120 and $0, under this arrangement.

All of the Company’s operations as of December 31, 2012, are located in Pennsylvania, New Jersey, Connecticut, California and Arizona, with the customer base being public attendance. The Company’s main suppliers are the major movie studios, primarily located in the greater Los Angeles area. Any events impacting the region the Company operates in, or impacting the movie studios, who supply movies to the Company, could significantly impact the Company’s financial condition and results of operations.
 
 
17

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

11.           STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
 
Capital Stock
 
 As of December 31, 2012, the Company’s authorized capital stock consisted of:
 
•           20 million shares of Class A common stock, par value $0.01 per share;
 
•           900,000 shares of Class B common stock, par value $0.01 per share;
 
•           10 million shares preferred stock, par value $0.01 per share;
 
Of the authorized shares of Class A common stock, 5,134,656 shares were issued and outstanding as of December 31, 2012. Of the authorized shares of Class B common stock, 900,000 shares were issued and outstanding as of December 31, 2012, all of which are held by the Company’s CEO. In March 2012, the Company’s certificate of incorporation was amended to reduce the authorized number of shares of Class B common stock from 5,000,000 shares to 900,000 shares. Of the authorized shares of preferred stock, 6 and 0 shares of Series B Preferred Stock were issued and outstanding as of December 31, 2012 and June 30, 2012, respectively. The material terms and provisions of the Company’s capital stock are described below.
 
Common Stock
 
The Class A and the Class B common stock of the Company are identical in all respects, except for voting rights and except that each share of Class B common stock is convertible at the option of the holder into one share of Class A common stock. Each holder of Class A common stock will be entitled to one vote for each outstanding share of Class A common stock owned by that stockholder on every matter submitted to the stockholders for their vote. Each holder of Class B common stock will be entitled to ten votes for each outstanding share of Class B common stock owned by that stockholder on every matter submitted to the stockholders for their vote. Except as required by law, the Class A and the Class B common stock will vote together on all matters. Upon any transfer of Class B common stock by the Company’s CEO, such transferred shares will be converted to Class A shares.  Subject to the dividend rights of holders of any outstanding preferred stock, holders of common stock are entitled to any dividend declared by the board of directors out of funds legally available for this purpose, and, subject to the liquidation preferences of any outstanding preferred stock, holders of common stock are entitled to receive, on a pro rata basis, all the Company’s remaining assets available for distribution to the stockholders in the event of the Company’s liquidation, dissolution or winding up. No dividend can be declared on the Class A or Class B common stock unless at the same time an equal dividend is paid on each share of Class B or Class A common stock, as the case may be. Dividends paid in shares of common stock must be paid, with respect to a particular class of common stock, in shares of that class. Holders of common stock do not have any preemptive right to become subscribers or purchasers of additional shares of any class of the Company’s capital stock. The outstanding shares of common stock are, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock may be adversely affected by the rights of the holders of shares of any series of preferred stock that the Company may designate and issue in the future.
 
 
18

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

 Preferred Stock
 
The Company’s certificate of incorporation allows the Company to issue, without stockholder approval, preferred stock having rights senior to those of the common stock. The Company’s board of directors is authorized, without further stockholder approval, to issue up to 10,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, and to fix the number of shares constituting any series and the designations of these series. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock. The issuance of preferred stock could also have the effect of decreasing the market price of the Class A common stock. Prior to April 20, 2012, the Company had outstanding 1,972,500 shares of Series A preferred stock which earned dividends at a rate of 8% per annum. The Series A preferred stock was originally convertible into Class A Common Stock at any time, at the option of the holder, on a one-for-one basis. However, following the one-for-two reverse stock split, the Series A preferred stock became convertible into one share for every two shares of Series A preferred stock. The Series A preferred stock was required to be converted into Class A Common Stock upon the occurrence of certain events, such as an IPO of the Company’s common stock at a price greater than 150% of the original issue price of the Series A preferred stock, as adjusted. The original issue price was $2.00 per share, and was adjusted to $4.00 per share following the one-for-two reverse split, making the price at which the Series A preferred stock was mandatorily convertible, at $6.00 per common share.
 
Upon completion of the IPO at $6.10 per share, all of the Series A preferred stock converted into 986,250 shares of Class A common stock. In addition, the Company issued 66,191 shares of Class A common stock in payment for a portion of the dividends the holders were entitled to, with the remaining dividends paid in cash of $102.
 
In September 2012, the Company created a new class of preferred stock (the "Series B preferred stock") and on September 20, 2012 sold six shares of Series B preferred stock to two investors for total proceeds of $450, or $75,000 per share. Dividends are payable quarterly in cash at the rate of 4.5% per annum.   The Series B Preferred Stock may be converted into the Company’s Class A common stock at the option of the holder at any time after six months from the date of issue without the payment of additional consideration by dividing the original purchase price per share of Preferred Stock, as adjusted (the “Issue Price”) by the conversion price of $7.50 per share, as adjusted. Commencing six months from the date of issue, the Series B Preferred Stock is mandatorily convertible in the event that the daily volume weighted average price of the Company’s Class

A Common Stock for a consecutive 30 day trading period is not less than $10.00 per share. The Company has the sole option to redeem the Series B Preferred Stock any time after one year from the date of issue at a price equal to 150% of the $75,000 Issue Price ($112,500 per share), subject to adjustments, plus all accrued and unpaid dividends.

Dividends
 
No dividends were declared on the Company’s common stock during the year and management does not anticipate doing so. As described above, the Company paid dividends on the Series A Preferred Stock prior to its conversion into Class A common stock, and will pay dividends on its Series B Preferred Stock.
 
 
19

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

Start Media Warrants

On December 10, 2012, Digiplex issued a common stock purchase warrant to Start Media, which entitles the holder to purchase up to 500,000 shares of Digiplex’s Class A common stock (the “Start Media Warrants”).   The Start Media Warrants were issued in connection with the creation of the joint venture and the Ultrastar Acquisitions, are exercisable at $6.10 per share and have an exercise period of 5 years. The Start Media Warrants have fixed settlement terms, do not require Digiplex to mandatorily redeem the warrants at any time, and the warrants have no cashless exercise provisions.  The preliminary fair value of the Start MediaWarrants was determined to be $954 based on a Black-Scholes calculation using the following key assumptions:  expected life, 5.0 years, volatility 40.8%, risk free rate 0.78%.  The Company recorded this as deferred financing costs and an increase to additional paid-in-capital for the fair value of $954 to be amortized over the five year life of the warrant.

 Upon any exercise of the Start Media Warrants, the Company will record the par value of the common stock issued and additional paid in capital. 

Stock-Based Compensation and Expenses
 
On August 6, 2012, the Company issued restricted stock awards totaling 50,500 shares of its Class A common stock to employees which will vest evenly over three years on an annual basis.

The total stock-based compensation was $26 and $16 for the three months ended December 31, 2012 and 2011, respectively, and $69 and $33, for the six months ended December 31, 2012 and 2011, respectively.
 
 The following summarizes the activity of the unvested share awards for the six months ended December 31, 2012:
 
 Unvested balance at June 30, 2012
    16,668  
 Issuance of awards
    50,500  
 Vesting of awards
    -  
 Unvested balance at December 31, 2012
    67,168  
 
The weighted average remaining vesting period as of December 31, 2012 is 1.32 years. As of December 31, 2012, there was $340 of remaining expense associated with unvested share awards.

12.           NOTES PAYABLE
 
In connection with the acquisition of the Cinema Centers theaters on April 20, 2012, the Company issued to the seller a Note for $1.0 million, due on September 17, 2012 and bearing interest at 6.0% per annum.   The Note was repaid on September 17, 2012, less $168 in offsets related to repairs and replacements of equipment and leasehold improvements the Company made subsequent to the closing of the acquisition.  In November 2012, the Company and the seller agreed to share these costs equally, and the Company paid the seller $84 to settle the matter in full satisfaction of the Note.  
 
 
20

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

On September 28, 2012, the Company entered into a loan agreement for $10.0 million due September 28, 2017, at an interest rate equal to 30 day LIBOR plus 10.50% per annum, with a 2.5% floor (the “Northlight loan”).  The Company expects the 2.5% floor to be applicable due to the current floor rates.  During the first 18 months from the closing date,  all interest in excess of 10.00% per annum that would otherwise be paid in cash during the 18-month period may, at the Company’s option, be paid in kind (“PIK interest”), and thereafter  all interest due is payable in cash. PIK interest, if any, will be added to the principal balance of the loan.  The Company primarily used the net proceeds from the Northlight loan to acquire certain assets and assume certain liabilities of Lisbon Theaters, Inc., pay the obligation to a vendor for digital systems, pay fees and expenses associated with the Northlight loan and the Lisbon acquisition, and to provide working capital. Interest and principal payments under the terms of the Northlight loan commenced on October 31, 2012. The Northlight loan is collateralized by, among other things, the Company’s membership interest in each of the Company’s operating subsidiaries and all of the operating subsidiaries’ assets, including the theater leases, and requires meeting certain financial covenant ratios. As of December 31, 2012, the Company was in compliance with all financial covenants. Total deferred financing costs recorded as of December 31, 2012 was $369.  The amount amortized in interest was $17 for both the three and six months ended December 31, 2012, respectively.
 
The principal payments due as of December 31, 2012 over the remainder of the term of the Northlight loan are summarized as follows, in fiscal years:

   
Total
 
2013 (remaining six months)
  $ 180  
2014
    1,343  
2015
    1,670  
2016
    1,670  
2017
    1,670  
2018 (includes PIK interest accrued to date of $78)
    3,455  
Total
    9,988  
Less: current portion
    (688 )
    $ 9,300  
 
The Northlight loan is mandatorily pre payable from 25% of the Company’s Excess Cash Flow (as defined in the Northlight loan agreement) beginning on September 30, 2013 and annually thereafter.
 
 13.           INCOME TAXES
 
The Company recorded income tax expense of approximately $47 and $15 for the three months ended December 31, 2012 and 2011, respectively, and approximately $64 and $20 for the six months ended December 31, 2012 and 2011, respectively. The Company's tax provision for all periods had an unusual relationship to pretax loss mainly because of the existence of a full deferred tax asset valuation allowance at the beginning of each period. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, tax expense recorded for the six months ended December 31, 2012 and 2011 included the accrual of non-cash tax expense of approximately $15 and $18, respectively of changes in the valuation allowance in connection with the tax amortization of our indefinite-lived intangible assets that was not available to offset existing deferred tax assets (termed a “naked credit”). The Company expects the naked credit to result in approximately $6 of additional non-cash income tax expense over the remainder of the year ending June 30, 2013.
 
 
21

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

The Company calculates income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year. For the six months ended December 31, 2012 and 2011, the differences between the effective tax rate of (3.3)% and (3.4)%, respectively, and the U.S. federal statutory rate of 35% principally resulted from state and local taxes, graduated federal tax rate reductions, non-deductible expenses and changes to the valuation allowance.

14.           RELATED PARTY TRANSACTIONS
 
The total rent expense under operating leases with a landlord that owns the Rialto and Cranford premises and owns shares of the Company’s Class A common stock was $130 and $88 for the three months ended December 31, 2012 and 2011, respectively and  $220 and $169 for the six months ended December 31, 2012 and 2011,  respectively.
 
15.           NET LOSS PER SHARE
 
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares and, if dilutive, common stock equivalents outstanding during the period.
 
The rights, including the liquidation and dividend rights, of the holders of the Company’s Class A and Class B common stock are identical, except with respect to voting. Each share of Class B common stock is convertible into one share of Class A common stock at any time, at the option of the holder of the Class B common stock.
 
The following table sets forth the computation of basic net loss per share of Class A and Class B common stock of the Company (in millions, except share and per share data):
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Numerator for basic and diluted loss per share
                       
Net loss attributable to Digital Cinema Destionations Corp.
  $ (1,141 )   $ (321 )   $ (1,804 )   $ (587 )
Preferred dividends
    (5 )     (80 )     (6 )     (153 )
Net loss attributable to common stockholders
  $ (1,146 )   $ (401 )   $ (1,810 )   $ (740 )
Denominator
                               
Weighted average shares of common stock outstanding (1)
    5,511,765       1,469,166       5,465,356       1,469,166  
Basic and diluted net loss per share of common stock
  $ (0.21 )   $ (0.28 )   $ (0.33 )   $ (0.51 )
 
(1)The Company has incurred net losses and, therefore, the impact of dilutive potential common stock equivalents totaling 228,557 and 1,019,581 shares for the three months ended December 31, 2012 and 2011, respectively and 160,613 and 981,671 shares for the six month ended December 31, 2012 and 2011, respectively, are not anti-dilutive and are not included in the weighted shares. The weighted average number of shares includes the effect of the one-for-two reverse stock split.
 
 
22

 
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES AND AFFILIATE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)

16.           SUPPLEMENTAL CASH FLOW DISCLOSURE
 
   
Six Months Ended
 
   
December 31,
 
   
2012
   
2011
 
Accrued dividends on Series A preferred stock
  $ -     $ 153  
Earnout payable to seller
    550       -  
Cash paid for interest
    296       -  
Amount offset on Note repayment
    168       -  
Issuance of Class A common stock to seller of Ultrastar theatres as part of the acquisition
    4,714       -  
Issuance of warrants to Start Media     954       -  
 
17.           DIGINEXT
 
In September 2012, the Company and Nehst Media Enterprises (“Nehst”) formed a joint venture called Diginext.  Under the joint venture agreement, Digiplex and Nehst each have a 50% ownership interest, and Nehst will supply Diginext with periodic movie content, the first of which was shown in theaters in September 2012. Digiplex has the option to display such content at its locations on an exclusive basis, or may choose to allow non-Digiplex venues to also display the content.  Digiplex pays film rent to Diginext as it would any other movie distributor, and any profits of Diginext, from theatrical revenues as well as net revenues from other sources such as DVD’s, downloads, cable television, international distribution and sponsorship will be shared equally by the owners.  The Company is not responsible for funding expenses of Diginext other than certain agreed upon items, such as auditing fees, if required.  

The Company and Nehst have each made capital contributions of $5 as of December 31, 2012 and has recorded this in other assets.  Through December 31, 2012, the revenue and expenses related to the joint venture have not been material.  The Company has concluded that it is not required to consolidate the Diginext joint venture and therefore is using the equity method to account for its investment  and subsequent share of the earnings or losses of the joint venture.
 
18.           SUBSEQUENT EVENTS

On January 1 and February 1, 2013, JV  assumed  operating leases for a three screen theater in Sparta, NJ and a 16 screen theater in Solon, Ohio, respectively.  Each theater was the subject of a lease entered into directly with the landlord, and there was no purchase price paid.  Both theaters were equipped with digital projection systems before rent commenced and both theaters are operated by Digiplex under Management Agreements.

On January 1, 2013, Digiplex hired Charles Goldwater as its Senior Vice President.  Mr. Goldwater has also served on the Company’s board of directors. The Company and Mr. Goldwater have entered into an employment agreement with a three year term providing for a minimum salary with other benefits commensurate with other executives of the Company
 
 
In January 2013, JV entered into an agreement to pay a third party $450 as an advisory fee in connection with services rendered in connection with the formation of the JV and related agreements. Digiplex and Start Media have each agreed to fund $225 to the JV as a capital contribution, and the JV in turn will pay the advisory fee. The advisory fee will be paid in 12 installments over one year from January 2013.
 
On January 13, 2013, Start Media contributed an additional $1,300 to JV, to fund capital expenditures and other expenses.
 
In February 2013, JV and Sellers reached an agreement to issue 272,419 shares of Digiplex Class A common stock related to post-closing adjustments in the Ultrastar  acquisitions. On the date these shares are issued, Digiplex and Start Media will own 34% and 66% of the JV, respectively.
 
 
23

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue” and other similar expressions are intended to identify forward-looking statements. We have based these forward looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC, particularly those contained in the Section entitled “Risk Factors” in our Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
 
Our fiscal year ends on June 30 each year.
 
 
24

 
Overview
 
At December 31, 2012, we operated 16 theaters located in New Jersey, Connecticut, Pennsylvania, California and Arizona, consisting of 159 screens. Our theaters had over 616,000 and 67,000 attendees for the three months ended December 31, 2012 and 2011, respectively (for the portions of the periods we operated them).
 
Our theaters operated as of December 31, 2012 are:
 
• a 6 screen theater known the Rialto, located in Westfield, New Jersey;
 
• a 5 screen theater known as the Cranford theater, located in Cranford, New Jersey;
 
• an 8 screen theater known as the Bloomfield 8, located in Bloomfield, Connecticut;
 
• an 11 screen theater known as Cinema Center of Bloomsburg, located in Bloomsburg, Pennsylvania;
 
• a 12 screen theater known as Cinema Center of Camp Hill, located in Camp Hill, Pennsylvania;

• a 10 screen theater known as Cinema Center of Fairground Mall, located in Reading, Pennsylvania;
 
• a 12 screen theater known as Cinema Center of Selinsgrove, located in Selinsgrove, Pennsylvania;
 
• a 9 screen theater known as Cinema Center of Williamsport, located in Williamsport, Pennsylvania;
 
• a 12 screen theater known as the Lisbon theater, located in Lisbon, Connecticut;

• a 14 screen theater known as the Surprise Pointe 14 theater, located in Surprise. Arizona;

• a 14 screen theater known as the Apple Valley theater, located in Apple Valley, California;

• a 13 screen theater known as the Mission Marketplace theater, located in Oceanside, California;

• a 10 screen theater known as Temecula Tower Cinemas, located in Temecula, California;

• a 10 screen theater known as the Poway theater, located in Poway, California;

• a 7 screen theater known as the Mission Valley theater, located in San Diego, California;

• a 6 screen theater known as the River Village theater, located in Bonsall, California.

On December 10, 2012, we entered into a joint venture (“JV”) with Start Media, LLC (“Start Media”), to acquire, refit and operate movie theaters.  On December 11, 2012, wholly owned subsidiaries of JV executed asset purchase agreements, which were amended on December 13, 2012, to acquire seven movie theaters (six of which are located in southern California and one of which is near Phoenix, Arizona)  (collectively, the “Ultrastar Acquisitions”) with an aggregate of 74 fully digital screens from seven sellers affiliated with one another  (collectively the “Ultrastar Sellers”).  These 7 theaters have annual attendance of over 2.0 million patrons.

The 7 theaters acquired from the Ultrastar Sellers are operated by us pursuant to  management agreements (the “Management Agreement”) with the JV, whereby we have full day to day responsibility for all aspects of the theater operations, and we receive a fee equal to 5% of the gross revenues of these theaters. . At December 31, 2012,  Digiplex and Start Media owned 30% and 70% of the equity of JV, respectively.
 
 
25

 
As of December 31, 2012, the Company, and the JV, owned 16 theaters (the “Theaters”) with 159 screens in New Jersey, Connecticut, Pennsylvania, California and Arizona, each of which is operated by the Company. As described in Note 3, the Company completed its acquisition of the Lisbon theater on September 29, 2012, and the JV completed the Ultrastar Acquisitions on four separate dates in December 2012.
 
On September 28, 2012, we entered into a loan agreement with Northlight Financial, LLC for $10.0 million (the “Northlight Loan”). The Northlight loan was used to fund our acquisition of the Lisbon theater for $6.0 million, pay a digital systems vendor for systems we previously installed for $3.3 million, pay fees and expenses associated with the Northlight loan and the Lisbon theater acquisition, and to provide working capital.
 
We completed the Lisbon theater acquisition on September 29, 2012 in an all-cash transaction. The Lisbon theater is fully converted to digital projection systems and has over 388,000 attendees on an annual basis.
 
We acquired the Rialto and the Cranford theater from one seller on December 31, 2010, the Bloomfield 8 on February 17, 2011, all of the five Pennsylvania locations, containing 54 screens (“Cinema Centers”), on April 20, 2012.

Our plan to expand our business is based on our business strategy, centered on our slogan “cinema reinvented,” and includes:
 
•  
Acquisitions of existing historically cash flow positive theaters in free zones either directly by Digplex or through our JV acquisitions vehicle. We intend to selectively pursue multi-screen theater acquisition opportunities that meet our strategic and financial criteria. Our philosophy is to “buy and improve” existing facilities rather than “find and build” new theaters. We believe this approach provides more predictability, speed of execution and lower risk.
 
•  
Creation of an all-digital theater circuit utilizing our senior management team’s extensive experience in digital cinema and related technologies, alternative content selection and movie selection. We will convert the theaters we acquire to digital projection platforms (if not already converted) with an appropriate mix of RealD™ 3D auditoriums in each theater complex.
 
•  
Offering our customers a program of popular movies and alternative content such as sports, concerts, opera, ballet and video games to increase seat utilization and concession sales during off peak and some peak periods.
 
•  
Deployment of state of the art integrated software systems for back office accounting and remote camera surveillance systems for theater management which enable us to manage our business efficiently and to provide maximum scheduling flexibility while reducing operational costs.
 
•  
Active marketing of the Digiplex brand and our programs to consumers using primarily new media tools such as social media, website design and regular electronic communications to our targeted audience.
 
•  
Enhancing our alternative content programs with themed costuming for our theater personnel, food packages, scripted introductions by theater managers, and the use of selected staff members called “ambassadors” to employ various social media tools before, during and after each event to promote the event and the Digiplex brand.
 
 
26

 
Other than the funds resulting from our capital raised to date, there can be no assurance, however, that we will be able to secure financing necessary to implement our business strategy, including to acquire additional theaters or to renovate and digitalize the theaters we do acquire.
 
 We manage our business under one reportable segment: theater exhibition operations.
 
Components of Operating Results
 
Revenues
 
We generate revenues primarily from admissions and concession sales with additional revenues from screen advertising sales and other revenue streams, such as theater rentals and private parties. Our advertising agreement with National CineMedia, LLC (“NCM”) has assisted us in expanding our offerings to domestic advertisers and will be broadening ancillary revenue sources, such as digital video monitor advertising and third party branding. Our alternative content agreements with NCM and others has assisted us in expanding our alternative content offerings, such as live and pre-recorded concert events, opera, ballet, sports programs, and other cultural events. In addition to NCM, we select, market and exhibit alternative content from a variety of other sources, including Emerging Pictures, Cinedigm Digital Cinema Corp., Screenvision, and others as they offer their programs to us. Our existing 16 theaters are located in “free zones,” or areas that permit us to acquire movies from any distributor. As such, we display all of the leading movies and can tailor our offerings to each of our markets.
 
Our revenues are affected by changes in attendance and concession revenues per patron. Attendance is primarily affected by the quality and quantity of films released by motion picture studios. Our revenues are seasonal, coinciding with the timing of releases of motion pictures by the major distributors. Generally, motion picture studios release the most marketable motion pictures during the summer and holiday seasons. The unexpected emergence or continuance of a “hit” film during other periods can alter the traditional pattern. The timing of movie releases can have a significant effect on our results of operations, and the results of one fiscal quarter are not necessarily indicative of the results for the next or any other fiscal quarter. The seasonality of motion picture exhibition, however, has become less pronounced as motion picture studios are releasing motion pictures somewhat more evenly throughout the year. Our operations may be impacted by the effects of rising costs of our concession items, wages, energy and other operating costs. We would generally expect to offset those increased costs with higher costs for admission and concessions.
 
Expenses
 
Film rent expenses are variable in nature and fluctuate with our admissions revenues. Film rent expense as a percentage of revenues is generally higher for periods in which more blockbuster films are released. Film rent expense can also vary based on the length of a film’s run and are generally negotiated on a film-by-film and theater-by-theater basis. Film rent expense is higher for mainstream movies produced by the Hollywood studios, and lower for art and independent product. Film rent expense is reduced by virtual print fees (“VPFs”) that we record from motion picture distributors under an exhibitor-buyer agreement that entitles us to payments for the display of digital movies.
  
Cost of concessions is variable in nature and fluctuates with our concession revenues. We purchase concession supplies to replace units sold. We negotiate prices for concession supplies directly with concession vendors and manufacturers to obtain volume rates. Because we purchase certain concession items, such as fountain drinks and popcorn, in bulk and not pre-packaged for individual servings, we are able to improve our margins by negotiating volume discounts.
 
Salaries and wages include a fixed cost component (i.e., the minimum staffing costs to operate a theater facility during non-peak periods) and a variable component in relation to revenues as theater staffing is adjusted to respond to changes in attendance.
 
 
27

 
Facility lease expense is primarily a fixed cost at the theater level as most of our facility operating leases require a fixed monthly minimum rent payment. Our leases are also subject to percentage rent in addition to their fixed monthly rent if a target annual revenue level is achieved.
 
Utilities and other expenses include certain costs that have both fixed and variable components such as utilities, property taxes, janitorial costs, repairs and maintenance and security services.
 
Significant Events and Outlook
 
•  
Completion of Initial Public Offering and Exercise of Overallotment.   On April 20, 2012 we completed our initial public offering of 2,200,000 shares of Class A common stock at a price of $6.10 per share, for net proceeds of $11,400 after deducting underwriting commissions and offering expenses.  On May 7, 2012, we sold 323,900 shares of Class A common stock upon the exercise of the underwriters’ overallotment option, for net proceeds of $1,800 after deducting underwriting discounts and commissions.
 
•  
Pennsylvania Theater Acquisition. On April 20, 2012, we acquired certain assets of Cinema Centers, a chain of five theaters with 54 screens located in central Pennsylvania.  The purchase price for Cinema Centers was $13.9 million, consisting of $11.1 million in cash paid at closing, a note for $1.0 million due on September 17, 2012 and 335,000 shares of Class A common stock with a fair value of $1.8 million.  We also assumed the operating lease of each theater location.  No debt or other liabilities were assumed.
 
•  
 
 
 
 
 
•  
Lisbon Theater Acquisition. On September 29, 2012 we acquired certain assets of the Lisbon theater, a 12-screen theater located in north eastern Connecticut for a purchase price of $6.6 million, which consisted of a cash payment of $6.0 million, and an earn-out.  The fair value of the earn-out was recorded as a liability with an estimated fair value of $0.6 million to be paid after the first year following the closing if certain earnings targets are met.  We also assumed the lease for the land that the theater is situated on.  No debt or other liabilities were assumed.
 
JV agreement and Ultrastar Acquisitions. As noted in Overview, in December 2012 we entered into a joint venture relationship with Start Media and the JV acquired 7 theaters from the Ultrastar Sellers in California and Arizona.  The total purchase price for the Ultrastar Acquisitions was $12.8 million; with $8.1 million in cash being paid by Start Media and 615,204 shares of Class A common stock with a fair value of $3.3 million being paid by us in December 2012. We expect to issue 272,419 additional shares, with a fair value of $1.4 million at the date of the acquisitions, to the Ultrastar sellers related to post-closing adjustments that were verbally agreed upon in February 2013. Each payment contributes to the JV as the members’ respective  initial capital contributions to the JV.  Certain operating leases for the theater facilities, and certain capital leases were assumed related to theater equipment.  No other liabilities were assumed from the Ultrastar Sellers.  We intend to acquire other theaters through the JV, although this cannot be assured.
 
 
28

 
  
 Management Agreements.  We have entered into agreements with JV (the “Management Agreements”) to manage the theaters JV acquires, and we will receive 5% of the total revenue of the theaters in each year as management fees in consideration for these management services.  Under the Management Agreement, we have full day-to-day authority to operate the theaters owned by JV including: staffing, banking, content selection, vendor selection and all purchasing decisions. We are required to submit an annual operating budget to JV for each fiscal year ending June 30 for approval by the JV board of managers (which is comprised of four seats, two of which are controlled by us, and two by Start Media).  In the event of any disagreements regarding the budget, there are dispute resolution procedures contained in the operating agreement (“JV Operating Agreement”).
 
 •  
Northlight Term Loan.  On September 28, 2012, we entered into a loan agreement for $10.0 million with Northlight Trust I (“Northlight”).  The Northlight loan was used to fund our acquisition of the Lisbon theater for $6.0 million, pay for previously installed digital systems of $3.3 million, pay fees associated with the Northlight loan and the Lisbon acquisition, and to provide working capital.
 
•  
Digital Projector Installation. At December 31, 2012, all of our 159 screens were equipped with digital projectors and related hardware and software.  95 of the 159 systems had been installed before our acquisition of the theaters, and the remaining 64 systems were installed under our ownership, at a total cost of approximately $5.0 million.  We earn Virtual Print Fees (VPFs), described under Components of Operating Results, on 85 of the 159 systems.  We do not earn VPFs on the 74 digital systems, related to the Ultrastar acquisitions, as these systems are owned by an unrelated digital cinema integrator.  However, we have full use of these systems purchased from Ultrastar, under a master license agreement until 2015, when we have the option to purchase these systems at fair market value.
 
•  
Alternative Content Program Launch. Along with the continued display of traditional feature movies, a cornerstone of our business strategy is to exhibit opera, ballet, concerts, sporting events, children’s programming and other forms of alternative content in our theaters. Using our 159 digital systems (57 of which are equipped to show 3D events), we can show live and pre-recorded 2D and 3D events at off-peak times to increase the utilization of our theaters.   Going forward we expect at least 40% of any new screens to be 3D-enabled.
 
•  
Acquisition Strategy. We plan to acquire existing movie theaters in free zones over the next 12 months and beyond. We generally seek to pay a multiple of 4.5 times to 5.5 times Theater Level Cash Flow (“TLCF”) for theaters we acquire. TLCF is calculated as revenues minus theater operating expenses (excluding depreciation and amortization).
 
The following table sets forth the percentage of total revenues represented by statement of operations items included in our consolidated statements of operations for the periods indicated (dollars and attendance in thousands, except average ticket prices and average concession per patron):
 
 
29

 
Results of Operations
 
   
Three months ended December 31,
 
(Amounts in thousands, except per patron data)
 
2012
   
2011
 
Revenues:
  $       %     $       %  
 Admissions
  $ 4,752       69     $ 650       71  
 Concessions
    1,929       28       202       22  
 Other
    189       3       68       7  
 Total revenues
    6,870       100       920       100  
                                 
Cost of operations:
 
 Film rent expense (1)
    2,417       51       270       42  
 Cost of concessions (2)
    317       16       28       14  
 Salaries and wages (3)
    710       10       144       16  
 Facility lease expense (3)
    811       12       128       14  
 Utilities and other (3)
    1,141       17       172       19  
 General and administrative (3)
    1,208       18       352       38  
 Depreciation and amortization (3)
    1,098       16       132       14  
 Total costs and expenses (3)
    7,702       112       1,226       133  
 Operating loss (3)
    (832 )     (12 )     (306 )     (33 )
 Interest expense
    (347 )     (5 )     -       -  
 Other
    (8 )     (0 )     -       -  
 Loss before income taxes (3)
    (1,187 )     (17 )     (306 )     (33 )
 Income taxes (4)
    47       (4 )     15       (5 )
 Net loss (3)
  $ (1,234 )     (18 )   $ (321 )     (35 )
                                 
Other operating data:
 
  Consolidated Theatre Level Cash Flow (7)
  $ 1,466       19     $ 178       19  
 Consolidated Adjusted EBITDA (8)
  $ 599       9     $ (127 )     (14 )
 Attendance
    616,520       *       67,743       *  
 Average ticket price (5)
  $ 7.71       *     $ 9.60       *  
 Average concession per patron (6)
  $ 3.13       *     $ 2.98       *  
__________
*           Not meaningful
 
(1)
Percentage of revenues calculated as a percentage of admissions revenues.
 
(2)
Percentage of revenues calculated as a percentage of concessions revenues.
 
(3)
Percentage of revenues calculated as a percentage of total revenues.
 
(4)
Calculated as a percentage of pre-tax loss.
 
(5)
Calculated as admissions revenue/attendance.
 
(6)
Calculated as concessions revenue/attendance.
 
 
30

 
 (7)
TLCF is a non-GAAP financial measure. TLCF is a common financial metric in the theater industry, used to gauge profitability at the theater level, before the effect of depreciation and amortization, general and administrative expenses, interest, taxes or other income and expense items. While TLCF is not intended to replace any presentation included in our consolidated financial statements under GAAP and should not be considered an alternative to cash flow as a measure of liquidity, we believe that this measure is useful in assessing our cash flow and working capital requirements. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this filing. For additional information on TLCF, see pages 39.
 
(8)
Adjusted EBITDA is a non-GAAP financial measure. We use adjusted EBITDA as a supplemental liquidity measure because we find it useful to understand and evaluate our results, excluding the impact of non-cash depreciation and amortization charges, stock based compensation expenses, and nonrecurring expenses and outlays, prior to our consideration of the impact of other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this filing. For additional information on Adjusted EBITDA, see pages 40.
 
Three Months Ended December 31, 2012 and 2011
 
At December 31, 2012, we operated 16 theaters located in New Jersey, Connecticut and Pennsylvania, California and Arizona consisting of 159 screens. We operated three theaters with 19 screens for the entire three month periods ended December 31, 2012 and 2011, five theaters with 54 screens since April 20, 2012, one theater with 12 screens since September 29, 2012, and seven theaters with 74 screens from dates ranging from December 14, 2012 to December 20, 2012.  Therefore, many comparisons of the 2012 and 2011 periods will be skewed accordingly.  Our theaters had over 616,000 and 67,000 attendees for the three months ended December 31, 2012 and 2011, respectively (for the portions of the periods we operated them). Overall, the North American box office revenue results for the three months ended December 31, 2012 had increased by approximately 13% from the comparable 2011 period, with more titles displayed in 2012 and general economic conditions improving slightly, contributing to the improvement.  For the three theaters we operated for the entire 2012 and 2011 three month periods, our results also increased, though not as dramatically as the overall industry during that period.
 
Admissions and Concessions. Our admissions and concessions revenues increased by 647%, due to our increased screen count in the three months ended December 2012 as compared to 2011.  In addition, our emphasis on alternative content programming has resulted in incremental admissions and concessions revenue. Our average ticket price decrease was due to our entry into new and less urban geographical markets. Alternative content revenue comprised 7% of our box office revenue during the three months ended December 31, 2012 and 2011, for our original 3 theaters that we operated in both years.
 
Other Revenues. Other revenues consist of advertising revenues, theater rentals for parties, camps and other activities. We entered into an agreement with NCM to receive ad revenues in August 2011. Advertising revenue was $126 for the three months ended December 31, 2012 period compared to $17 in the 2011 period.
 
 
31

 
Film Rent Expense. Film rent expense is a variable cost that fluctuates with box office revenues. We generally expect film rent expense to range from 50% to 60% of admissions revenues, with art and independent titles at the lower end of the range and mainstream movie titles at the middle to high end of the range. Film rent expense as a percentage of box office revenues was 51% in the three months ended
December 31, 2012 period as compared to 42% of box revenues in 2011.  Our increased film rent was due to our entry into new markets and display of mainstream movie titles with higher film expenses. Included as a reduction of film rent expense in the 2012 period is $259 of VPFs that we receive from a third party vendor, associated with digital titles that we play from the studios, as compared to $62  in 2011. Excluding VPFs, film rent expense would have been 56% and 51% of admissions revenues in the 2012 and 2011 periods, respectively.

Cost of Concessions. At 16% and 14 % of our concessions revenue for the three months ended December 31, 2012 and 2011, respectively, we believe our cost of concessions is close to the industry average of 15% to 20%. Our concession costs as a percentage of concessions revenue can fluctuate based on the mixture of concession products sold, and changes in our supply pricing.
 
Salaries and Wages. Our theater employees are mostly part-time hourly employees, supervised by one or more full-time managers at each location. Our payroll expenses contain a fixed component but are also variable and will fluctuate, being generally higher during the peak summer and holiday periods, and also during alternative content events, and lower at other times. The increase from the 2011 period is due to our operation of a larger number of theaters during the three months ended December 31, 2012 versus 2011. As a percentage of revenue, the decrease is due to our adjustment of the mix of theater staff shortly following our acquisition of the locations.
 
Facility Lease Expense. Each of our facilities is operated under operating leases that contain renewal options upon expiration. The leases contain provisions that increase rents in certain amounts and at certain times during the initial term, and the leases for certain theaters require percentage rent to be paid upon the achievement of certain revenue targets. We incurred $92 in percentage rent expense as a result of these lease provisions during the three months ended December 31, 2012, and $0 in the 2011 period. The remainder of the increase from the 2011 period is due to our operation of more theaters in the 2012 period.
 
Utilities and Other. Utilities and other expenses consist of utility charges, real estate taxes incurred pursuant to the operating leases for our theaters, and various other costs of operating the theaters. We expect these costs, which are largely fixed in nature, to remain relatively constant for the theaters, with growth in these expenses as we acquire more theaters. The increase in these expenses is due to the operation of more screens during the three months ended December 31, 2012 as compared to 2011.  Though many of these costs are largely fixed except for inflationary-type increases, we will experience growth in these expenses as we acquire more theaters.
 
General and Administrative Expenses. General and administrative expenses consisted primarily of salaries and wages for our corporate staff, legal, accounting and professional fees associated with our start-up and acquisition of theaters, marketing, and information technology related expenses. The increase in these expenses is due to additional personnel hired to manage our actual and planned growth, along with professional fees for auditing, legal, marketing and information technology. We expect these costs to decrease as a percentage of revenue as we grow and realize increased economies of scale. Included in general and administrative expenses is stock compensation expense of $26 and $16  in the 2012 and 2011 periods, respectively, related to issuance of Class A common stock to employees and non-employees for services rendered. We expect to grant additional stock-based awards in the future under our 2012 stock option and incentive plan that was adopted in conjunction with our IPO. Awards may consist of stock options or restricted stock, with or without vesting periods. As of December 31, 2012 and 2011, we had 13 and 8 employees, respectively, on our corporate staff, including our chief executive officer and other officers and staff to support our business development, technology, accounting, and marketing activities.
 
 
32

 
Depreciation and Amortization. The increase from 2011 is due to the operation of 159 screens as of December 31, 2012 versus 19 screens at December 31, 2011, including the addition of assets such as digital projection equipment, and other capital improvements made. We record depreciation and amortization for property and equipment and intangible assets over the estimated useful life of each asset class on a straight line basis. Our largest fixed asset is our digital projection equipment, which had a gross cost of $5.8 million as of December 31, 2012 and is being depreciated over a 10-year estimated useful life. We expect digital projection equipment to be a large component of our asset base going forward following any acquisitions that we may consummate, along with other theater equipment and leasehold improvements.
 
Operating Loss. The increased operating loss was primarily attributable to the higher general and administrative and depreciation and amortization costs, associated with the increased asset base and larger corporate infrastructure which will support our future growth.
 
Impact of Inflation.  We believe that our results of operations are not materially impacted by moderate changes in the inflation rate.  Inflation and changing prices did not have a material effect on our business, financial condition or results of operations in the three month periods ended December 31, 2012 and 2011, respectively.
 
Income Taxes.  We have income tax expense, although there were pretax losses, mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, we recorded an accrual of non-cash tax expense due to additional valuation allowance in connection with the tax amortization of our indefinite-lived intangible assets that was not available to offset existing deferred tax assets.
 
 
33

 
   
Six months ended December31,
 
(Amounts in thousands, except per patron data)
 
2012
   
2011
 
Revenues:
  $       %     $       %  
 Admissions
  $ 7,761       69     $ 1,392       73  
 Concessions
    3,128       28       401       21  
 Other
    327       3       106       6  
 Total revenues
    11,216       100       1,899       100  
                                 
Cost of operations:
 
 Film rent expense (1)
    3,855       50       598       43  
 Cost of concessions (2)
    482       15       68       17  
 Salaries and wages (3)
    1,224       11       288       15  
 Facility lease expense (3)
    1,334       12       248       13  
 Utilities and other (3)
    1,881       17       329       17  
 General and administrative (3)
    1,946       17       673       35  
 Depreciation and amortization (3)
    1,947       17       262       14  
 Total costs and expenses (3)
    12,669       113       2,466       130  
 Operating loss (3)
    (1,453 )     (13 )     (567 )     (30 )
 Interest expense
    (372 )     (3 )     -       -  
 Other
    (8 )     (0 )     -       -  
 Loss before income taxes (3)
    (1,833 )     (16 )     (567 )     (30 )
 Income taxes (4)
    64       (3 )     20       (4 )
 Net loss (3)
  $ (1,897 )     (17 )   $ (587 )     (31 )
                                 
Other operating data:
 
  Consolidated Theatre Level Cash Flow (7)
  $ 2,432       21     $ 368       19  
 Consolidated Adjusted EBITDA (8)
  $ 934       8     $ (224 )     (12 )
 Attendance
    1,032,652       *       152,234       *  
 Average ticket price (5)
  $ 7.52       *     $ 9.14       *  
 Average concession per patron (6)
  $ 3.03       *     $ 2.63       *  
__________

*           Not meaningful
 
(1)
Percentage of revenues calculated as a percentage of admissions revenues.
 
(2)
Percentage of revenues calculated as a percentage of concessions revenues.
 
(3)
Percentage of revenues calculated as a percentage of total revenues.
 
(4)
Calculated as a percentage of pre-tax loss.
  
(5)
Calculated as admissions revenue/attendance.
 
(6)
Calculated as concessions revenue/attendance.
 
 
34

 
 (7)
TLCF is a non-GAAP financial measure. TLCF is a common financial metric in the theater industry, used to gauge profitability at the theater level, before the effect of depreciation and amortization, general and administrative expenses, interest, taxes or other income and expense items. While TLCF is not intended to replace any presentation included in our consolidated financial statements under GAAP and should not be considered an alternative to cash flow as a measure of liquidity, we believe that this measure is useful in assessing our cash flow and working capital requirements. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this filing. For additional information on TLCF, see pages 39.
 
(8)
Adjusted EBITDA is a non-GAAP financial measure. We use adjusted EBITDA as a supplemental liquidity measure because we find it useful to understand and evaluate our results, excluding the impact of non-cash depreciation and amortization charges, stock based compensation expenses, and nonrecurring expenses and outlays, prior to our consideration of the impact of other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this filing. For additional information on Adjusted EBITDA, see pages 40.

Six Months Ended December 31, 2012 and 2011
 
At December 31, 2012, we operated 16 theaters located in New Jersey, Connecticut, Pennsylvania, California and Arizona, consisting of 159 screens. We operated three theaters with 19 screens for the entire six month periods ended December 31, 2012 and 2011, five theaters with 54 screens since April 20, 2012, one theater with 12 screens since September 29, 2012, and seven theaters with 74 screens from dates ranging from December 14, 2012 to December 20, 2012.  Therefore, many comparisons of the 2012 and 2011 periods will be skewed accordingly.  Our theaters had over 1,032,000 and 152,000 attendees for the six months ended December 31, 2012 and 2011, respectively (for the portions of the periods we operated them). Overall, the North American box office results for the six months ended December 31, 2012 had increased by approximately 3% from the comparable 2011 period, with more  titles displayed in 2012 and general economic conditions improving slightly, contributing to the improvement.  For the three theaters we operated for the entire 2012 and 2011 three month periods, our results increased by similar amounts.

Admissions and Concessions. Our admissions and concessions revenues increased by 458%, due to our increased screen count in the six months ended December 2012 as compared to 2011. Our average ticket price decrease was due to our entry into new and less urban geographical markets.  In addition, our emphasis on alternative content programming has resulted in incremental admissions and concessions revenue. Alternative content revenue comprised 5% of our box office revenue during the six months ended December 31, 2012 and 2011, for our original 3 theaters that we operated in both years.
 
Other Revenues. Other revenues consist of advertising revenues, theater rentals for parties, camps and other activities. We entered into an agreement with NCM to receive ad revenues in August 2011. Advertising revenue was $232 for the six months ended December 31, 2012 period compared to $32 in the 2011 period.
 
 
35

 
Film Rent Expense. Film rent expense is a variable cost that fluctuates with box office revenues. We generally expect film rent expense to range from 50% to 60% of admissions revenues, with art and independent titles at the lower end of the range and mainstream movie titles at the middle to high end of the range. Film rent expense as a percentage of box office revenues was 50% in the six months ended December 31, 2012 period as compared to 43% of box revenues in 2011. Our increased film rent was due to our entry into new markets and display of mainstream movie titles with higher film expenses.  Included as a reduction of film rent expense in the 2012 period is $504 of VPFs that we receive from a third party vendor, associated with digital titles that we play from the studios, as compared to $132  in 2011. Excluding VPFs, film rent expense would have been 56% and 53% of admissions revenues in the 2012 and 2011 periods, respectively.
 
 Cost of Concessions. At 15% and 17 % of our concessions revenue for the six months ended December 31, 2012 and 2011, respectively, we believe our cost of concessions is close to the industry average of 15% to 20%. Our concession costs as a percentage of concessions revenue can fluctuate based on the mixture of concession products sold, and changes in our supply pricing.
 
Salaries and Wages. Our theater employees are mostly part-time hourly employees, supervised by one or more full-time managers at each location. Our payroll expenses contain a fixed component but are also variable and will fluctuate, being generally higher during the peak summer and holiday periods, and also during alternative content events, and lower at other times. The increase from the 2011 period is due to our operation of a larger number of theaters during the six months ended December 31, 2012 versus 2011. As a percentage of revenue, the decrease is due to our adjustment of the mix of theater staff shortly following our acquisition of the locations.
 
Facility Lease Expense. Each of our facilities is operated under operating leases that contain renewal options upon expiration. The leases contain provisions that increase rents in certain amounts and at certain times during the initial term, and the leases for certain theaters require percentage rent to be paid upon the achievement of certain revenue targets. We incurred $138 in percentage rent expense as a result of these lease provisions during the six months ended December 31, 2012, and $0 in the 2011 period. The remainder of the increase from the 2011 period is due to our operation of more theaters in the 2012 period.
 
Utilities and Other. Utilities and other expenses consist of utility charges, real estate taxes incurred pursuant to the operating leases for our theaters, and various other costs of operating the theaters. We expect these costs, which are largely fixed in nature, to remain relatively constant for the theaters, with growth in these expenses as we acquire more theaters. The increase in these expenses is due to the operation of more screens during the six months ended December 31, 2012 as compared to 2011.  Though many of these costs are largely fixed except for inflationary-type increases, we will experience growth in these expenses as we acquire more theaters.
 
General and Administrative Expenses. General and administrative expenses consisted primarily of salaries and wages for our corporate staff, legal, accounting and professional fees associated with our start-up and acquisition of theaters, marketing, and information technology related expenses. The increase in these expenses is due to additional personnel hired to manage our actual and planned growth, along with professional fees for auditing, legal, marketing and information technology. We expect these costs to decrease as a percentage of revenue as we grow and realize increased economies of scale. Included in general and administrative expenses is stock compensation expense of $69 and $33 in the 2012 and 2011 periods, respectively related to issuance of Class A common stock to employees and non-employees for services rendered. We expect to issue additional stock-based awards in the future under our 2012 stock option and incentive plan that was adopted in conjunction with our IPO. Awards may consist of stock options or restricted stock, with or without vesting periods. As of December 31, 2012 and 2011, we had 13 and 8 employees, respectively on our corporate staff, including our chief executive officer and other  officers and staff to support our business development, technology, accounting, and marketing activities.
 
 
36

 
Depreciation and Amortization. The increase from 2011 is due to the operation of 159 screens as of December 31, 2012 versus 19 screens at December 31, 2011, including the addition of assets such as digital projection equipment, and other capital improvements we made. We record depreciation and amortization for property and equipment and intangible assets over the estimated useful life of each asset class on a straight line basis. Our largest fixed asset is our digital projection equipment, which had a gross cost of $5.8 million as of December 31, 2012 and is being depreciated over a 10-year estimated useful life. We expect digital projection equipment to be a large component of our asset base going forward following any acquisitions that we may consummate, along with other theater equipment and leasehold improvements.
 
Operating Loss. The increased operating loss was primarily attributable to the higher general and administrative and depreciation and amortization costs, associated with the increased asset base and larger corporate infrastructure which will support our future growth.
 
Impact of Inflation.  We believe that our results of operations are not materially impacted by moderate changes in the inflation rate.  Inflation and changing prices did not have a material effect on our business, financial condition or results of operations in the three month periods in 2012 and 2011, respectively.
 
Income Taxes.  We have income tax expense, although there were pretax losses, mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, we recorded an accrual of non-cash tax expense due to additional valuation allowance in connection with the tax amortization of our indefinite-lived intangible assets that was not available to offset existing deferred tax assets.
 
Liquidity and Capital Resources

On April 20, 2012 we completed our initial public offering of 2,200,000 shares of Class A common stock at a price of $6.10 per share, for net proceeds of $11,400 after deducting underwriting commissions and offering expenses.  On May 7, 2012, we sold 323,900 shares of Class A common stock upon the exercise of the underwriters’ overallotment option, for net proceeds of $1,800 after deducting underwriting discounts and commissions.
 
On September 20, 2012, we sold 6 shares of Series B preferred stock and raised $450.
 
On September 28, 2012, we entered into a loan agreement for $10.0 million with Northlight.  The Northlight loan was used to fund our acquisition of the Lisbon theater for $6.0 million, pay for previously installed digital systems of $3.3 million, pay fees associated with the Northlight loan and the Lisbon acquisition, and to provide working capital.

On December 10, 2012, we, together with Start Media, entered into a joint venture to acquire, refit and operate movie theaters.  Start Media has committed to contribute up to $20 million to JV, including its initial $8 million. In December 2012, JV acquired seven movie theaters (six of which are located in southern California and one of which is near Phoenix, Arizona) with an aggregate of 74 fully digital screens, for an aggregate purchase price of $12.8 million, consisting of $8 million which was funded by Start Media in cash plus 615,204 shares of our Class A common stock with a fair value of $3.3 million issued in December 2012, and an estimated additional 272,419 shares to be issued valued at $1.4 million to finalize certain post-closing adjustments.

We expect our primary uses of cash to be for additional theater acquisitions, operating expenses, capital expenditures (for digital projection equipment and otherwise), corporate operations, possible debt service and/or payments with respect to capital leases that we may incur in the future. We expect our principal sources of liquidity to be from cash generated from operations, cash on hand, and anticipated proceeds from equity or debt issuances.
 
 
37

 
Summary of Cash Flows
 
   
Six Months Ended
 
 (000's)
 
December 31,
 
 Consolidated Statement of Cash Flows Data:
 
2012
   
2011
 
 Net cash provided by (used in):
 
 
       
 Operating activities
  $ (1,480 )   $ (525 )
 Investing activities
    (6,497 )     (269 )
 Financing activities
    9,069       376  
 Net increase (decrease) in cash and cash equivalents
  $ 1,092     $ (418 )
 
Operating Activities
 
Net cash flows used in operating activities totaled approximately ($1.5) million and ($0.5) million for the six months ended December 31, 2012 and 2011, respectively.   Our net loss was impacted by general and administrative costs which grew rapidly in 2012 due to the addition of theaters and the creation of our corporate infrastructure.  We made a payment to our primary vendor of digital systems of $3.3 million in the six months ended December 31, 2012.
 
Investing Activities
 
Our capital requirements have arisen principally in connection with our acquisitions of theaters, upgrading our theater facilities post-acquisition and replacing equipment. Cash used in investing activities totaled ($6.5) million and ($0.3) million for the six months ended December 31, 2012 and 2011, respectively. The increase from 2011 is due to the cash purchase price for the Lisbon theater acquired in 2012, totaling $6.0 million and the Ultrastar Acquisitions of $8.1; $8.0 million of which was funded by Start Media,LLC through its capital contribution to the JV.  We may also incur significant capital outlays in connection with other acquisitions that we may consummate in the next 12 months, including digital projection equipment and other theater upgrades.  We intend to continue to grow our theater circuit either directly by us or through our JV acquisitions vehicle through selective expansion and acquisitions.

Financing Activities
 
Net cash provided by financing activities totaled $9.1 million and $0.4 million for the six months ended December 31, 2012 and 2011, respectively.  The 2012 increase to net cash provided by financing activities was due mainly to the proceeds of the Northlight loan of $10.0 million, proceeds from issuance of preferred stock of $0.5 million and was offset in part  by the payment of a note to the seller of Cinema Centers for $0.8 million. We expect to issue equity and debt instruments in the future in connection with our business plan.
 
 
38

 
Non-GAAP Financial Measures
 
Theater Level Cash Flow and Adjusted EBITDA
 
TLCF is a common financial metric in the theater industry, used to gauge profitability at the theater level, before the effect of depreciation and amortization, general and administrative expenses, interest, taxes or other income and expense items. We use Adjusted EBITDA as a supplemental liquidity measure because we find it useful to understand and evaluate our results excluding the impact of non-cash depreciation and amortization charges, stock based compensation expenses, and nonrecurring expenses and outlays, prior to our consideration of the impacts of other potential sources and uses of cash, such as working capital items. We believe that TLCF and Adjusted EBITDA are useful to investors for these purposes as well.
 
TLCF and Adjusted EBITDA should not be considered alternatives to, or more meaningful than, GAAP measures such as net cash provided by operating activities. Because these measures exclude depreciation and amortization and they do not reflect any cash requirements for the replacement of the assets being depreciated and amortized, which assets will often have to be replaced in the future.  Further, because these metrics do not reflect the impact of income taxes, cash dividends, capital expenditures and other cash commitments from time to time as described in more detail elsewhere in this filing, they do not represent how much discretionary cash we have available for other purposes. Nonetheless, TLCF and Adjusted EBITDA are key measures used by us. We also evaluate TLCF and Adjusted EBITDA because it is clear that movements in these measures impact our ability to attract financing. TLCF and Adjusted EBITDA, as calculated, may not be comparable to similarly titled measures reported by other companies. 
 
A reconciliation of TLCF and Adjusted EBITDA to GAAP net loss is calculated as follows (in thousands):
 
TLCF reconciliation:
 
 (unaudited)
 
Three months ended
   
% Increase/ (Decrease)
 
Six months ended
   
% Increase/ (Decrease)
 
 
 
December 31,
         
December 31,
       
(000's)
 
2012
   
2011
         
2012
   
2011
       
 Net loss
  $ (1,234 )   $ (321 )     284 %   $ (1,897 )   $ (587 )     223 %
Addback:
                 
 General and administrative (1)
    1,208       352       243 %     1,946       673       189 %
 Depreciation and amortization
    1,098       132       732 %     1,947       262       643 %
 Income tax expense
    47       15       213 %     64       20       220 %
 Interest expense
    347       -       -100 %     372       -       -100 %
 Consolidated TLCF
  $ 1,466     $ 178             $ 2,432     $ 368          
Deduct:
                               
 Start Media's share of TLCF
    (130 )     -       -100 %     (130 )     -       -100 %
 TLCF of Digital Cinema Destinations Corp.
  $ 1,336     $ 178       650 %   $ 2,302     $ 368       525 %
 
 
39

 
Adjusted EBITDA reconciliation:
 
 (unaudited)
 
Three months ended
 
%
Increase/
(Decrease)
 
Six months ended
   
% Increase/
(Decrease)
 
 
 
December 31,
       
December 31,
       
(000's)
 
2012
   
2011
         
2012
   
2011
       
 Net loss
  $ (1,234 )   $ (321 )     284 %   $ (1,897 )   $ (587 )     223 %
Add back:
                 
 Depreciation and amortization
    1,098       132       732 %     1,947       262       643 %
 Interest expense
    347       -       100 %     372       -       100 %
 Income tax expense
    47       15       213 %     64       20       220 %
 EBITDA
    258       (174 )     248 %     486       (305 )     259 %
Addback:
                 
 Stock-based compensation (2)
    26       16       63 %     69       33       109 %
 Non-recurring organizational and M&A-related professional fees (3)
    315       16       1869 %     362       28       1193 %
 Consolidated Adjusted EBITDA
  $ 599     $ (142 )     522 %   $ 917     $ (224 )     422 %
Addback:
                 
 Management fees (4)
    52       -       100 %     52       -       100 %
Deduct:
                               
 Start Media's share of adjusted EBITDA
    (94 )     -       -100 %     (94 )     -       -100 %
 Adjusted EBITDA of Digital Cinema Destinations Corp.
  $ 557     $ (142 )     492 %   $ 875     $ (224 )     459 %
 ___________
 
(1)  
TLCF is intended to be a measure of theater profitability. Therefore, our corporate general and administrative expenses have been excluded.
 
(2)  
Represents the fair value of shares of Class A common stock and restricted stock awards issued to employees and non-employees for services rendered. As these are non-cash charges, we believe that it is appropriate to show Adjusted EBITDA excluding this item. The increase from the prior year is due to the magnitude of the Lisbon and Ultrastar  acquisitions.
 
(3)  
Primarily represents professional fees incurred in connection with start-up activities, the creation of acquisition template documents that will be used by us for future transactions, and certain other costs related to our acquisition strategy. While we intend to acquire additional theaters, we have laid the groundwork for our acquisition program and we expect to incur reduced legal fees in connection with future acquisitions. We therefore believe that it is appropriate to exclude these items from Adjusted EBITDA.
 
(4)  
To add back management fees to Digiplex from JV.
 
 
40

 
Critical Accounting Policies
 
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating our reported consolidated financial results, include the following:
 
Revenue and Film Rent Expense Recognition
 
Revenues are recognized when admissions and concession sales are received at the box office. Other revenues primarily consist of screen advertising, theater rentals and parties. Sales are made either in cash or in the form of credit cards, which settle in cash within three days. Screen advertising revenues are recognized over the period that the related advertising is delivered on-screen. Theater rentals and party revenue are recognized at the time of the event. We record proceeds from the sale of gift cards and other advanced sale-type certificates in current liabilities and recognize admissions and concession revenue when a holder redeems the card or certificate. We recognize unredeemed gift cards and other advanced sale-type certificates as revenue only after such a period of time indicates, based on historical experience, that the likelihood of redemption is remote, and based on applicable laws and regulations. In evaluating the likelihood of redemption, we consider the period outstanding, the level and frequency of activity, and the period of inactivity.
 
 Film rent expenses are accrued based on the applicable admissions and either mutually agreed upon firm terms or a sliding scale formula, which are generally established prior to the opening of the film, or estimates of the final mutually agreed upon settlement, which occurs at the conclusion of the film run, subject to the film licensing arrangement. Under a firm terms formula, we pay the distributor a mutually agreed upon specified percentage of box office receipts, which reflects either a mutually agreed upon aggregate rate for the life of the film or rates that decline over the term of the run. Under a sliding scale formula, we pay a percentage of box office revenues using a pre-determined matrix that is based upon box office performance of the film. The settlement process allows for negotiation of film rental fees upon the conclusion of the film run based upon how the film performs. Estimates are based on the expected success of a film. The success of a film can typically be determined a few weeks after a film is released when initial box office performance of the film is known. Accordingly, final settlements typically approximate estimates since box office receipts are known at the time the estimate is made and the expected success of a film can typically be estimated early in the film’s run. If actual settlements are different than those estimates, film rental costs are adjusted at that time.
 
 
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Under our Exhibitor-Buyer Master License Agreement, we earn VPFs fees from the movie studios when a new digital title is shown on our screens. We may receive virtual print fees for up to the total costs of our digital systems, less a base amount of $9 thousand per system, but including any financing costs we may incur, over a maximum period of ten years from the date of our installations. We are eligible to receive these payments through May 2021, or until the amount of cumulative VPFs is equal to our costs. VPFs are
treated as a reduction of film rent expense. Below is a summary of the costs we incurred relating to the purchase of our digital projection systems to date less the base amount, the VPFs we have earned, and the administrative fees incurred (which add to the amounts we can receive for virtual print fees). We have incurred financing costs in connection with the acquisition of these systems, which is shown below.

(in thousands)
     
 Balance at June 30, 2012
  $ 4,382  
 Digital systems costs
    530  
 Financing costs
    351  
 VPFs earned
    (503 )
 Exhibitor contribution
    (106 )
 Administrative costs
    74  
 Balance, December 31, 2012
  $ 4,728  
Depreciation and Amortization
 
Theater property and equipment are depreciated using the straight-line method over their estimated useful lives. In estimating the useful lives, we have relied upon our experience with such assets. We periodically evaluate these estimates and assumptions and adjust them as necessary. Adjustments to the expected lives of assets are accounted for on a prospective basis through depreciation expense. Leasehold improvements for which we pay and to which we have title are amortized over the shorter of the lease term or the estimated useful life.
 
Impairment of Long-Lived Assets
 
We review long-lived assets for impairment indicators whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. We assess many factors including the following to determine whether to impair long-lived assets:
 
•           actual theater level cash flows;
 
•           future years budgeted theater level cash flows;
 
•           theater property and equipment carrying values;
 
•           amortizing intangible asset carrying values;
 
•           competitive theaters in the marketplace;
 
•           the impact of recent ticket price changes;
 
•           available lease renewal options; and
 
•           other factors considered relevant in our assessment of impairment of individual theater assets.
 
 
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Long-lived assets are evaluated for impairment on an individual theater basis, which we believe is the lowest applicable level for which there are identifiable cash flows. The impairment evaluation is based on the estimated undiscounted cash flows from continuing use through the remainder of the theater’s useful life. The remainder of the useful life correlates with the available remaining lease period, which includes the probability of renewal periods for leased properties.
 
Impairment of Goodwill and Finite-Lived Intangible Assets
 
We evaluate goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of the goodwill may not be fully recoverable. We evaluate goodwill for impairment for each theater as a reporting unit, based on an estimate of its relative fair value.

 Finite-lived intangible assets are tested for impairment whenever events or changes in circumstances indicate the carrying value may not be fully recoverable.
 
Income Taxes
 
We use an asset and liability approach to financial accounting and reporting for income taxes.

Recently Adopted Standards

In June 2011, the FASB issued ASU 2011-5, “Presentation of Comprehensive Income”, which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The provisions of this guidance are effective for the Company beginning July 1, 2012 and are required to be applied retroactively. We adopted this standard on July 1, 2012.

In July 2012, the FASB issued a new accounting standard update, which amends guidance allowing an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite – lived intangible asset is impaired. This assessment should be used as a basis for determining whether it is necessary to perform the quantitative impairment test. An entity would not be required to calculate the fair value of the intangible asset and perform the quantitative test unless the entity determines, based upon its qualitative assessment, that it is more likely than not that its fair value is less than its carrying value. The update provides further guidance of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of an indefinite – lived intangible asset is less than its carrying amount. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. This update is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted. We are in the process of analyzing the update and we do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.  We adopted this standard on October 1, 2012, which did not have a material effect on our financial position or results of operations.
 
Recently Issued Standards
 
In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income". This update requires companies to present the effects on the line items of net income or loss of significant reclassifications out of accumulated other comprehensive income or loss if the amount being reclassified is required under U.S. generally accepted accounting principles to be reclassified in its entirety to net income or loss in the same reporting period. ASU 2013-02 is effective prospectively for the fiscal years and interim periods within those years, beginning after December 15, 2012. We do not expect the adoption of the amended guidance to have a significant impact on our consolidated financial statements.
 
Off-Balance Sheet Arrangements
 
Other than the operating leases described herein, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
 
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Quantitative and Qualitative Disclosures about Market Risk
 
We do not hold instruments that are sensitive to changes in interest rates, foreign currency exchange rates or commodity prices. Therefore, we believe that we are not materially exposed to market risks resulting from fluctuations from such rates or prices.
 
Subsequent Events

  On January 1 and February 1, 2013, wholly owned subsidiaries of JV began operating a three screen theater in Sparta, NJ and a 16 screen theater in Solon, Ohio, respectively.  Each theater was the subject of a lease entered into directly with the landlord, and there was no purchase price paid.  Both theaters were equipped with digital projection systems before JV began operating the theaters.  Both theaters are operated by us, under a Management Agreement with JV, and will be included in our consolidated financial statements. 

On January 1, 2013, Digiplex hired Charles Goldwater as our Senior Vice President.  Mr. Goldwater also has served on our board of directors. Digiplex and Mr. Goldwater have entered into an employment agreement with a three year term providing for a minimum salary with other benefits commensurate with our executives.
 
In January 2013, JV entered into an agreement to pay a third party $450 as an advisory fee in connection with services rendered in connection with the formation of the JV and related agreements. Digiplex and Start Media have each agreed to fund $225 to the JV as a capital contribution, and the JV in turn will pay the advisory fee. The advisory fee will be paid in 12 installments over one year from January 2013.
 
On January 13,2013, Start Media contributed an additional $1,300 to JV, to fund additional expenditures and other expenses.
 
In February 2013, JV and Sellers reached an agreement to issue 272,419 shares of Digiplex Class A common stock related to post-closing adjustments in the Ultrastar  acquisitions. On the date these shares are issued, Digiplex and Start Media will own 34% and 66% of the JV, respectively.
 
Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As the Company is a “smaller reporting Company,” this item is inapplicable.
 
Item 4.    CONTROLS AND PROCEDURES
 
 Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
 There have been no significant changes in the Company’s internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
From time to time, we may be involved in various legal proceedings in the ordinary course of business. We do not believe that any settlement or judgement regarding current or potential future legal proceedings will have a material effect on our financial position.
 
 
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES
 
None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
None.

ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS
 
The exhibits are listed in the Exhibit Index on page X herein.
 
SIGNATURES
 
In accordance with the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
DIGITAL CINEMA DESTINATIONS CORP.
(Registrant)
 
 
       
Date:  February 14, 2013
By:
/s/ Brian D. Pflug  
 
Name:  
Brian D. Pflug
 
 
Title:
Chief Financial Officer and Principal Accounting Officer
 
 
 
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 EXHIBIT INDEX
 
Exhibit
Number
 
 
Description of Document
31.1
 
Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation
101.DEF
 
XBRL Taxonomy Extension Definition
101.LAB
 
XBRL Taxonomy Extension Label
101.PRE
 
XBRL Taxonomy Extension Presentation