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EX-31.1 - Digital Cinema Destinations Corp.e612283_ex31-1.htm
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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.
 
 
1

 
 
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.
 
 
2

 
 
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.
 
 
3

 
 

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.
 
 
4

 
 
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.
 
 
5

 
 
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.
 
 
6

 
 

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.
 
 
7

 
 
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.
 
 
8

 

 
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.
 
 
9

 
 
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  
 
 
10

 

 
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.
 
 
11

 

 
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.
 
 
12

 
 

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.  
 
 
13

 
 
 
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  

 
 
14

 
 
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  
 
 
15

 
 
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.
 
 
16

 
 
 
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.
 
 
17

 
 
 
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  
 
 
18

 

 
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.
 
 
19

 
 
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.
 
 
20

 

 
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.
 
 
21

 
 
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.
 
 
22

 
 
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.
 
 
23

 
 
 
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).
 
 
24

 
 
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.
 
 
25

 
 
(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.
 
 
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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.
 
 
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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. 
 
 
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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.
 
 
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(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 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. 
 
 
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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.
 
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 nine 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. 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.

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 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.
 
 
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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.
 
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 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.
 
 
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Summary of Cash Flows
 
(000's)
  Nine Months ended March 31,  
Consolidated Statement of Cash Flows Data:
  2014     2013