Based in Port St. Lucie, FL, Digital Domain (proposed DDMG) scheduled a $61 million IPO with a market capitalization of $440 million at a price range mid-point of $11 for Friday, November 18, 2011.

CONCLUSION

An award-winning digital production company, DDMG is an artistic success, but business failure to-date, based on its income statement. With a small 18% gross margin it’s hard for DDMG to be profitable with its current cost structure.

Even breakeven is not visible, and the use of proceeds to ‘facilitate’ growth of a so far unprofitable business model.

Valuation Ratios	IPO Mrkt	Price /	Price /	Price /	Price /	Stock
Annualizing June 6 mos	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	YTD
Digital Domain (DDMG)	$440	5.5	-42	5.1	18.3	14%

At the price range mid-point of $11, DDMG’s IPO risk outweighs potential rewards.

BUSINESS

DDMG is an award-winning digital production company. Since inception in 1993, DDMG has been a leading provider of CG animation and VFX for major motion picture studios and advertisers.

AWARDS

DDMG has received seven awards issued by the Academy of Motion Picture Arts and Sciences (the "Academy") — three Academy Awards® for Best Visual Effects and four awards for Scientific and Technical Achievement.

DDMG’s filmography of over 80 major motion pictures includes Thor, TRON: Legacy, the Transformers trilogy, The Curious Case of Benjamin Button, Apollo 13 and Titanic. DDMG capabilities include the production of 3D content, performance capture, and CG visual effects such as fluid simulation, terrain generation and photorealistic animation.

COMPETITION

CG Visual Effects

Competitors in the production of CG visual effects for feature films and commercials include large firms with a long history of producing digital visual effects, such as Industrial Light and Magic, a division of Lucasfilm Ltd., Sony Pictures Imageworks Inc., a division of Sony Corp, Weta Digital Ltd., Rhythm & Hues Inc. and Framestore CFC, as well as many smaller firms that specialize in visual effects.

3D Conversion Services

With respect to 3D conversion services, DDMG competes mainly with specialty firms that are generally hired on a project to project basis, such as Legend3D and Prime Focus. Although the market for 3D conversion services is relatively new, it is rapidly growing and in recent years large motion picture exhibitors and studios have been developing internal 3D technologies and capabilities, which we expect to intensify competition in the future.

DDMG believes that its proprietary and patent-protected 3D conversion process, Dimensionalization®, provides them with a competitive advantage in the 3D services market.

Digital Advertising and Marketing

Principal participants in the digital advertising and marketing industry include traditional full-service advertising agencies owned by the four major agency holding companies (Omnicom, WPP, Publicis and Interpublic) looking to implement digital marketing strategies; pure-play interactive-focused advertising agencies such as R/GA (subsidiary of Interpublic) and The Barbarian Group (subsidiary of Samsung); full-service digital advertising agencies such as Razorfish (subsidiary of Publicis); and advertising-focused visual effects studios such as The Mill, Framestore CFC, Motion Theory and Psyop.

An important factor in this competitive landscape is the fact that we have worked, and will continue to work, with these groups as co-partners in the creative and/or production phases of a client’s campaign.

USE OF PROCEEDS

DDMG expects to net $55 million in IPO proceeds, to be used to facilitate the growth strategy by, among other things, advancing the development and production of animated and VFX-driven feature films and building a for-profit education business through development of DDI, to the extent not funded from third-party sources

Digital Domain	DDMG, C, 6					Post PO shares: 40mm
Special effects			June 6 mos	June 6 mos
Port St. Lucie, FL		2010	2010	2011		IPO Mkt
Revenues ($mm)		$105	$44	$61		Cap (mm)
Gross Margin % of revenue		20%	23%	18%		$440
Operating income		-$14	-$5	-$28		@$11
Chge in warrant debt value				-$75
Net loss ($mm)		-$42	-$5	-$111
Net income (loss) % of revenue		-40%	-11%	-182%
Valuation Ratios	IPO Mrkt	Price /	Price /	Price /	Price /	% offered
Annualizing June 6 mos	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	in IPO
Digital Domain (DDMG)	$440	3.6	-2	5.1	18.3	14%
Valuation Ratios	IPO Mrkt	Price /	Price /	Price /	Price /	Stock
Annualizing June 6 mos	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	YTD
Digital Domain (DDMG)	$440	5.5	-42	5.1	18.3	14%
SCORECARD		Mgt	Market	Market Do-	Proprie-	Total
1-5, 5 is high			Growth	mination	tary	rating
20 is perfect		2	1	1	2	6