Digital Cinema Destinations Corp. - FORM 10-Q

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EX-31.1 - Digital Cinema Destinations Corp.	e612283_ex31-1.htm
EX-32.1 - Digital Cinema Destinations Corp.	e612283_ex32-1.htm
EX-31.2 - Digital Cinema Destinations Corp.	e612283_ex31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - Digital Cinema Destinations Corp.	Financial_Report.xls

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: March 31, 2014

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 May 15, 2014, 7,214,073 shares of Class A Common Stock, $0.01 par value, and 849,000 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)
	Condensed Consolidated Balance Sheets at March 31, 2014 (Unaudited) and June 30, 2013	1
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine
	Months ended March 31, 2014 and 2013	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended March 31, 2014 and 2013	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	38
PART II -	OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds from Sales of Registered Securities	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	39
Signatures		39
Exhibit/Index		40

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	March 31,			June 30,
	2014			2013
ASSETS	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	4,417		$	3,607
Accounts receivable		842			697
Inventories		150			191
Deferred financing costs, current portion		357			357
Prepaid expenses and other current assets		895			1,444
Total current assets		6,661			6,296
Property and equipment, net		29,786			29,171
Goodwill		4,314			3,156
Intangible assets, net		5,401			6,186
Security deposits		189			205
Deferred financing costs, long term portion, net		962			1,225
Other assets		103			9
TOTAL ASSETS	$	47,416		$	46,248
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	2,086		$	2,478
Accrued expenses and other current liabilities		2,616			3,964
Notes payable, current portion		1,718			1,373
Capital lease, current portion		245			121
Earn out from theater acquisitions		-			296
Deferred revenue		594			305
Total current liabilities		7,259			8,537
NONCURRENT LIABILITIES
Notes payable, long term portion		7,693			8,615
Capital lease, net of current portion		575			239
Unfavorable leasehold liability, long term portion		132			159
Deferred rent expense		707			407
Deferred tax liability		210			199
TOTAL LIABILITIES		16,576			18,156
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 10,000,000 shares authorized as of March 31, 2014 and June 30, 2013, 6 shares of Series B Preferred Stock issued and outstanding as of March 31, 2014 and June 30, 2013 , respectively		-			-
Class A Common stock, $.01 par value: 20,000,000 shares authorized; and 7,214,073 and 5,511,938 shares issued and outstanding as of March 31, 2014 and June 30, 2013, respectively		72			55
Class B Common stock, $.01 par value, 900,000 shares authorized; 849,000 and 865,000 shares issued and outstanding as of March 31, 2014 and June 30, 2013, respectively		9			9
Additional paid-in capital		33,819			25,816
Accumulated deficit		(9,874	)		(7,049	)
TOTAL STOCKHOLDERS' EQUITY OF DIGITAL CINEMA DESTINATIONS CORP.		24,026			18,831
Noncontrolling interest		8,618			9,261
Treasury stock, 361,599 shares		(1,804	)		-
Total equity		30,840			28,092
TOTAL LIABILITIES AND EQUITY	$	47,416		$	46,248

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

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share data)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2014			2013			2014			2013
REVENUES
Admissions	$	6,662		$	5,985		$	22,009		$	13,728
Concessions		2,951			2,461			9,455			5,586
Other		441			319			1,255			668
Total revenues		10,054			8,765			32,719			19,982
COSTS AND EXPENSES
Cost of operations:
Film rent expense		3,205			2,824			10,920			6,637
Cost of concessions		451			413			1,634			895
Salaries and wages		1,239			1,155			3,986			2,378
Facility lease expense		1,523			1,514			4,653			2,847
Utilities and other		2,227			1,868			6,501			3,794
General and administrative		1,509			1,365			4,175			3,311
Change in fair value of earnout		-			(79	)		54			(79	)
Gain on sale of theater		(950	)		-			(950	)		-
Depreciation and amortization		1,565			1,439			4,279			3,385
Total costs and expenses		10,769			10,499			35,252			23,168

OPERATING LOSS		(715	)		(1,734	)		(2,533	)		(3,186	)

OTHER EXPENSE
Interest expense		(345	)		(326	)		(1,044	)		(620	)
Non-cash interest expense		(71	)		(75	)		(223	)		(153	)
Other expense		(41	)		(38	)		(88	)		(46	)
LOSS BEFORE INCOME TAXES		(1,172	)		(2,173	)		(3,888	)		(4,005	)

Income tax expense (benefit)		22			(22	)		40			42
NET LOSS	$	(1,194	)	$	(2,151	)	$	(3,928	)	$	(4,047	)

Net loss attributable to non-controlling interest		419			620			1,078			713
Net loss attributable to Digital Cinema Destinations Corp.	$	(775	)	$	(1,531	)	$	(2,850	)	$	(3,334	)

Preferred stock dividends		(5	)		(5	)		(15	)		(11	)
Net loss attributable to common stockholders	$	(780	)	$	(1,536	)	$	(2,865	)	$	(3,345	)


Net loss per Class A and Class B common share- basic and diluted attributable to common stockholders	$	(0.10	)	$	(0.25	)	$	(0.39	)	$	(0.59	)

Weighted average common shares outstanding:		7,931,270			6,065,265			7,313,618			5,663,016

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

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Nine Months Ended
	March 31,
	2014			2013
Cash flows from operating activities
Net loss	$	(3,928	)	$	(4,047	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,279			3,385
Deferred tax expense		11			22
Change in fair value of earnout liability		54			(79	)
Stock-based compensation		494			148
Amortization of deferred financing costs included in interest expense		263			84
Amortization of unfavorable lease liability		(27	)		(23	)
Paid-in-kind interest added to notes payable		223			153
Earnings from investment in Diginext		(53	)		-
Gain on sale of theater		(950	)		-
Changes in operating assets and liabilities:
Accounts receivable		(145	)		(580	)
Inventories		49			(12	)
Prepaid expenses and other current assets		562			(831	)
Other assets and security deposits		21			(427	)
Accounts payable and accrued expenses		(1,737	)		3,127
Payable to vendor for digital systems		-			(3,334	)
Deferred revenue		289			347
Deferred rent expense		300			192
Net cash used in operating activities		(295	)		(1,875	)
Investing activities:
Purchases of property and equipment		(920	)		(1,120	)
Capital contribution from Start Media, LLC to joint venture		435			9,306
Investment in Diginext		(45	)		(5	)
Theater acquisitions		(2,049	)		(14,122	)
Proceeds from sale of theater		38			-
Cash acquired in acquisitions		8			40
Net cash used in investing activities		(2,533	)		(5,901	)
Financing activities:
Repayment of notes payable		(978	)		(1,066	)
Proceeds from notes payable		-			10,000
Payment under capital lease obligations		(139	)		(26	)
Payment of earn out from theater acquisition		(350	)		-
Payment of financing costs		-			(374	)
Proceeds from issuance of Class A common stock		5,704			-
Proceeds from issuance of preferred stock		-			450
Dividends paid on preferred stock		(15	)		(11	)
Costs associated with issuance of stock		(584	)		(100	)
Net cash provided by financing activities		3,638			8,873
Net change in cash and cash equivalents		810			1,097
Cash and cash equivalents, beginning of year		3,607			2,037
Cash and cash equivalents, end of period	$	4,417		$	3,134

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

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

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”) was incorporated in Delaware in July 2010 and had its initial public offering in April 2012. Digiplex and its’ consolidated subsidiaries and entities (collectively, the “Company”), currently operate 20 theaters with 192 screens in seven states (the “Theaters”). The Company intends to acquire additional businesses operating in the theater exhibition industry sector. Digiplex, together with its wholly owned subsidiaries and those of Start Media/Digiplex, LLC (“JV”), is also referred to herein as the “Company”.

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. Nehst will supply Diginext with periodic movie content and the Company 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. The Company 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 ancillary sources will be shared equally by the owners. The Company and Nehst have each made capital contributions of $50 since inception, and the Company is using the equity method to account for its share of earnings from the joint venture. For the nine months ended March 31, 2014, Digiplex’s share of Diginext net income was $53. The balance of the Company’s equity investment at March 31, 2014 is $103 and included in other assets.

On December 10, 2012, Digiplex, together with Start Media, LLC (“Start Media”), formed JV, a Delaware limited liability company, to acquire, refit and operate movie theaters. 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.

On July 19, 2013, JV acquired a nine screen movie theater in Torrington, Ct. (“Torrington”). Torrington is operated by Digiplex under a management agreement with JV. See Note 3 and Note 4.

On December 19, 2013, the Company acquired an eight screen movie theater in Mechanicsburg, Pa. (“Mechanicsburg”). On March 21, 2014, the Company acquired a seven screen theater in Bel Air, Md ("Churchville"). Together, these two theaters are referred to as the Flagship theaters. The operating results of the Flagship theaters are included in the Company’s consolidated results from their respective dates of acquisition. See Note 3.

On February 14, 2014, JV sold the seven screen Mission Valley theater in San Diego, Ca. See Note 5.

Although the Company has announced the signing of asset purchase agreements and/or leases for additional locations, all are subject to further diligence, financing and other closing conditions. Therefore, there can be no assurance that the Company will complete these planned transactions.

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, 2013 filed with the Securities and Exchange Commission (“ SEC”) on September 18, 2013 (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 period presented herein are not necessarily indicative of the results expected for the full year ending June 30, 2014.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

The Company has incurred net losses since inception. The Company also has contractual obligations related to its debt as of March 31, 2014 and beyond. The Company expects to generate net losses for the foreseeable future. Based on the Company’s cash position at March 31, 2014, expected cash flows from operations, and the Company’s October 2013 issuance of Class A common stock for net proceeds of $5,200, management believes that the Company has the ability to meet its obligations through March 31, 2015. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have an adverse effect on the Company’s financial position, results of operations or liquidity.

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, which is a VIE. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of unaudited 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 unaudited 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.

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 terminals 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. The Company estimates the gift card breakage rate based on historical redemption patterns. Unredeemed gift cards are recognized as revenue only after such a period of time indicates, based on historical attendance, the likelihood of redemption is remote, and based on applicable laws and regulations, in evaluating the likelihood of redemption, the period outstanding, the level and frequency of activity, and the period of inactivity is evaluated.

Rewards Club Program

In August 2013, the Digiplex Rewards Club was implemented, whereby members earn credits for each dollar spent at one of the Company's theaters and earn concession or ticket awards based on the number of credits accumulated. Because the Company believes that the value of the awards granted is insignificant in relation to the value of the transactions necessary to earn the award, the Company records the estimated cost of providing awards at the time the awards are redeemed. The Company’s costs of these awards are not significant for the nine months ended March 31, 2014. The awards issued under the Digiplex Rewards Club expire 90 days after issuance.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At March 31, 2014 and June 30, 2013, the Company held substantially all of its cash in bank 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. The Company has determined that an allowance for doubtful accounts is not necessary at March 31, 2014 and June 30, 2013.

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:

Furniture and fixtures	5 years
Leasehold improvements	Lesser of lease term or estimated asset life
Building and improvements	17 years
Digital systems and related equipment	10 years
Equipment and computer software	3 - 5 years

Goodwill

The carrying amount of goodwill at March 31, 2014 and June 30, 2013 was $4,314 and $3,156, 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 —the Company has identified its reporting units to be the regions in which the Company conducts its theater operations.

The Company determines fair value by using an enterprise valuation methodology weighing the income approach and market approach 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 future 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.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

The changes in carrying amounts of goodwill are as follows:

	Total
Balance as of June 30, 2013	$	3,156
Goodwill resulting from the Flasgship acquisition		1,267
Sale of Mission Valley theater		(109	)
Balance as of March 31, 2014	$	4,314

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)

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 March 31, 2014 and June 30, 2013:

As of March 31, 2014:
	Level 1		Level 2		Level 3		Total
Earnout from theater acquisitions		-		-		-		-
	$	-	$	-	$	-	$	-

As of June 30, 2013:
	Level 1		Level 2		Level 3		Total
Earnout from theater acquisitions		-		-		296		296
	$	-	$	-	$	296	$	296

Earnout from theater acquisitions is a liability to the seller of the Lisbon theater and is based upon meeting certain financial performance targets. Estimates of the fair values of the earnout was estimated by a forecast of theater level cash flow, as defined by the asset purchase agreement. That measure is based on significant inputs that are not observable in the market, which are considered Level 3 inputs.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

The following summarized changes in the earnout during the nine months ended March 31, 2014:

	Total
Balance as of June 30, 2013	$	296
Change in fair value of earnout liability for Lisbon acquisition		54
Payment of earnout to seller for Lisbon acquisition		(350	)
Balance as of March 31, 2014	$	-

Key assumptions underlying the initial Lisbon earnout estimate include a discount rate of 12.5 percent and that Lisbon will achieve its forecasted financial performance target in the one year earnout period ended September 28, 2013. The Company increased the Lisbon earnout from $296 to $350 based on actual results compared to the threshold in the asset purchase agreement. A fair value change of $0 and $54 for the three and nine months ended March 31, 2014 was recognized and the $350 was paid to the seller in February 2014.

Fair Value of Financial Instruments

The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and accrued expenses, and note payable approximate their fair values, due to their short term nature.

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 for the note payable, unamortized financing costs related to the formation of JV, and the fair value of warrants issued to Start Media, which are amortized on a straight-line basis over the respective terms. 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 unaudited condensed consolidated statement of operations of the Company for the three months ended March 31, 2014 and 2013 was reduced by virtual print fees (“VPFs”) of $268 and $259, respectively, under a master license agreement exhibitor-buyer arrangement with third party vendors. VPFs for the nine months ended March 31, 2014 and 2013 were $850 and $763, respectively. VPFs represent a reduction in film rent paid to film distributors. Pursuant to the master license agreements, 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 administrative fees. VPFs are generated based on initial display of titles on the digital projection equipment.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

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, or vesting period, 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 warrants. The fair value of the restricted stock awards is determined by the stock fair market 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 also issues 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 closing stock price of the Company’s stock issued.

Reclassification

Certain reclassifications have been made to the fiscal period ended March 31, 2013 financial statements to conform to the current fiscal period ended March 31, 2014 presentation.

Segments

As of March 31, 2014, the Company managed its business under one reportable segment: theater exhibition operations. All Company operations are located in the United States.

Recent Accounting Standard

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments contained in this update change the criteria for reporting discontinued operations and enhances the reporting requirements for discontinued operations. Under the revised standard, a discontinued operation must represent a strategic shift that has or will have a major effect on an entity’s operations and financial results: The revised standard will also allow an entity to have certain continuing cash flows or involvement with the component after the disposal. Additionally, the standard requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities and expenses of discontinued operations. This ASU is effective for reporting periods beginning after December 15, 2014 with early adoption permitted, but only for disposals that have not been reported in financial statements previously issued or available for issue. The Company has elected to early adopt this guidance effective January 1, 2014. See Note 5.

3. ACQUISITIONS

On December 19, 2013 and March 21, 2014, the Company completed the acquisitions of theaters in Mechanicsburg, Pa. and Bel Air, Md respectively, from Flagship Theaters. The provisional purchase price of the theaters totals $3,860 (assets acquired of $4,459 less assumed capital leases payable of $599), consisting of $1,828 in cash, and 412,330 shares of the Company’s Class A common stock valued at $2,032 in total (based on the trading prices on the closing dates, less a ten percent discount for trading restrictions placed on the stock). The purchase price was provisionally allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The provisional allocation of the 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 evaluation of the operating lease. The Company incurred approximately $30 in acquisition costs which was expensed and included in general and administrative expenses in the unaudited condensed consolidated statement of operations for the nine months ended March 31, 2014.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

The provisional allocation of the purchase price for the Flagship theaters was as follows:

	Flagship Theaters
ASSETS
Cash	$	4
Inventory		4
Property and equipment		2,584
Favorable leasehold interest		350
Covenants not to compete		250
Goodwill		1,267
Total assets acquired		4,459

LIABILITIES AND OTHER
Capital lease liabilities assumed		599
Issuance of Class A common stock		2,032
Total purchase price paid in cash	$	1,828

On July 19, 2013, JV acquired a nine screen movie theater in Torrington, Connecticut. The purchase price totals $612 (assets acquired of $790, less an assumed promissory note of $178), consisting of $221 in cash, and 73,770 shares of the Company’s Class A common stock valued at $391, (based on the trading price of $5.89 on the closing date, less a ten percent discount for trading restrictions placed on the stock). Accordingly, the purchase price was allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The allocation of the 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 $4 in acquisition costs which was expensed and included in general and administrative expenses in the unaudited condensed consolidated statement of operations for the nine months ended March 31, 2014. The Company finalized the Torrington purchase price allocation as of December 31, 2013.

The allocation of the purchase price for the Torrington theater was as follows:

	Torrington
	Theater
ASSETS
Cash	$	4
Prepaid expenses		13
Inventory		4
Property and equipment		385
Favorable leasehold interest		299
Covenants not to compete		85
Total assets acquired		790

LIABILITIES AND OTHER
Note payable assumed		178
Issuance of Class A common stock		391
Total purchase price paid in cash	$	221

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

The results of operations of the Flagship theaters and Torrington are included in the unaudited condensed consolidated statement of operations from their respective acquisition dates. The following are the unaudited pro forma results of operations of the Company for the three and nine months ended March 31, 2014 and 2013, respectively, as if the acquisitions were completed on July 1, 2012.

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 March 31,						Nine Months ended March 31,
	2014			2013			2014			2013
Revenues	$	10,395		$	9,973		$	34,833		$	23,112
Net loss		(1,522	)	$	(1,239	)		(2,885	)	$	(2,677	)

4. START MEDIA/ DIGIPLEX JOINT VENTURE

As of June 30, 2013, Digiplex contributed 887,623 shares of Class A Common Stock to the JV, and Start Media contributed $10,000 in cash. In July 2013, Start Media contributed $300 in cash and Digiplex contributed 73,770 shares of the Company’s Class A common stock valued at $391, to fund the Torrington acquisition, and both Start Media’s and Digiplex’s interest in the JV was adjusted accordingly. In November 2013, Start Media and Digiplex contributed $135 and $100 in cash, respectively. In February 2014, JV sold one theater and received 361,599 shares of Digiplex Class A common stock as the primary consideration. See Note 5. 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 March 31, 2014, Digiplex and Start Media owned 34% and 66% 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.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

Management fees earned by Digiplex for the three months ended March 31, 2014 and 2013 were $245 and $203, respectively. Management fees earned by Digiplex for the nine months ended March 31, 2014 and 2013 were $805 and $255, respectively. JV records these fees as general and administrative expenses, and Digiplex records an offset to general and administrative expenses. These fees are eliminated in consolidation.

Under the Management Agreements, 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 $20,000 to JV, inclusive of approximately $10,435 of capital contributions previously made, for 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. While Start Media has the right to participate in future theater acquisitions, it is not obligated to do so. 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 Digiplex receives a 6% preferred return on its 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 the Company’s receipt of a 6% preferred return on and the return of the Company’s 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 nine of the ten 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.

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

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

5.	SALE OF THEATER

JV originally purchased seven theaters from Ultrastar Theaters in December 2012 for an aggregate purchase price of $12,822, consisting of $8,108 in cash and 887,623 shares of Digiplex’s Class A common stock with a fair value of $4,714 on the acquisition date. Following discussions with Ultrastar regarding the performance of the Mission Valley theater and the ability of the landlord to terminate the lease with little notice, JV sold Mission Valley back to Ultrastar Theaters on February 14, 2014 in exchange for 361,599 shares of Digiplex Class A common stock and $38 in cash. The total sale price amounted to $1,842, resulting in a gain on sale of $950 and treasury stock of $1,804 on the March 31, 2014 consolidated balance sheet. The value of the common stock was determined based on its trading value on the closing date, less a ten percent discount for the lock up period. The Company concluded that the sale of Mission Valley does not represent a strategic shift that will have a major effect on the Company’s operations and therefore has not classified the sale as discontinued operations. Accordingly, the net assets sold were removed and the gain from the sale is included as part of operating loss in the consolidated statement of operations.

6.	ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

	March 31,		June 30,
	2014		2013
VPFs	$	534	$	470
Advertising		99		180
Concession rebates (1)		153		-
Other		56		47
Total	$	842	$	697

(1)	Concession rebates relate to the Company’s agreement with its’ primary beverage supplier. Such rebates are based on the volume of purchases and recorded when probable and reasonably estimable.

7.	PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

	March 31,		June 30,
	2014		2013
Insurance	$	201	$	215
Projector and other equipment maintenance		151		246
Real estate taxes		66		82
Note receivable (1)		-		89
Due from former theater owners		32		299
Due from Start Media		225		290
Other theater operating		72		84
Other expenses		148		139
Total	$	895	$	1,444

(1)	The note receivable was from the former owner of the Lisbon theater and was paid in February 2014 in connection with the payment of the Lisbon earnout.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

8.	PROPERTY AND EQUIPMENT

Property and equipment, net was comprised of the following:

	March 31,			June 30,
	2014			2013
Furniture and fixtures	$	5,246		$	4,931
Leasehold improvements		14,344			12,820
Building and improvements		4,638			4,627
Digital systems and related equipment		7,317			6,071
Equipment and computer software		4,210			3,976
		35,755			32,425
Less: accumulated depreciation and amortization		(5,969	)		(3,254	)
Total property and equipment, net	$	29,786		$	29,171

9.	INTANGIBLE ASSETS

Intangible assets, net consisted of the following as of March 31, 2014:

March 31, 2014
	Gross						Useful
	Carrying		Accumulated		Net		Life
	Amount		Amortization		Amount		(years)
Trade names	$	3,016	$	2,001	$	1,015		3-5
Covenants not to compete		1,937		863		1,074		3
Favorable leasehold interest		3,837		525		3,312	Remaining lease term
	$	8,790	$	3,389	$	5,401

Intangible assets, net consisted of the following as of June 30, 2013:

June 30, 2013
	Gross						Useful
	Carrying		Accumulated		Net		Life
	Amount		Amortization		Amount		(years)
Trade names	$	3,016	$	1,302	$	1,714		3-5
Covenants not to compete		1,906		493		1,413		3
Favorable leasehold interest		3,371		312		3,059	Remaining lease term
	$	8,293	$	2,107	$	6,186

At March 31, 2014, the Company adjusted the provisional fair values of the favorable leasehold interest and covenants not to compete acquired in the acquisition of the Mechanicsburg theater from Flagship theaters during the measurement period. The fair value of these intangible assets at the acquisition date decreased by $924 which increased goodwill for the same amount.

The weighted average remaining useful life of the Company's trade names, covenants not to compete, and favorable leasehold interests is 2.82 years, 1.63 years and 12.03 years, respectively, as of March 31, 2014.

Expected amortization of intangible assets over the next five fiscal years is as follows:

June 30,	Total
2014 (remaining three months)	$	469
2015		1,638
2016		668
2017		377
2018		339
2019		311

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

10. LEASES

The Company accounts for all of its facility leases as operating leases. Minimum lease payments under all non-cancelable operating leases with terms in excess of one year as of March 31, 2014, are summarized for the following fiscal years:

June 30,	Total
2014 (remaining three months)	$	1,422
2015		5,839
2016		5,966
2017		5,384
2018		4,871
2019		4,586
Thereafter		25,806
Total	$	53,874

Certain of the Company’s theater leases require the payment of percentage rent if certain revenue targets are exceeded. For the three months ended March 31, 2014 and 2013, the Company recorded $18 and $16, respectively, of percentage rent expense in the unaudited condensed consolidated statements of operations. The Company recorded $63 and $104 for the nine months ended March 31, 2014 and 2013 respectively.

CAPITAL LEASES

The Company leases certain theater equipment under capital leases that expire through fiscal year 2018, with imputed interest rates of 5.5% to 8.0% per annum. Repayment of the capital lease obligation is based on a percentage of revenue generated from the usage of the underlying theater equipment. The assets are being amortized over the shorter of their lease terms or their estimated useful lives. The applicable amortization is included in depreciation and amortization expense in the accompanying unaudited condensed consolidated statement of operations. Amortization of assets under capital leases during the three months ended March 31, 2014 and 2013 was $38 and $5 respectively. Amortization of assets under capital leases during the nine months ended March 31, 2014 and 2013 was $91 and $10 respectively.

The following is a summary of property held under capital leases included in property and equipment:

	March 31,			June 30,
	2014			2013
Equipment	$	941		$	409
Less: accumulated amortization		(134	)		(54	)
Net	$	807		$	355

Future maturities of capital lease payments as of March 31, 2014 are:

March 31,	Total
2015	$	245
2016		228
2017		217
2018		231
Total minimum payments		921
Less: amount representing interest		(101	)
Present value of minimum payments		820
Less: current portion		(245	)
	$	575

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

11. 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 $1,212.

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 March 31, 2014 and 2013, the Company recorded $70 and $65 of compensation expense under this arrangement. For the nine months ended March 31, 2014 and 2013, the Company recorded $210 and $185 under this arrangement.

All of the Company’s operations as of March 31, 2014, are located in Pennsylvania, New Jersey, California, Connecticut, Maryland, Arizona and Ohio, 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 regions 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.

12. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Capital Stock

As of March 31, 2014, 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, 7,214,073 shares were issued and outstanding as of March 31, 2014. Of the authorized shares of Class B common stock, 849,000 shares were issued and outstanding as of March 31, 2014, all of which are held by the Company’s CEO. Of the authorized shares of preferred stock, 6 shares of Series B Preferred Stock were issued and outstanding as of March 31, 2014. The material terms and provisions of the Company’s capital stock are described below.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

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 and the converted Class B shares shall be retired and are not available for reissuance. 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 non-assessable. 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.

In October 2013, the Company sold 1,141,000 shares of Class A common stock to several investors for $5.00 per share and received net proceeds of approximately $5,200. Such issuance took place pursuant to a May 2013 shelf registration statement the Company had filed with the SEC.

During the nine months ended March 31, 2014, the Company issued 25,000 fully vested shares of Class A common stock to vendors for services rendered in the ordinary course of business and recognized expense of $144.

As discussed in Note 3, the Company issued a total of 486,100 of Class A Common Stock as consideration for acquisitions during the nine months ended March 31, 2014.

As discussed in Note 5, on February 14, 2014, JV sold one theater and received 361,599 shares of the Company’s Class A common stock as the primary consideration which has been recorded as treasury stock.

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.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

Dividends

No dividends were declared on the Company’s common stock during the period and management does not anticipate doing so. The Company pays a quarterly dividend on its Series B preferred stock in an amount equal to 4.5% per annum.

Stock-Based Compensation and Expenses

During the three months ended March 31, 2014, the Company’s 2012 Stock Option and Incentive Plan, (“The Plan”) was amended to increase the number of authorized shares of common stock that can be issued under the plan, from 400,000 to 550,000.

During the nine months ended March 31, 2014, the Company issued restricted stock awards totaling 174,500 shares of its Class A common stock to employees, which vests over a period of three years. Total stock-based compensation was $132 and $78 for the three months ended March 31, 2014 and 2013, respectively. Total stock- based compensation was $494 and $148 for the nine months ended March 31, 2014 and 2013, respectively. Stock-based compensation is included in general and administrative expense in the unaudited condensed consolidated statement of operations.

The following summarizes the activity of the unvested share awards for the nine months ended March 31, 2014:

Unvested balance at June 30, 2013	88,871
Issuance of awards	174,500
Vesting of awards	(34,035	)
Unvested balance at March 31, 2014	229,336

The weighted average remaining vesting period as of March 31, 2014 is 1.37 years. As of March 31, 2014, there was $1,412 of remaining expense associated with unvested share awards.

13. NOTES PAYABLE

On September 28, 2012, the Company entered into a loan agreement with Northlight Trust I for $10,000 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 LIBOR 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, may 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, pay 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 March 31, 2014, the Company was in compliance with all financial covenants. For the three months ended March 31, 2014 and 2013, $13 and $17 of amortization of deferred financing costs for the Northlight loan were included in interest expense on the unaudited condensed consolidated statement of operations. For the nine months ended March 31, 2014 and 2013, $33 and $17 of amortization of deferred financing costs for the Northlight loan were included in interest expense on the unaudited condensed consolidated statement of operations.

The principal payments due as of March 31, 2014 over the remainder of the term of the Northlight loan are summarized as follows, for the years ended:

March 31,	Total
2014	$	1,671
2015		1,671
2016		1,671
2017 (includes PIK interest accrued of $452)		4,251
Total		9,264
Less: current portion		(1,671	)
	$	7,593

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

March 31,	Total
2014	$	11
2015		47
2016		51
2017		40
Total		149
Less: current portion		(47	)
	$	102

The Northlight loan is mandatorily pre-payable from 25% of the Company’s Excess Cash Flow (earnings before interest, taxes, depreciation, as adjusted, as further defined in the Northlight loan agreement) beginning on September 30, 2013 and annually thereafter. No payment was due with the 2013 calculation.

In connection with the acquisition of Torrington, the Company assumed a promissory note for certain digital projection equipment, with an outstanding balance as of March 31, 2014 of $147. The note is payable monthly, is due March 2017 and has an interest rate of 7%.

The principal payments due as of March 31, 2014 over the remainder of the term of the Torrington promissory note are summarized as follows, in fiscal years:

14. INCOME TAXES

The Company recorded income tax expense/(benefit) of $22 and $(22) for the three months ended March 31, 2014 and 2013, respectively and $40 and $42 for the nine months ended March 31, 2014 and 2013, 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 nine months ended March 31, 2014 and 2013 included the accrual of non-cash tax expense of approximately $31 and $36, respectively of 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 (termed a “naked credit”). The Company expects the naked credit to result in approximately $20 of additional non-cash income tax expense over the remainder of the year ending June 30, 2014.

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 nine months ended March 31, 2014 and 2013, the differences between the effective tax rate of (1.4)% and (1.2)%, 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.

DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share data)

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						Nine Months Ended
	March 31,						March 31,
	2014			2013			2014			2013
Numerator for basic and diluted loss per share
Net loss attributable to Digital Cinema Destinations Corp.	$	(775	)	$	(1,531	)	$	(2,850	)	$	(3,334	)
Preferred dividends		(5	)		(5	)		(15	)		(11	)
Net loss attributable to common stockholders	$	(780	)	$	(1,536	)	$	(2,865	)	$	(3,345	)
Denominator
Weighted average shares of common stock outstanding (1)		7,931,270			6,065,265			7,313,618			5,663,016
Basic and diluted net loss per share of common stock	$	(0.10	)	$	(0.25	)	$	(0.39	)	$	(0.59	)

(1) The Company has incurred net losses and, therefore, the impact of dilutive potential common stock equivalents totaling 836,538 and 651,873 shares at March 31, 2014 and 2013, respectively has been excluded from the loss per share calculations.

16. SUPPLEMENTAL CASH FLOW DISCLOSURE

	Nine Months Ended
	March 31,
	2014		2013
Cash paid for interest	$	726	$	504
Fair value of earnout recorded at acquisition		-		550
Equipment acquired with capital leases		599		-
Amount offset on note repayment		-		168
Common stock issued for Ultrastar theaters		-		4,714
Issuance of warrants to Start Media		-		954
Common stock issued for acquisition of Torrington theater		391		-
Common stock issued for acquisition of Flagship theaters		2,032		-
Common stock received for sale of Mission Valley theater		1,804		-
Conversion of Class B common stock into Class A		1		-

17. SUBSEQUENT EVENTS

As of May 9, 2014, the Company entered into an asset purchase agreement to acquire a 16-screen theater located in Springfield, Massachusetts. The transaction is subject to certain closing conditions including the completion of due diligence.

On May 15, 2014, the Company and Carmike Cinemas, Inc (“Carmike”) announced the signing of a definitive merger agreement (the “Merger”). Pursuant to the Merger, Digiplex common stockholders will receive 0.1775 shares of Carmike common stock in exchange for each share of Digiplex common stock (the “Exchange Rate”). A total of 229,336 restricted stock units will automatically vest upon the completion of the Merger and the holders will receive Carmike common stock at the Exchange Rate. Prior to the Merger completion, the holders of Series B preferred stock will receive a total of $675 in cash from Digiplex, representing 150% of the initial investment, plus accrued dividends, pursuant to the Series B preferred stock certificate of designations. In addition, Digiplex has entered into agreements or a term sheet to acquire certain theaters. In the event a proposed acquisition is terminated, a downward adjustment would occur to the Exchange Rate (not to exceed 0.014x in the aggregate) unless the terminated transaction were replaced with another transaction acceptable to Carmike. The closing of the Merger is subject to stockholder approval and other conditions and is expected to be completed in the third calendar quarter of 2014.

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.

Overview

(in thousands, except share data dollars)

At March 31, 2014, we operated 20 theaters located in New Jersey, Connecticut, Pennsylvania, Maryland, California, Arizona and Ohio, consisting of 192 screens. Our theaters had 822,015 and 809,854 attendees for the three months ended March 31, 2014 and 2013, respectively (for the portions of the periods we operated them). Our theaters had 2,892,512 and 1,844,944 attendees for the nine months ended March 31, 2014 and 2013, respectively (for the portions of the periods we operated them).

Our theaters operated as of March 31, 2014 are:

Date Acquired	City/ State	Number of Screens	Number of Seats
12/31/10	Cranford, NJ	5	642
12/31/10	Westfield, NJ	6	956
02/18/11	Bloomfield, CT	8	1,119
04/20/12	Bloomsburg, PA	11	1,883
04/20/12	Camp Hill, PA	12	2,403
04/20/12	Reading, PA	10	2,035
04/20/12	Selinsgrove, PA	12	2,048
04/20/12	Williamsport, PA	9	1,721
09/29/12	Lisbon, CT	12	2,107
12/14/12	Surprise, AZ (1) (2)	14	2,696
12/18/12	Apple Valley, CA (1)	14	2,568
12/18/12	Bonsall, CA (1)	6	867
12/18/12	Poway, CA (1)	10	2,217
12/19/12	Oceanside, CA (1)	13	1,659
12/20/12	Temecula, CA (1)	10	1,775
01/01/13	Sparta, NJ (1)	3	264
02/01/13	Solon, OH (1)	16	2,826
07/19/13	Torrington, CT (1)	6	1,021
12/19/13	Mechanicsburg, PA	8	1,182
03/21/14	Bel Air, MD	7	979
	Total	192	32,968

(1) Owned by JV.

(2) Includes one IMAX screen with approximately 212 seats.

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 21, 2012, wholly owned subsidiaries of JV completed the acquisition of 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 digital screens from seven sellers affiliated with one another (collectively the “Ultrastar Sellers”). These seven theaters have annual attendance of over 2.0 million patrons.

As of March 31, 2014, JV operated 9 theaters with 92 screens, including the Ultrastar Acquisitions, theaters in Sparta, NJ and Solon, OH that were leased in January and February 2013, respectively and a theater in Torrington, CT acquired in July 2013. All of the JV locations are operated by us pursuant to management agreements (the “Management Agreements”) whereby we have full day to day responsibility for all aspects of theater operations, and we receive a fee equal to 5% of the gross revenues of these theaters.

On February 14, 2014, the JV sold the Mission Valley theater back to Ultrastar Theaters for 361,599 shares of Digiplex Class A common stock and $38 in cash. The sale was made after discussions with Ultrastar Theaters regarding the theater performance and the ability of the landlord to terminate the lease with little notice.

On December 19, 2013, Digiplex acquired an eight screen movie theater in Mechanicsburg, Pennsylvania. The theater was equipped with digital projection systems before Digiplex began operating the theater.

On March 21, 2014, Digiplex acquired a seven screen movie theater in Bel Air, Maryland. The theater was equipped with digital projection systems before Digiplex began operating the theater.

At March 31, 2014, Digiplex and Start Media owned 34% and 66% of the equity of JV, respectively. 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 Digiplex or through our JV. 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 programming 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. Seven of our locations also offer D-Box™ motion seating available for certain movies.

•	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 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 joint venture, DigiNext, to release specialty movie content, and other 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.

•

Creation of strategic relationships to acquire exclusive distribution rights to content which (i) can play at both our own theaters, and at additional non-competing theaters, and (ii) can be the source of additional revenues from non-theatrical revenue streams (such as DVD sales, digital downloads, cable TV, etc.).

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 Corp., Screenvision, DigiNext, and others as they offer their programs to us. Our 20 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.

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

JV agreement and JV 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 $13,131; with $8,108 in cash, of which $8,000 was provided by Start Media, 887,623 shares of Class A common stock with a fair value of $4,714 provided by us, and the assumption of a capital equipment lease. Both the cash and stock elements constitute our respective initial capital contributions to the JV. Certain operating leases for the theater facilities, and certain capital leases and service contracts related to theater equipment were assumed. No other liabilities were assumed from the Ultrastar Sellers. On January 1 and February 1, 2013, JV entered into operating leases for a three screen theater in Sparta, NJ and a 16 screen theater in Solon, Ohio, respectively, and in July 2013 JV acquired one theater in Torrington, Connecticut having nine screens.

Management Agreements. We have entered into agreements (the “Management Agreements”) to manage the theaters JV acquires, and we receive 5% of the total revenue of the theaters in each year as management fees in consideration for these management services. Under the Management Agreements, 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 JV operating agreement.

Northlight Term Loan. On September 28, 2012, we entered into a loan agreement for $10,000 with Northlight Trust I (“Northlight”). The Northlight loan was used to fund our acquisition of the Lisbon theater for $6,014, pay for previously installed digital systems of $3,334, pay fees associated with the Northlight loan and the Lisbon acquisition, and to provide working capital.

Shelf Registration. In May 2013, we filed a registration statement (the maximum amount is subject to adjustment), which has been declared effective by the Securities and Exchange Commission, and permits the sale of a broad range of securities for maximum aggregate offerings of approximately $10,500. Any proceeds can be used for a variety of items, including acquisitions, debt repayment and general corporate purposes. In October 2013, we sold 1.1 million shares of our Class A Common Stock to several investors under the registration statement and received net proceeds of approximately $5,200.

Digital Projector Installation. At March 31, 2014, all of our 192 screens were equipped with digital projectors and related hardware and software. 128 of the 192 systems had been installed before our acquisition of the theaters, and the remaining 64 systems were installed under our ownership. We earn VPFs, described under Components of Operating Results, on 99 systems and do not earn VPFs on 93 digital systems, as these systems are owned by unrelated digital cinema integrators. However, we have full use of these systems under a master license agreement, and we have the option to purchase these systems at fair market value after the systems have been in use for a ten-year period.

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, and sporting events, children’s programming and other forms of alternative content in our theaters. Using our 192 digital systems (76 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 approximately 40% of any new screens to be 3D-enabled.

Acquisitions. In addition to Torrington (see JV Agreement and JV Acquisitions), in December 2013 and March 2014, we acquired an eight screen theater in Mechanicsburg, Pa and a seven screen theater in Bel Air, Md, respectively, from the same seller. As of March 31, 2014, we have signed agreements to acquire three theaters with 28 screens, however these are subject to the Company obtaining sufficient financing and completing due diligence. Additionally, the Company has entered into a direct lease with a landlord for one theater with 12 screens, for occupancy later in 2014. 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 6.0 times Theater Level Cash Flow (“TLCF”) for theaters we acquire. TLCF is calculated as revenues minus theater operating expenses (excluding depreciation and amortization and other non-cash items).

The following table sets forth the percentage of total revenues represented by statement of operations items included in our unaudited condensed consolidated statements of operations for the periods indicated (dollars and attendance in thousands, except average ticket prices and average concession per patron and other non-cash items):

Results of Operations

	Three months ended March 31,
(Amounts in thousands, except per patron data)	2014						2013
Revenues:	$			%			$			%
Admissions	$	6,662			66		$	5,985			68
Concessions		2,951			29			2,461			28
Other		441			5			319			4
Total revenues		10,054			100			8,765			100

Cost of operations:
Film rent expense (1)		3,205			48			2,824			47
Cost of concessions (2)		451			15			413			17
Salaries and wages (3)		1,239			12			1,155			13
Facility lease expense (3)		1,523			15			1,514			17
Utilities and other (3)		2,227			22			1,868			21
General and administrative (3)		1,509			15			1,365			16
Change in fair value of earnout (3)		-			-			(79	)		(1	)
Gain on sale of theater (3)		(950	)		(9	)		-			-
Depreciation and amortization (3)		1,565			16			1,439			16
Total costs and expenses (3)		10,769			107			10,499			120
Operating loss (3)		(715	)		(7	)		(1,734	)		(20	)
Interest expense (3)		(416	)		(4	)		(401	)		(5	)
Other (3)		(41	)		-			(38	)		-
Loss before income taxes (3)		(1,172	)		(12	)		(2,173	)		(25	)
Income taxes (4)		22			(2	)		(22	)		1
Net loss (3)	$	(1,194	)		(12	)	$	(2,151	)		(25	)
Net loss attributable to non-controlling interest (10)		419			35			620			29
Net loss attributable to Digital Cinema Destinations Corp. (10)	$	(775	)		65		$	(1,531	)		71
Preferred stock dividends		(5	)		-			(5	)		-
Net loss attributable to common stockholders (10)	$	(780	)		65		$	(1,536	)		71
Other operating data:
Consolidated theatre Level Cash Flow (5)	$	1,506			15		$	1,155			13
Management fees (9)	$	245			2		$	203			2
Adjusted EBITDA of Digital Cinema Destinations Corp (6)	$	415			4		$	451			5
Total Attendance		822,015			*			809,854			*
Average ticket price (7)	$	8.31			*		$	8.17			*
Average concessions per patron (8)	$	3.59			*		$	3.04			*

__________

*	Not meaningful

(1)	Film rent expense percentage calculated as a percentage of admissions revenues.

(2)	Cost of concessions percentage calculated as a percentage of concessions revenues.

(3)	Percentage calculated as a percentage of total revenues.

(4)	Calculated as a percentage of pre-tax loss.

(5)

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, deferred rent, 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. See page 34-36 for TLCF reconciliation.

(6)	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, other non-cash items, 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. See page 34-36 for Adjusted EBITDA reconciliation.
(7)	Calculated as admissions revenue/ paid attendance of 802,042 in 2014 and 732,347 in 2013, respectively. Paid attendance excludes certain theater rental activity, such as parties and film festivals.
(8)	Calculated as concessions revenue/ total attendance
(9)	Management Fees earned by Digiplex to operate the theaters of the JV.
(10)	Percentage calculated as a percentage of net loss.

Three Months Ended March 31, 2014 and 2013

At March 31, 2014, we operated 20 theaters located in New Jersey, Connecticut, Maryland and Pennsylvania, California, Arizona and Ohio with a total of 192 screens. At March 31, 2013, we operated 18 theaters located in New Jersey, Connecticut and Pennsylvania, California and Arizona consisting of 178 screens. Our theaters had 822,015 and 809,854 attendees for the three months ended March 31, 2014 and 2013, respectively (for the portions of the periods we operated them). According to Box Office Mojo, the overall North American box office results for the three months ended March 31, 2014 had increased by approximately 5.6% from the comparable 2013 period.

Admissions and Concessions. Our admissions and concessions revenues increased by 11%, due to our increased screen count in the three months ended March 31, 2014 as compared to 2013, and the impact of the industry increase in box office revenue. In addition, our emphasis on alternative content programming has resulted in incremental admissions and concessions revenue. Our average ticket and concession price increases was due to our continued focus on alternative programming which generally has higher admission pricing, and new concession menu offerings.

Other Revenues. Other revenues consist of advertising revenues, theater rentals for parties, festivals, camps, ATM and game machine fees and other activities. Advertising revenue was $260 for the three months ended March 31, 2014 period compared to $126 in the 2013 period.

Film Rent Expense. Film rent expense is a variable cost that fluctuates with admission revenues. We generally expect film rent expense (excluding VPF’s) 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 admission revenues was 48% in the three months ended March 31, 2014 as compared to the 2013 period of 47%. The increase was due primarily to product mix. Included as a reduction of film rent expense in the 2014 period on the systems we own is $268 of VPFs that we receive from third party vendors, associated with digital titles that we play from the studios, as compared to $259 in 2013. Excluding VPFs, film rent expense would have been 52% of admissions revenues in both the 2014 and 2013 periods.

Cost of Concessions. At 15% and 17% of our concessions revenue for the three months ended March 31, 2014 and 2013, 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, rebates from our primary beverage supplier, and changes in our supply pricing. In the current fiscal period, we increased our estimate of concession rebate due from a primary beverage supplier, based on our purchases.

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 2013 period is due to our operation of a larger number of theaters during the three months ended March 31, 2014 versus 2013.

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. As a percentage of revenue, the decrease is primarily due to a rent reductions at one location pursuant to a lease renegotiation.

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 March 31, 2014 as compared to 2013. As a percentage of revenue, the increase is due to an exceptionally cold winter impacting our each cost locations.

General and Administrative Expenses. General and administrative expenses consisted primarily of salaries and wages for our corporate staff, legal, accounting and professional fees associated including those associated with our 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, as was evidenced by the slight decline last year. Included in general and administrative expenses is stock compensation expense of $132 and $78 in the 2014 and 2013 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, as amended in February 2014. Awards may consist of stock options or restricted stock, with or without vesting periods. As of March 31, 2014 and 2013, we had 20 employees (two of which are part-time) and 15 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.

Change in Fair Value of Earnout. As of March 31, 2014, the Company increased the Lisbon earnout from $296 at June 30, 2013 to $350 based on actual results compared to the threshold in the asset purchase agreement and made the final payment in February 2014. During the three months ended March 31, 2013, the Company recognized a fair value change of ($79).

Gain on Sale of Theater. On February 14, 2014 we sold the seven screen Mission Valley theater back to the original Ultrastar seller, for a total price of $1,842. The resulting gain on sale was $950 and recorded to the consolidated statement of operations.

Depreciation and Amortization. The increase from 2013 is due to our increased asset base, resulting from our acquisitions and subsequent investments in our theaters, including the addition of assets such as digital projection equipment, and other capital improvements. 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 approximately $7,317 as of March 31, 2014 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.

Interest Expense. Interest expense is due mainly to the Northlight loan and capital leases for the three months ended March 31, 2014 and March 31, 2013.

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 the recent 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 nine month periods ended March 31, 2014 and 2013, respectively.

Income Taxes. For the three months ended March 31, 2014 and 2013, we had income tax expense (benefit) of $22 and ($22), respectively.

	Nine months ended March 31,
(Amounts in thousands, except per patron data)	2014						2013
Revenues:	$			%			$			%
Admissions	$	22,009			67		$	13,728			69
Concessions		9,455			29			5,586			28
Other		1,255			4			668			3
Total revenues		32,719			100			19,982			100

Cost of operations:
Film rent expense (1)		10,920			50			6,637			48
Cost of concessions (2)		1,634			17			895			16
Salaries and wages (3)		3,986			12			2,378			12
Facility lease expense (3)		4,653			14			2,847			14
Utilities and other (3)		6,501			20			3,794			19
General and administrative (3)		4,175			13			3,311			17
Change in fair value of earnout (3)		54			-			(79	)		-
Gain on sale of theater (3)		(950	)		(3	)		-			-
Depreciation and amortization (3)		4,279			13			3,385			17
Total costs and expenses (3)		35,252			108			23,168			116
Operating loss (3)		(2,533	)		(8	)		(3,186	)		(16	)
Interest expense (3)		(1,267	)		(4	)		(773	)		(4	)
Other (3)		(88	)		-			(46	)		-
Loss before income taxes (3)		(3,888	)		(12	)		(4,005	)		(20	)
Income taxes (4)		40			(1	)		42			(1	)
Net loss (3)	$	(3,928	)		(12	)	$	(4,047	)		(20	)
Net loss attributable to non-controlling interest (10)		1,078			27			713			18
Net loss attributable to Digital Cinema Destinations Corp. (10)	$	(2,850	)		73		$	(3,334	)		82
Preferred stock dividends		(15	)		-			(11	)		-
Net loss attributable to common stockholders (10)	$	(2,865	)		73		$	(3,345	)		83
Other operating data:
Consolidated theatre Level Cash Flow (5)	$	5,271			16		$	3,624			18
Management fees (9)	$	805			2		$	255			1
Adjusted EBITDA of Digital Cinema Destinations Corp (6)	$	2,261			7		$	1,452			7
Total Attendance		2,892,512			*			1,844,944			*
Average ticket price (7)	$	7.92			*		$	7.78			*
Average concession per patron (8)	$	3.27			*		$	3.03			*

__________

*	Not meaningful

(1)	Film rent expense percentage calculated as a percentage of admissions revenues.

(2)	Cost of concessions percentage calculated as a percentage of concessions revenues.

(3)	Percentage calculated as a percentage of total revenues.

(4)	Calculated as a percentage of pre-tax loss.

(5)

(6)	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, other non-cash items, 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. See page 34-36 for Adjusted EBITDA reconciliation.
(7)	Calculated as admissions revenue/ paid attendance of 2,780,610 in 2014 and 1,764,999 in 2013, respectively. Paid attendance excludes certain theater rental activity, such as parties and film festivals.
(8)	Calculated as concessions revenue/ total attendance.
(9)	Management Fees earned by Digiplex to operate the theaters of the JV.
(10)	Percentage calculated as a percentage of net loss.

Nine Months Ended March 31, 2014 and 2013

At March 31, 2014, we operated 20 theaters located in New Jersey, Connecticut, Maryland and Pennsylvania, California, Arizona and Ohio consisting of 192 screens. At March 31, 2013, we operated 18 theaters located in New Jersey, Connecticut and Pennsylvania, Ohio, California and Arizona consisting of 178 screens. Our theaters had 2,892,512 and 1,844,944 attendees for the nine months ended March 31, 2014 and 2013, respectively (for the portions of the periods we operated them). According to Box Office Mojo, the overall North American box office results for the nine months ended March 31, 2014 had increased by approximately 4.2% from the comparable 2013 period.

Admissions and Concessions. Our admissions and concessions revenues increased by 63%, due to our increased screen count in the nine months ended March 31, 2014 as compared to 2013, and the impact of the industry increase in box office revenue. In addition, our emphasis on alternative content programming has resulted in incremental admissions and concessions revenue. Our average ticket and concession price increases was due to our entry into new markets with higher prices generally, our continued focus on alternative programming which generally has higher admission pricing, and new concession menu offerings.

Other Revenues. Other revenues consist of advertising revenues, theater rentals for parties, festivals, camps, ATM and game machine fees and other activities. Advertising revenue was $693 for the nine months ended March 31, 2014 period compared to $395 in the 2013 period.

Film Rent Expense. Film rent expense is a variable cost that fluctuates with admission revenues. We generally expect film rent expense (excluding VPF’s) 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 admission revenues was 50% in the nine months ended March 31, 2014 as compared to the 2013 period of 48%. Included as a reduction of film rent expense in the 2014 period on the systems we own is $850 of VPFs that we receive from third party vendors, associated with digital titles that we play from the studios, as compared to $763 in 2013. Excluding VPFs, film rent expense would have been 53% and 54% of admissions revenues in 2014 and 2013 periods, respectively.

Cost of Concessions. At 17% and 16% of our concessions revenue for the nine months ended March 31, 2014 and 2013, 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. In the current fiscal period, the cost of product promotions, giveaways, and concession supplies has increased over the prior period.

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. The increase from the 2013 period is due to our operation of more theaters in the 2014 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 nine months ended March 31, 2014 as compared to 2013. As a percentage of revenue, the increase is due to higher utility charges at our more recently acquired theaters, particularly in California.

General and Administrative Expenses. General and administrative expenses consisted primarily of salaries and wages for our corporate staff, legal, accounting and professional fees associated including those associated with our 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, as was evidenced by the decline from 17 percent of revenue last year, to 13 percent this year. Included in general and administrative expenses is stock compensation expense of $494 and $148 in the 2014 and 2013 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, as amended February 2014. Awards may consist of stock options or restricted stock, with or without vesting periods. As of March 31, 2014 and 2013, we had 20 employees (two of which are part-time) and 15 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.

Change in Fair Value of Earnout. As of March 31, 2014, the Company increased the Lisbon earnout from $296 at June 30, 2013 to $350 based on actual results compared to the threshold in the asset purchase agreement and made the final payment in February 2014. During the nine months ended March 31, 2014, the Company recognized a fair value change of $54. During the nine months ended March 31, 2013, there were fair value changes of ($79) to the earnout.

Depreciation and Amortization. The increase from 2013 is due to our increased asset base, resulting from our acquisitions and subsequent investments in our theaters, 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 approximately $7,317 as of March 31, 2014 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.

Interest Expense. Interest expense is due to the Northlight loan and capital leases for the nine months ended March 31, 2014.

Operating Loss. Our decreased operating loss was primarily attributable to the sharply higher revenues, partially offset by related expense growth.

Income Taxes. For the nine months ended March 31, 2014 and 2013, we had income tax expense of $40 and $42, respectively.

Liquidity and Capital Resources

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 $10,000 with Northlight. The Northlight loan was used to fund our acquisition of the Lisbon theater for $6,014, pay for previously installed digital systems of $3,334, 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 $20,000 to JV, including approximately $10,435 contributed through March 31, 2014. In December 2012, JV acquired seven movie theaters (nine 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 $13,131, consisting of $8,108 in cash, of which $8,000 was funded by Start Media, plus 887,623 shares of our Class A common stock with a fair value of $4,714 issued, and the assumption of a capital lease for theater equipment. In January and May 2013, Start Media contributed an additional $1,306 and $694 in cash, respectively, to fund anticipated capital expenditures for the JV theaters. In July 2013, Start Media contributed $300 to fund the cash portion of the purchase price of the Torrington theater. In November 2013, Start Media and Digiplex contributed an additional $135 and $100, respectively to JV as capital contributions.

On May 1, 2013, we filed a shelf registration statement on Form S-3 with the SEC, which was later declared effective. The shelf registration statement, with maximum aggregate offerings of approximately $10,500, allows for the future issuance of Class A common stock, preferred stock, debt securities, warrants, or units. We may use any proceeds from the shelf offering for various reasons including general corporate purposes, debt repayment, capital expenditures, or future theater acquisitions. In October 2013 we sold 1.1 million shares of Class A Common Stock to several investors for $5.00 per share and received net proceeds of approximately $5,200.

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.

Summary of Cash Flows

(000's)	Nine Months ended March 31,
Consolidated Statement of Cash Flows Data:	2014			2013
Net cash provided by (used in):
Operating activities	$	(295	)	$	(1,875	)
Investing activities		(2,533	)		(5,901	)
Financing activities		3,638			8,873
Net increase in cash and cash equivalents	$	810		$	1,097

Operating Activities

Net cash flows used in operating activities totaled ($295) and ($1,875) for the nine months ended March 31, 2014 and 2013, respectively. While our net loss was a similar amount in the 2014 and 2013 periods, our fiscal 2014 non-cash gain on sale of a theater, offset by higher non-cash charges for items such as depreciation and amortization, stock-based compensation and an increase in accounts payable and accrued expenses paid, resulted in a lower net operating cash usage in fiscal 2014.

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 ($2,533) and ($5,901) for the nine months ended March 31, 2014 and 2013, respectively. The decrease from 2013 is due to the cash purchase price for the Lisbon and Ultrastar theaters acquired in 2013. In the 2014 period, the amount represents the cash purchase price of the Torrington, Mechanicsburg and Churchville theaters. We may also incur significant capital outlays in connection with other acquisitions that we may consummate in the next 12 months, including any digital projection equipment and other theater upgrades. We intend to continue to grow our theater circuit either directly by us or through our JV through selective expansion and acquisitions.

Financing Activities

Net cash provided by financing activities totaled $3,638 and $8,873 for the nine months ended March 31, 2014 and 2013, respectively. The 2014 decrease to net cash provided by financing activities was due mainly to the proceeds of the Northlight loan of $10,000, proceeds from issuance of preferred stock of $450, offset in part by the payment of a note to the seller of Cinema Centers for $832, repayments under the Northlight loan and payment of financing costs related to the Northlight loan in 2013. In October 2013 we sold 1.1 million shares of Class A Common Stock to several investors for $5.00 per share and received net proceeds of approximately $5,200. We expect to issue equity and debt instruments in the future in connection with our business plan.

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 report, 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 March 31,						Increase/		Nine months ended March 31,						Increase/
(000's)	2014			2013			(Decrease)		2014			2013			(Decrease)
Net loss	$	(1,194	)	$	(2,151	)		(44%)	$	(3,928	)	$	(4,047	)		(3%)
Addback:
General and administrative (1)		1,509			1,365			11%		4,175			3,311			26%
Depreciation and amortization		1,565			1,439			9%		4,279			3,385			26%
Income tax expense (benefit)		22			(22	)		-200%		40			42			-5%
Interest expense		416			401			4%		1,267			773			64%
Other expense		41			38			8%		88			46			91%
Deferred rent expense (5)		97			85			14%		300			114			163%
Less:
Gain on sale of theater		(950	)		-			100%		(950	)		-			100%
Consolidated TLCF	$	1,506		$	1,155			30%	$	5,271		$	3,624			45%

Adjusted EBITDA reconciliation:

(unaudited)							%								%
	Three months ended March 31,						Increase/		Nine months ended March 31,						Increase/
(000's)	2014			2013			(Decrease)		2014			2013			(Decrease)
Net loss	$	(1,194	)	$	(2,151	)		-44%	$	(3,928	)	$	(4,047	)		-3%
Add back:
Depreciation and amortization		1,565			1,439			9%		4,279			3,385			26%
Interest expense		416			401			4%		1,267			773			64%
Income tax expense (benefit)		22			(22	)		-200%		40			42			-5%
Other expense		41			38			8%		88			46			91%
Deferred rent expense (5)		97			85			14%		300			200			50%
Stock-based compensation (2)		133			79			68%		494			148			234%

Non-recurring organizational and
M&A-related professional fees (3)		104			315			-67%		110			552			-80%
Management fees (4)		245			203			21%		805			255			216%
Start Media's share of adjusted
EBITDA		(64	)		64			-200%		(244	)		98			-349%
Less:
Gain on sale of theater		(950	)		-			100%		(950	)		-			100%
Adjusted EBITDA of Digital Cinema Destinations Corp.	$	415		$	451			-8%	$	2,261		$	1,452			56%

(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 additional share grants to employees, issuances to non-employees in the normal course of business and the Company’s growth.

(3)	Primarily represents professional fees incurred in connection with specific acquisitions. Since the amounts will vary depending on the size and quantity of any acquisition, and are not part of ongoing operations of our theaters, we believe that it is appropriate to exclude these items from Adjusted EBITDA.

(4)	To add back management fees to Digiplex from JV.

(5)	Represents non-cash deferred rent expense which is included in facility lease expense in the consolidated statements of operations. As these are non-cash charges, we believe it is appropriate to show TLCF and Adjusted EBITDA excluding this item.

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.

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 for approximately ten years, or until the amount of cumulative VPFs is equal to our costs. VPFs are treated as a reduction of film rent expense in our statements of operations. 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, 2013	$	4,382
Digital systems costs		839
Financing costs		463
VPFs earned		(850	)
Exhibitor contribution		(54	)
Administrative costs		85
Balance, March 31, 2013	$	4,865

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.

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 (the regions in which the Company conducts theater operations), 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.

Recent Accounting Standard

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments contained in this update change the criteria for reporting discontinued operations and enhances the reporting requirements for discontinued operations. Under the revised standard, a discontinued operation must represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. The revised standard will also allow an entity to have certain continuing cash flows or involvement with the component after the disposal. Additionally, the standard requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities and expenses of discontinues operations. This ASU is effective for reporting periods beginning after December 15, 2014 with early adoption permitted, but only for disposals that have not been reported in financial statements previously issued or available for issue. We elected to early adopt this guidance effective January 1, 2014.

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.

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

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 judgment regarding current or potential future legal proceedings will have a material effect on our financial position.

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 36 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: May 15, 2014	By:	/s/ Brian D. Pflug
	Name:	Brian D. Pflug
	Title:	Chief Financial Officer and Principal Accounting Officer

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

Attached files

Digital Cinema Destinations Corp. Reports

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