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Digital Cinema Destinations Corp. (NASDAQ:DCIN)

F4Q 2013 Earnings Conference Call

September 17, 2013 16:30 ET

Executives

Rob Rinderman - Investor Relations, JCIR

Bud Mayo - Chairman and Chief Executive Officer

Brian Pflug - Chief Financial Officer

Analysts

Marla Backer - Ascendiant Capital

Mike Hickey - Benchmark

John Tinker - Maxim

Thomas Pfister - RedChip Companies

Ross Silver - Vista Partners

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Digital Cinema Destinations Corp Fiscal 2013 Fourth Quarter Financial Results. During the presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Rob Rinderman, Digiplex Investor Relations firm, JCIR. Please go ahead.

Rob Rinderman

Thank you very much, Scott. Good afternoon everyone. Today’s presentation may contain forward-looking statements related to the company’s future operating results. Such statements are based upon current expectations and assumptions and may involve certain risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These risks and uncertainties are detailed from time-to-time in our SEC filings. Digiplex’s actual performance may differ materially because of these or other factors as discussed in the management’s discussion and analysis section of our filings.

Copies of which can be obtained from the SEC or via digiplexdest.com. All information discussed is as of today September 17, 2013 and the company undertakes no obligation to update any statements or expectations from prior conversations. Today’s call is being webcast live over the internet and a replay will be available on the corporate website for a minimum of 30 days.

I would now like to turn the call over to Chairman and CEO, Bud Mayo, who is joined by Digiplex CFO, Brian Pflug. Bud?

Bud Mayo

Thank you, Rob. We appreciate everyone joining us this afternoon. At the conclusion of my opening remarks, Brian will cover the company’s fiscal Q4 and full year financials. Following his commentary, we’ll both address your questions.

During fiscal 2013, we significantly grew our theatrical circuit by approximately 250% expanding Digiplex’s footprint to 18 locations and 178 screens. We also added an additional 6-plex in Torrington, Connecticut subsequent to year end giving us a present total of 19 theatres and 184 screens. The company is actively seeking further expansion with an ultimate target of a national circuit of approximately 100 locations and 1000 screens based in top markets. We expect to have additional screen growth updates for you very shortly.

Year-over-year for the full year, the company’s key attendance per screen metric rose approximately 14% and attendance per screen for the quarter versus last year was up 3%. Concession per caps increased approximately 13.5% and admissions per patron grew by $0.10 to $7.92. In aggregate, our average guest spend was $11.37 per visit to Digiplex, one of our Digiplex entertainment centers as we call them today, up 5% versus the year earlier level. Brian will provide you with a more detailed financial overview shortly.

In June, we announced an exciting new partnership with IMAX and a mid-month opening of our first ever large screen format auditorium, which debuted at the Digiplex Surprise Pointe 14 in Arizona. We are evaluating the possibility of additional IMAX locations as well as the debut of our own DCIX, which is what we will call our own large screen format technology at select multiplexes around the country. In addition, we are also experimenting with all other types of immersive technology including 4D-enabled seating and sound. Through the UltraStar and Lisbon acquisitions, we inherited premium D-Box seating sections at several locations. And earlier this month, we upgraded to a full auditorium at our Solon, Ohio location to immersive ButtKicker 4D seating.

Digiplex has become a magnet for a number of cinema technology companies around the world, and we will continue exploring other cutting-edge digital technologies that bring additional enjoyment to our guests and help further differentiate the Digiplex out-of-home cinema going experience from smaller screen, portable and in home alternatives. As a small but fast growing company, we look at the movie theater business a bit differently from our considerably larger peers. As such we believe that in many respects we are providing a peek into the future of theatrical exhibition. If our organization strategy continues to be successful, we expect many of our fellow exhibitors to follow Digiplex’s lead.

Last quarter we highlighted the introduction of special presentations of select Hollywood titles in the Spanish language as an example of or focus on innovation and of leveraging Digiplex’s digital platform to offer patrons the best entertainment options available in any language. We’ve also been successful showing Bollywood titles at a number of locations and are planning to feature movies in other languages targeting additional cultures and demographics.

I discussed the DigiNext joint venture with Nehst Media as a noteworthy example of our creativity and capitalizing on and eventizing quality alternative programs such as in treating documentaries on important issues. Exhibitors had historically played a passive role in booking Hollywood titles on their screens, but DigiNext affords us the opportunity curate our own content and to also capitalize on ancillary down screen revenues after a movie completes its theatrical run.

We also host popular live Q&As where cast and crew members are able to interact with our audiences. Last year’s inaugural DigiNext season featured eight documentary releases covering a wide array of topics. And we and our partners Nehst are pleased with the initial success. Our content is already available in 66 countries where consumers have access to our releases by a digital streaming and downloads as well as DVDs. Last month we forged an exciting new alternative content distribution alliance with Screenvision, a leader of in-cinema advertising that reaches over 14,000 screens across the United States.

The Screenvision alliance kicked off DigiNext’s second season with the late August release of the United States of Football a compelling controversial documentary. The United States of Football explores the cumulative effects of the repetitive head trauma in America’s game from the Pee Wees to the pros. With the recent NFL lawsuit settlement this movie became even more topical and our team has garnered a wealth of national media attention surrounding its release. We anticipate that the enhanced awareness of this title will pay future dividends for DigiNext as we negotiate future ancillary rights agreements.

United States of Football has been shown in more than 130 theaters throughout the nation qualifying it as one of the all-time widest documentary sports releases especially in the Sports General in particular. In addition to box office revenue, we are receiving from its theatrical run we expect this title to also throw – thrive in digital downstream market. We also have been delighted with the tremendous support from the former NFL Gridiron Greats. Many of whom have appeared in theaters. Just to name a few, Gale Sayers, Leonard Marshall, Jeff Feagles, Kyle Turley whose featured in the United States of Football have all met and greeted moviegoers at select locations just to name a few. There are many more upcoming one-off shows scheduled through October throughout the country like that will also feature appearances by former NFL players.

Next up for DigiNext will be the holiday theme theatrical titles set for December 6 debut. After 9 documentaries we are shifting gears a bit and releasing Miracle in Spanish Harlem a feature targeting Latino and faith based audiences that we expect to resonate with our Digiplex audiences in addition to many of the Screenvision’s exhibitor affiliates around the country. Although we are justifiably very excited about our DigiNext festival series and the popularity of other forms of alternative content that we are showing from opera to live concerts and sporting events. To be very clear, the vast majority of DigiPlex attendance and box office receipts still comes from Hollywood product. And fiscal Q4 period crowded with studio blockbusters, about 3% of our total admissions came from alternative content showing at theaters in our circuit for a year or more. And I might add that those features did about 15 times the business of what was replaced on that screen during that quarter. Some of the top alternative entertainment performers during the three-month period include a diverse array from rock concerts featuring Bon Jovi and Paul McCartney to ballet and retracts a comedy act.

Taking a quick look at the Hollywood movie slate performance during our fiscal Q4 ended June 30 despite a slow start for the overall industry lasted through the first four months for the calendar year, Iron Man 3 posted very strong box office results beginning with its early May release. To-date, it remains the top grossing film of calendar 2013 with aggregate admissions topping $400 million. As mentioned on our prior quarterly call, the movie’s $174 million opening marked the second best box office debut of all-time. Other top performing titles during the June quarter included Man of Steel, Monsters University, Fast and Furious 6, and Star Trek Into The Darkness. It’s worth noting that all of these tent-poles grossed in excess of $200 million during their full theatrical runs.

Since we are now almost done with the September quarter, I am pleased to report that as of last weekend, box office this quarter is tracking up approximately 8.5%. We just finished the strongest summer movie-going season on record. Top performers have been Despicable Me 2, World War Z, The Heat, Wolverine, Conjuring and Grown Ups 2. We are also optimistic about the remainder of 2013, which includes upcoming releases like Gravity, Thor, Ender’s Game, The Hunger Games and The Hobbit. Three of those are sequels of already popular franchises and other two are new, but promising titles.

To sum up, we have successfully grown our circuit in the 17 months subsequent to decent April 2012 IPO. We also anticipate adding additional accretive acquisitions before calendar year end. We built our footprint on a digital platform and are taking full advantage of available state of the industry technology from IMAX screens and 4D seating to advances in software and social media. There is a solid pipeline of acquisition targets in our sites and we are in various stages of negotiation, which lots of theater owners and landlords. The goal is accretive at additions of cash flow positive locations. And once acquired further improvement at theater level and adjusted EBITDA metrics through deployment of our unique and differentiated operating strategy. With the organization seasoned senior corporate team already in place, we expect the larger percentage of incremental theater level cash flow to further enhance our corporate EBITDA line as we continue opportunistically expanding the Digiplex circuit.

At this point, I am going to turn it over to Brian for a review of our financials. Brian?

Brian Pflug

Thanks, Bud and good afternoon everyone. I will preface my commentary by saying that all of our comparative financials and metrics were positively impacted by a rapid growth year-over-year. Our fiscal Q4 is the first full quarter including results from our 16-plex in Solon, Ohio, where we signed a long-term lease agreement effective February 1. The three-month period ended June 30 marks the second full quarter reflecting results from the 74 UltraStar screens based in Southern California and Arizona and also our leased Sparta, New Jersey facility. It’s also important to note that the comparable fourth quarter and fiscal 2012 financials only include contributions from our original 19 screens in New Jersey and Connecticut and the Cinema Centers theaters for the approximate 10-week period between their April acquisition date and our June 30 quarter and year end.

For the three months ended June 30, 2013, our total revenues were $11.2 million, including admissions revenues of approximately $7.6 million, concession sales of $3.3 million with the balance from other revenues. For the full year, admissions revenues were $21.3 million, concessions $8.9 million and other revenues approximately $990,000 resulting in total top line of $31.2 million for fiscal 2013. Our current circuit of 184 screens and 19 complexes is presently generating a topline annual run rate in the mid $40 million range. Ticket sales from alternative programming events at theaters on the Digiplex circuit for more than a year were over 3% of admissions receipts in fiscal Q4.

As Bud mentioned that June quarter release slate featured a wide array of Hollywood tent-pole movies and other theatrical titles so alternative content was less off a factor for us during this period as expected. Film rent expense for the 3 months ended June 30, 2013 was $4 million representing approximately 52.6% of admission revenues. Fiscal 2013 film rent amounted to $10.7 million or 50% of box office receipts. These percentages include the benefit of virtual print fees or VPS for screens where we own and funded the digital projection systems which as a reminder was accounted for as an offset to film rent expense. Digiplex is the only public theatrical exhibitor to earn VPS.

During the quarter we earned VPS on 85 of our 178 screens. The additional 6 Torrington screens also earned VPS. However, they were added to our circuit in July subsequent to quarter and year end. Our total film rent margin on admissions increased slightly in fiscal Q4 primarily due to a lower – to a higher percentage of screens receiving VPS and the mix of products shown. In aggregate we expect that Digiplex’s total film rent margin on admissions to be impacted by the number of screens that do receive VPS as a percentage of total screen count as well as the quarterly Hollywood independent and alternative content mix.

Cost of concessions in fiscal Q4 represented 18% of concession revenues and 16.8% for the full year. Gross margin on concessions in fiscal 2013 increased about 110 basis points versus the prior year to about 83.2%. As new locations are added to the footprint, we will benefit from national pricing contracts with concession vendors and we expect our gross margin on concessions to average somewhere around 85% annually. Although this percentage may fluctuate due to product mix, changes in supply pricing and seasonality. Average concessions per patron in Q4 were $3.45, up from $3.04 level a year ago. While we are still in the very early stages of experimenting with and tweaking our concession strategy, we believe we can continue to increase our per patron spending going forward.

Fiscal Q4 G&A costs were $1.7 million and as I stated last quarter these expenditures have been impacted by M&A related costs due to the active expansion of our circuit that we expect now and into the future. Including non-cash stock based compensation there is nearly $0.5 million of these types of expenses included in the quarterly G&A number. Over time as we grow and achieve economies of scale G&A expenses will decrease as a percentage of overall revenue and they’ve already dropped by nearly 50% on that basis year-over-year. This should also be noted that Digiplex earns management fees from its operation of the joint venture owned theaters which has accounted for as a reduction of G&A, but because we fully consolidated the JV these reductions do not appear on the face of the income statement. Digiplex has one of the most seasoned senior management teams in the cinema industry and this will be instrumental in our success for years to come. But with that team already firmly in place it means that any increases going forward would be minor as a percentage of revenue.

Depreciation and amortization expense were $665,000 for the quarter and with our recent and future M&A plans we can expect this to grow. Interest expense was $379,000 due to our $10 million of notes payable that we incurred last year to finance the Lisbon Connecticut acquisition and Digital Cinema purchases.

The Q4 operating loss was $608,000 and the net loss amounted to $1.2 million or $0.15 per diluted share based on approximately $6.3 million weighted average diluted shares outstanding at quarter end. Our full year operating loss was $3.8 million and the net loss amounted to $5.3 million or $0.74 per diluted share based on approximately 5.8 million weighted average diluted shares outstanding at June 30. Both the Q4 and the fiscal 2013 operating losses were primarily attributable to higher costs associated with our increased asset base, larger corporate infrastructure, which will support expected future growth.

Q4 2013 theater level cash flow (Technical Difficulty) EBITDA was $888,000 versus Q4 2012 theater level cash flow of $701,000 and an adjusted EBITDA loss of $32,000 respectively. For the full fiscal year, we generated $5.6 million of theater level cash flow versus $1.3 million last year and adjusted EBITDA of $2.4 million versus a negative $410,000 last year. These metrics of course include only a partial year of operation from many screens. We expect continued improvements as the company leverages G&A expenses, further enhances our operating efficiency and we cultivate new revenue streams and get better at our social media and marketing initiatives. Adjusted EBITDA in theater level cash flow and metrics are non-GAAP figures and reconciliations to the reported GAAP results can be found in today’s news announcements. And lastly, I will mention that our Form 10-K, our annual financial report will be filed as early as tomorrow.

This concludes our prepared remarks. Operator, please open up the lines for questions.

Question-and-Answer Session

Operator

Absolutely, thank you. (Operator Instructions) Our first question comes from the line of Marla Backer from Ascendiant Capital. Please proceed with your question.

Marla Backer - Ascendiant Capital

Thank you. Hi guys.

Bud Mayo

Good afternoon Marla.

Marla Backer - Ascendiant Capital

Hi Bud. I am just wondering the numbers obviously look really good and I know that alternative content has always been a big interest of yours and now it’s really becoming a reality. Can you talk a little bit about what if any impact the recent restructuring at Fathom might have on your ability to attain a footprint for alternative content?

Bud Mayo

First of all, Fathom does represent a significant percentage of the total alternative programming that we do play and but it is not in every theater today and hasn’t been in the past quarter for a number of reasons, clearance issues primarily, but I did speak to Kurt Hall who is the CEO of National CineMedia immediately following that information. And he assured me that there will be no change in the flow of content to us. We have options. I mean, we have alternative sources for opera and ballet, which are two of the most successful kinds of things at Fathom and it distributes. And certainly we have the ability and often do play those as an alternative in those theaters we are not playing Fathom. I will say that the Metropolitan Opera series in particular, which is a Fathom exclusive is particularly successful in many of our theaters and certainly be missed, but there is no question to my mind that at the rate of increase in alternative programming choices we have now that include global conversations, increasing amounts of ethnic and faith-based content documentaries and our DigiNext series, we will more than make up for any losses if there are any. And to just underscore this, we don’t expect any.

Marla Backer - Ascendiant Capital

Okay. So then the flip side with some of your DigiNext content given that historically those Fathom screens were exclusive to Fathom content, do you think this might create an opportunity for you to be able to generate some of incremental revenue on screens that were formerly not available to you?

Bud Mayo

I think we have that conversation. And it’s not clear whether we will be adding more Fathom events at various locations that are not playing Fathom today. About half of our theaters are playing Fathom, the other half are playing alternatives to the same content and the same audiences. DigiNext will make a difference, but has really no relationship to anything that Fathom is doing. We see that as purely incremental not only to our theaters but now with Screenvision agreement incremental in other ways thanks to the relationship we have now forged with Screenvision.

And as importantly we are just getting into the downstream negotiations for not only the new season but last seasons 8 documentaries. And I think there is value there and we plan to unlock that as we continue to sell DVDs and streaming downloads in our direct to consumer network. So that’s really horse of a different color, Marla. The whole DigiNext thing is meant to be our entry into not only theatrical releases but actually as I mentioned earlier our first full feature length film will be released on December 6, Miracle, in Spanish Harlem. And that’s an entry into another business with totally accretive revenue streams attached and no material risk to us which is also important. If we are going to enter this vertical we want to do it risk free because our core business is still the movie theater business and what we are looking to do is to change the model not only through alternative content from Fathom and numerous others as described in our 10-K but also as importantly and we think eventually more importantly our own curated content.

Marla Backer - Ascendiant Capital

Okay. Thanks. And then one last question in switching topics, the M&A environment seems to have really accelerated a little bit in the past 12 months. Do you think there is an opportunity going forward to get something else done before year end or at this point are most of the exhibitors that you might be looking at and speaking with, are they sort of looking at holiday and making their own plans for holiday and at this point they don’t want to miss that and so realistically we are talking about 2014 before we see some additional deal flow?

Bud Mayo

I hope not. I think based on the conversations we are have having now I think we are looking at some news well before that and some closings before year end. I think some of them could spill a little early into the first quarter of calendar 2014. But we’ve got – we are in pretty good shape. We do our best work with the family owned theaters whether we buy a portion of them and get a right of first refusal which we always try to get for the balance or buy if there are only 2 or 3 theaters that are owned by that particular operator.

Where we play with the big boys and most of our management team has always played with the big boys it’s a more difficult and less predictable outcome. So we are staying with what we do best right now but we are in the game on some larger transactions and we’ll see how they play out. I think it’s safe to say we are going to grow and that there will be some news before the end of this calendar year and we hope some closings. We would like to take advantage in any closing of the Hollywood product that comes in December and we will do our best to do that.

Marla Backer - Ascendiant Capital

Thank you.

Bud Mayo

Thank you, Marla.

Operator

And our next question comes from the line of Mike Hickey from Benchmark. Please proceed with your question.

Mike Hickey - Benchmark

Hi guys. Thank you for taking my questions and congratulations on your continued circuit growth.

Bud Mayo

Thank you.

Mike Hickey - Benchmark

Just to kind of thinking back on Marla’s question there and as it relates to the M&A environment I was just wondering how you see the market behaving it’s if you kind of see the activity or maybe the intent from the big four don’t they have some impact on valuations?

Bud Mayo

Well, we are not seeing it in playing small ball. We are not seeing a big impact I mean there is no doubt that eventually since we are seeking to be in 100 different markets throughout the country. Today, we can be opportunistic and really virtually any theater in any group market that we can buy at the right multiple and have accretive cash flows from we are going to go after. As we get closer to trying to fill the remaining DMAs with theaters, I think we probably will end up paying a little bit more, but I think during that process which we would like to think is going to be significant growth from here. We will be in a position to make accretive acquisitions even on a larger scale.

Mike Hickey - Benchmark

Thank you. And then…

Bud Mayo

Did that answer your question, Michael?

Mike Hickey - Benchmark

Yes, absolutely. Thank you. And then the IMAX introduction to your circuit and thinking about maybe how that’s performed and it’s relative to kind of what you are trying to maybe do internally with your own big screen format? And then I was wondering kind of how you see that sort of big screen format expanding relative to kind of your 1000 screen goal?

Bud Mayo

I mean, that’s a very interesting question. And frankly, I don’t know the answer. IMAX is a compelling, immersive opportunity. And we are not surprised by the results. They are pretty much in line with our expectations in our Arizona theater. We think there is room to do some more, but we like the idea and the flexibility of having our own form of that, which isn’t key to the digital print that comes in. And so we can play any movie that we think is suitable in the time slot using our own version of that. But from what we can see, there is only one IMAX and it is meaningful, we think they do a great job, and I think they have some of the features that have come out so far this year haven’t been the, I’d say the highest grossers, but they have been certainly excellent. And we are – this is an experiment that we will act upon as we go forward. That being said, some of the theaters that we are looking to acquire already have IMAXs. And that’s certainly which means we will inherit them just as we did with the D-Boxes and some other formats.

And that gives us an opportunity built into the multiple we are paying for those theaters, because that’s key to cash flow is to evaluate the impact of those individual pieces of technology. I am a little old schooled in one respect even though I am a technology guy. It’s all about content. It’s all about what do people want to see. And you can see that from the way we built our organization and really aimed at alternative programming we’d love to partner with IMAX on bringing some alternative programming in IMAX theaters. And in some respects they do have some. They have all the museum type events that we are going now the kids are back to school. We will start pitching to schools and play those in the mornings for those schools, but we have not touched the surface the real opportunity that Digital Cinema brings with it the content choices from all over the world. And I am sure IMAX will be looking at that and I know we are.

Mike Hickey - Benchmark

Alright, thank you Bud and Brian. Good luck with your financial quarter.

Brian Pflug

Thank you.

Bud Mayo

Thank you.

Operator

And our next question comes from the line of John Tinker from Maxim. Please proceed with your question.

John Tinker - Maxim

Hi, thank you. Just quick couple of number questions. You are breaking out the TLCF, the theater level cash flow at about 1.9 compared to about EBITDA of 0.9 suggesting the sort of the acquisition that you are over-hedged running at about $1 million and compared to last year obviously we expand about 700,000. Is that the kind of level we should model in going forward or will that be ticking up a little more?

Brian Pflug

John, that’s about the level going forward barring any major growth that we have, where we are now as of the June quarter we pretty much have all the people that we need for what we have today and as well as any reasonable amount of growth going forward.

Bud Mayo

Unless we make a major acquisition what we need are support level people and as I think we’ve mentioned a number of times before, our goal is to be at 5% of revenues as SG&A and that would be net of management fees. And we are already in single digits on a run rate basis which is good progress we think. And more importantly we have the team that can take this to another plateau. And so I think you can model as Brian said we are really not expecting any senior level people or any really senior people added to the team that was done around January 1 of this year and now what we are talking about are some support and then win types.

John Tinker - Maxim

And now I have got quick question on your average admission price has slightly picked up again a little, is it sort of has it went down given the different kind of theaters you acquired what would be a good goal as we model the business out to look at for average admission price is there any peak that about $9.60 a few quarters ago then it dropped $7.23 and it’s now as you picked up things of $7.92 so it’s began to trend up nicely?

Bud Mayo

It really has a lot to do with the DMAs. I mean you know that of $9.60 was because it was all in the New York DMA. We had a couple of theaters here and then on in Hartford and those prices were all general admission $11 or $10 or $11. But we kind of play the – play it as it lies as we buy these theaters and then try to increase certainly the things we can control which would tend to be at the concession stand. So I think we’ve made really good strides. And under Chuck Goldwater’s leadership as our Chief Operating Officer we are starting to really focus on those nickel and dimes of the concession stand. And I am very pleased with that progress on a year-over-year basis and even sequentially. So that portrays for patron per tickets are really a market by market kind of analysis and it really depends on where the theaters are John. I think that’s the only answer that I can reasonably give you. We don’t control that completely, obviously we look to maximize that number but as I said it’s really in the party’s rentals special advanced alternative programming which tend to be higher priced where we can drive that. But again it takes us about a year before alternative programming which is typically 150% of this number can really have an impact and in particular when it only represents a few percent of the total admissions.

John Tinker - Maxim

Okay. Thanks.

Bud Mayo

Thank you, John.

Operator

Our next question comes from the line of Thomas Pfister with RedChip Companies. Please proceed with your question.

Thomas Pfister - RedChip Companies

Hi. Thanks for taking my questions and congratulations on the continued great progress that you have shown this year. Just the first question from me here, so when you guys are looking at putting various types of alternative programming into your theaters how do you go about the process of determining which programming you would want to put in which theaters?

Bud Mayo

Well we have a lot of data regarding the success of various events by genre, by theater, by day part all very important in addressing target audiences. We start by playing everything because what we’ve discovered is that through social media we can reach end and local outreach in PR we can reach an enormous audience because well beyond the traditional 5 mile to 7 mile radius around the theater. And once we’ve done that and can engage them we can bring them into our theaters. So we do have one theater that is actually running a huge percentage over 20% of its total admissions from alternative programming and at least half of that is coming from audiences that it had never seen before, the cultural opera ballet crowd and also the Bollywood crowd. So that gives us some incentive to bring some of the other theaters that could be running at 1% now up to a much higher level and we are emphasizing the reach and communication with those target audiences on a case-by-case basis. And once we have had them for a while we can begin to say this isn’t going to work here, let’s not bother.

I will point out there is no incremental cost to us if we were placing something that’s not doing any business on an empty screen. So there is no risk incrementally involved to us, but what we are seeing in this June quarter we will share the fact that and I think I mentioned it earlier that more than – that it’s 15 times what we have replaced in those theaters. In the aggregate, it’s not a huge dollar amount, but if it’s incremental by 15 times what the average event income is compared to the show that we are not playing for that one show. Now we are headed in the right direction. What we need to do is just do more of it, and it’s working.

Thomas Pfister - RedChip Companies

Okay, great. Thank you for the color there. And then just one more question from me and I will hop back in the queue. So I think you mentioned this in one of your previous questions a bit, but how do you view the capital spend going forward between acquiring new screens and making capital improvements at some of your theaters like with the new IMAX location or with the 4D auditorium that you put in one of your Ohio theaters?

Bud Mayo

Well, first of all, IMAX was a minimal investment. It was something called a joint venture with IMAX and that’s the only way we would have been able to go forward and that’s extraordinary. Typically, our CapEx is part of the acquisition analysis. So if we want to pay 5.5 times cash flow that includes the initial CapEx in order to turn it into a Digiplex and do any of it fit up that we need to do whether it’s a digital platform or cosmetics that it could be new seats carpeting, paint, lighting all kinds of things like that, that are purely cosmetic or it could be a more fundamental Digital Cinema upgrade, but that’s all baked in to whatever the multiple is. And we paid anywhere from 4.5 times to 6 times at the higher end of that cash flow, but again it always included the initial CapEx.

Thomas Pfister - RedChip Companies

Okay, great. Thank you for that. And that’s all the questions I have for today and just congratulations again on your guys as excellent growth this quarter.

Bud Mayo

Thank you.

Operator

Our next question comes from the line of Rick Solomon from (indiscernible) Fund. Please proceed with your question. Mr. Solomon, your line is now open. Please proceed. And our next question comes from the line of Ross Silver with Vista Partners. Please proceed with your question.

Ross Silver - Vista Partners

Hey guys and congratulations on the quarter as well as the fiscal year.

Bud Mayo

Thank you, Ross.

Ross Silver - Vista Partners

Question as it relates to the some of the acquisition targets, what sort of EBITDA multiple are you sort of seeing out there? And then the second question is in terms of purchasing some of these opportunities, is it something where it’s stock-based, cash-based a blend or what sort of – what’s the way to kind of think of it and model it going forward?

Bud Mayo

Okay. Every acquisition we have made with one exception has involved our issuance of unregistered securities under a lockup agreement as a portion of the purchase price. The ones that we are most interested in today and most confident in being able to get something done with all involve a component of stock as a part of the purchase price. And I am glad you asked the question, because it gives me the opportunity to explain that we still have $10 million of dry powder in our Start Media joint venture and that’s all equity. What we have done in the past is we have made an investment by using our stock as currency for our portion of the ownership of that JV. So based on the same formula that we’ve used in the past where we put in about $5 million and our partners put in $10 million that would suggest we have $15 million of dry powder just in the joint venture to make acquisitions and thought of just keep it simple of five multiple we have generated $3 million worth of incremental cash flow for the JV.

Using an assumption that is similar to what we’ve done in the past if those theaters did about $20 million we would end up with 5% of that $20 million as a management fee first. And then we would be sharing the roughly 35% of the remaining $2 million of cash flow. Now those are numbers that obviously are I am throwing out to as an example I am not suggesting that they are actuals, but the deal we have is 5% management fee which is a reduction of our SG&A and we are at a point now where that would be very incremental to our SG&A and to our bottom line because we’ve spent a good part of the increase in our SG&A as John pointed out earlier as of January 1st by adding a number of key senior executives to our payroll so without going any further in terms of our $10 million shelf registration and the use of our equity and currency in any of our acquisitions. In order to make sure that these issuances are also somewhat accretive immediately we are really looking to price them at the lower – at the greater of the IPO price or a 30-day VWAP. So we don’t even in a situation we are issuing stock and the market happens to take a temporary drop we aren’t disadvantaged in the issuance of the price in relation to the multiple we are paying. Does that make sense?

Ross Silver - Vista Partners

Yes, and I appreciate it and thanks for taking the question too. Just obviously with some of these acquisitions just understanding how sort of the structure would look like but seeing that you are well capitalized obviously that wouldn’t hinder your ability to make some of these acquisitions and potentially…

Bud Mayo

No, it has nothing to do with any delays we’ve had it’s been our discipline in picking deals that are going to be really good deals, good theaters in good location had multiples that would be accretive. As I’d like to say about the M&A part of our business you have to kiss a lot of frogs before you find the prince and we are doing that and we are finding some really good princes now after going through a continuous flow. You can assume that we are engaged in M&A activity everyday of the year. And everything does not bear fruit at the end of the day when we do our homework and we see we are looking at or the multiples just are too high when we do our due diligence. So I know we feel the pressure to keep growing at the rate we’ve been growing and we intend to we are not going to wear off and start making bad deals just because we are chasing numbers we are not going to do it.

Ross Silver - Vista Partners

Great. Well, thank you for taking my question and again congratulations on the fiscal year and the quarter.

Bud Mayo

Thanks Ross.

Operator

And our next question comes from the line of (indiscernible) with Value Capital. Now please proceed with your question.

Unidentified Analyst

Hi there. You have been talking about M&A and I am just looking at the quarterly margins and they are continually negative. And I was wondering what your plan was to achieve profitability excluding mergers and acquisitions?

Bud Mayo

Well, I think first of all you got to look at the cash flow line and the depreciation as a component and the non-cash items that are in that loss. So with that I hand this off to Brian to just talk to that.

Brian Pflug

Yes, I think on a net loss basis we will have brackets around those numbers for the near term anyway. I can’t really predict the time when that may turnaround, but when you look at depreciation and some of our interest costs as well a company like ours is very capital intensive in the M&A business is going to have that. We have got $4 million of depreciation for the year and a $5 million loss, and I think that those kinds of relationships are going to continue.

Bud Mayo

Yes. I mean, we buy assets and because we buy assets we have to depreciate them. And in that depreciation, it’s going to be very tough to when that depreciation runs out, we will have an NOL, we do have an NOL that’s growing and we will be able to apply against future as we crossover. And there will be a point in the future when we do, but I would say it’s certainly two or three years out. The depreciation has to burn down and our rate of growth has to slow down for those two things to converge. And frankly, we like the idea of not playing taxes, we like the idea that we can shelter the income that we do have from our theaters and ultimately from the business. And that’s pretty much been a metric for everybody in this business. I mean, every analyst I know about had a multiple of EBITDA. And we are in no exception and probably more so now, because we are smaller.

Unidentified Analyst

Right. Now, on this alternative programming, is the cost structure of per patron any different than your conventional standard programming?

Bud Mayo

No, well actually it’s a little bit lower, although we are at about 50% of film rent. So we split the rev share and it’s about 50% on alternative programming. And it works very much the same way it does on a movie and it varies obviously based on the level of business it does, but with alternative programming, it’s pretty much a straight up 50-50 split.

Unidentified Analyst

In the consumer spend the ticket price and refreshments are about the same?

Bud Mayo

I am sorry?

Unidentified Analyst

The ticket price is higher for alternative programming?

Bud Mayo

Yes, it is. On average, it’s about 150% of what the average ticket for movies and normal what the fare will be. And that gives us even more of an incentive to do a lot more as a percentage of your total.

Unidentified Analyst

Yes, I would say that’s the only way to do it other than unless you have some exclusivity in the programming.

Bud Mayo

Well, we do have exclusivity when we wanted on our own programming, but our goal there is to create value beyond the theatrical release as well when we do our DigiNext series and do our own curated product, but most of the alternative programming we do today is from distributors where we are sharing revenue and whatever the distribution costs and recruitment model they have is their own, not ours. But the real reason for doing alternative programming from my perspective is to fill seats that are empty otherwise. I mean, that’s really the name of the game. This business historically is operated with 10% to 12% utilization throughout the year and Monday to Thursday is virtually nobody in a movie theater when the kids are in school. So the opportunity is to play things that are appealing to those who are available to go out to the movies during the week and who are they? Empty nesters, senior citizens and singles. So we need to play more products aimed at them to fill those empty seats. There is nothing wrong with the traditional model for movie theaters as we have seen with this year being a record summer, that was our all Hollywood tent-pole movies crowding the schedule, but the opportunity starting in September and October and even into November and parts of December is enormous. And January, February, March, even April are all opportunities to complement those Hollywood releases and get more products from all over the world and start filling seats that are empty. When you start doing that, you are talking purely incremental revenue.

Unidentified Analyst

So would that be a metric you should or would tend to post that people can follow?

Bud Mayo

We have been indicating what the percentage of our admissions have been in each quarter. And as we mentioned earlier, it’s slightly over 3% in this fourth quarter, which is lower than it was in the prior quarter, they have been at 6%, but that 6% represented 6% of a smaller number, because we did less business. We were up sequentially substantially because of the product mix and the fact that the kids are home from school and there were kind of…

Unidentified Analyst

Yes, things are now coming up.

Bud Mayo

Yes. And so you tend to play less alternative program, but even there we did (teen nights), but we didn’t play as an…

Unidentified Analyst

Yes, that’s a huge potential. I am just looking in the press release, where that number is or is it somewhere else?

Bud Mayo

I am not sure if it’s in the press release, but….

Unidentified Analyst

It’s in the other filings?

Bud Mayo

Definitely in our 10-K.

Unidentified Analyst

Okay.

Brian Pflug

That was just in your remarks.

Bud Mayo

It was in my remarks and I think Brian may have repeated in his.

Unidentified Analyst

Okay.

Bud Mayo

But it is always in our filings and we watch it closely. As I said, we have some theaters that are north of 20%. And when we talk about box office revenue or admissions being 3%, you can add on to that a natural water flow of other revenues, concession revenues that follow, so people go to see a rock and roll concert of Bon Jovi. You are going to spend money at the concession stand, not so much the opera crowd, where those tickets are $22, $23, but we make our money on the ticket there and probably less on the incrementals from the concession stand, but our advertising revenue which is based on attendance is also influenced and so we get extra dollars there. And it’s all about putting butts in seats. It’s all about aiming audiences, communicating with them, nurturing those audiences and bringing them back, because very much like the Amazon model, people who like this were also interested in that. And it’s very important for us to be doing what we are doing, which is data mining and building a following for the hundreds of thousands of people, yes.

Unidentified Analyst

Are the opera events live or recorded?

Bud Mayo

The Metropolitan Opera live, the La Scala and some of the other, The Royal Opera House are pre-recorded. Yes, they are pre-recorded.

Unidentified Analyst

Okay. It was very interesting. Thank you very much.

Bud Mayo

Well, thank you.

Operator

And there are no further questions registered at this time.

Bud Mayo - Chairman and Chief Executive Officer

Well, thank you all for joining us late in the day and we appreciate your attending and being on this call. Look forward to staying in touch with all of you and updating you on our first quarter of 2014. With that, I wish you all a good evening.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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