CURIOSITYSTREAM INC. The following discussion and analysis provide information that management believes is relevant to an assessment and understanding of our results of operations and financial condition. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we," "us," "our," and "the Company" are intended to mean the business and operations ofCuriosityStream .
Cautionary Note Regarding Forward-looking Statements
All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including, without limitation, statements under this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as "anticipate," "attribute," "believe," "continue," "could," "hope," "estimate," "expect," "intend," "may," "might," "potential," "seek," "should," "will" and "would," and similar expressions, as they relate to us or the Company's management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with theSecurities Exchange Commission (the "SEC"). All subsequent written or oral forward-looking statements attributable to us or persons acting on the Company's behalf are qualified in their entirety by this paragraph. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements. Risk factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 31, 2022 , and our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2022 , filed with theSEC onMay 16, 2022 . We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.
Overview
CuriosityStream is a media and entertainment company that offers premium video programming across the principal categories of factual entertainment, including science, history, society, nature, lifestyle and technology. Our mission is to provide premium factual entertainment that informs, enchants and inspires. We are seeking to meet demand for high-quality factual entertainment via SVoD platforms, as well as via bundled content licenses for SVoD and linear offerings, partner bulk sales, brand partnerships and content sales. We believe we are well-positioned for growth as a digital-native video platform monetizing content across this broad revenue stack. We operate our business as a single operating segment that provides premium streaming content through multiple channels, including the use of various applications, partnerships and affiliate relationships. We generate our revenue through six products and services: Direct to Consumer Business, Partner Direct Business, Bundled Distribution,Content Licensing , Enterprise subscriptions and Other. The table below shows our revenue generated through each of the foregoing products and services for the three and nine months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands, (in thousands, except except percentages) percentages) Direct to Consumer (Subscriptions - O&O and App Services)$ 7,432 32 % $
6,346 34 %
$ 1,157 5 % $
1,057 6 %
$ 2,595 11 % $
3,574 19 %
$ 10,790 45 %$ 6,760 36 %$ 21,692 34 %$ 12,277 28 % Enterprise (Subscriptions - O&O Service)$ 1,418 6 %$ 39 0 %$ 4,143 7 %$ 134 0 % Other$ 177 1 %$ 929 5 %$ 1,983 3 %$ 1,053 2 % Total Revenues$ 23,569 $ 18,705 $ 63,544 $ 43,985 CuriosityStream's award-winning content library features more than 15,000 programs that explore topics ranging from space engineering to ancient history to the rise ofWall Street . Our extensive catalog of originally produced and owned content includes more than 9,500 short-, mid- and long-form video and audio titles, includingOne Day University and Learn25 recorded lectures that are led by some of the most acclaimed college and university professors in the world. Our library also features a rotating catalog of more than 5,500 internationally licensed videos and audio programs. Every month, we launch dozens of new video titles, which are available on-demand in high- or ultra-high definition. Through new and long-standing international partnerships, we have localized a large portion of our video library in ten different languages. Our video content is available directly through our O&O Service and App Services. Our App Services enable access toCuriosityStream on almost every major consumer device, including streaming media players like Roku, Apple TV and Amazon Fire TV, all major smart TV brands (e.g., LG, Vizio, Samsung, Sony) and gaming consoles like Xbox. Our Direct Service is available to any household in the world with a broadband connection for$2.99 per month or$19.99 per year. We also provide a premium service for$9.99 per month or$69.99 per year. Our Premium membership includes everything in our standard service, plus subscriptions to third-party platformsTastemade , Topic, and SommTV, our equity investee Nebula, and our new service,One Day University . 20
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The MVPD, vMVPD and digital distributor partners making up our Partner Direct Business pay us a license fee for sales to individuals who subscribe toCuriosityStream via the partners' respective platforms. We have affiliate agreement relationships with, and our service is available directly from, major MVPDs that include Comcast, Cox, Dish and vMVPDs and digital distributors that include Amazon Prime Video Channels, Apple Channel, Roku Channel, Sling TV and YouTube TV. In addition to our Direct to Consumer Business and Partner Direct Business, we have affiliate relationships with ourBundled MVPD Partners and MVPDs, which are broadband and wireless companies in theU.S. and international territories to whom we can offer a broad scope of rights, including 24/7 "linear" channels, our on-demand content library, mobile rights and pricing and packaging flexibility, in exchange for an annual fixed fee or fee per subscriber.
In our
Our Enterprise business is comprised primarily of selling subscriptions in bulk to companies and organizations that in turn offer these subscriptions to their employees and members as an employment benefit or "gift of curiosity." As of the date of this Quarterly Report on Form 10-Q, 25 companies have purchased annual subscriptions at bulk discounts. Our Other business is primarily comprised of advertising and sponsorship revenue. We offer companies the opportunity to be associated withCuriosityStream content in a variety of forms, including short and long form program integration, branded social media promotional videos, advertising spots in our video and audio programs that are made available in front of the paywall, and digital display ads.
Key Factors Affecting Results of Operations
Our future operating results and cash flows are dependent upon a number of opportunities, challenges, and other factors, including our ability to efficiently grow our subscriber base and expand our service offerings to maximize subscriber lifetime value. In particular, we believe that the following factors significantly affected our results of operations over the periods presented below and are expected to continue to have such significant effects:
Revenues
Currently, the main sources of our revenue are (i) subscriber fees from the Direct to Consumer Business and Direct Subscribers, (ii) license fees from affiliates who receive subscriber fees forCuriosityStream from such affiliates' subscribers ("Partner Direct Business" and "Partner Direct Subscribers"), (iii) bundled license fees from distribution affiliates ("Bundled MVPD Business" and "Bundled MVPD Subscribers"), (iv) license fees from content licensing arrangements ("Content Licensing "), (v) subscriber fees from our Enterprise business, and (vi) Other revenue, including advertising and sponsorships. As ofSeptember 30, 2022 , we had approximately 23.0 million total paying subscribers, including Direct Subscribers, Partner Direct Subscribers, Bundled MVPD Subscribers and Enterprise subscribers. 21
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Since our founding in 2015, we have generated a significant portion of our revenues from Direct Subscribers in the form of monthly or annual subscription plans. We may in the future increase the price of our subscription plans, which may have a positive effect on our revenue from this line of our business. The MVPD, vMVPD and digital distributor partners making up our Partner Direct Business pay us a license fee. We recognize subscription revenues ratably during each subscriber's monthly or yearly subscription period. We pay a fixed percentage distribution fee to our partners for subscribers accessing our platform via App Services to compensate these partners for access to their customer and subscriber bases. Our MVPD, vMVPD and digital distributor partners host and stream our content to their customers via their own platforms, such as set top boxes in the case of most MVPDs. We do not incur billing, streaming or backend costs associated with content distribution through our MVPD, vMVPD and digital distributor partners.
Operating Costs
Our primary operating costs relate to the cost of producing and acquiring our
content, the costs of advertising and marketing our service, personnel costs,
and distribution fees. Producing and co-producing content and commissioned
content is generally more costly than content acquired through licenses.
The Company's business model is subscription based as opposed to a model
generating revenues at a specific title level. Content assets (licensed and
produced) are predominantly monetized as a group and therefore are reviewed in
aggregate at a group level when an event or change in circumstances indicates a
change in the expected usefulness of the content or that the fair value may be
less than unamortized cost. If such changes are identified, the aggregated
content library will be stated at the lower of unamortized cost or fair value.
In addition, unamortized costs for assets that have been, or are expected to be,
abandoned are written off. For a discussion of the accounting policies for
content impairment write-down and management estimates involved therein, see "-
Critical Accounting Policies and Estimates" below.
Further, our advertising and marketing expenditures and personnel costs
constitute primary operating costs for our business. These costs may fluctuate
based on advertising and marketing objectives and personnel needs. In general,
we have been and intend to continue to focus marketing dollars on efficient
customer acquisition. With respect to personnel costs, we focus on
revenue-generating personnel, such as sales staff and roles that support the
improvement, maintenance and marketing of our Direct Service.
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Results of Operations
The financial data in the following table sets forth selected financial information derived from our unaudited consolidated financial statements for the three and nine months endedSeptember 30, 2022 and 2021 and shows our results of operations as a percentage of revenue or as a percentage of costs, as applicable, for the periods indicated. We conduct business through one operating segment,CuriosityStream .
Comparison of the three months ended
Three months ended September 30,
%
2022 2021 $ Change Change
(unaudited)
(in thousands)
Revenues
Subscriptions $ 8,850 38 % $ 6,385 34 % $ 2,465 39 %
License fee 14,542 61 % 11,391 61 % 3,151 28 %
Other 177 1 % 929 5 % (752 ) (81 %)
Total Revenues $ 23,569 100 % $ 18,705 100 % $ 4,864 26 %
Operating expenses
Cost of revenues 13,566 49 % 9,553 35 % 4,013 42 %
Advertising and marketing 5,626 20 % 9,320 35 % (3,694 ) (40 %)
General and administrative 8,757 31 % 8,058 30 % 699 9 %
Impairment of goodwill and intangible assets - 0 % - 0 % - n/m
Total operating expenses $ 27,949 100 % $ 26,931 100 % $ 1,018 4 %
Operating loss (4,380 ) (8,226 ) 3,846 (47 %)
Other income (expense)
Change in fair value of warrant liability 514 8,345 (7,831 ) (94 %)
Interest and other (expense) income (478 ) 595 (1,073 ) (180 %)
Equity interests (loss) income (94 ) 165 (259 ) (157 %)
Loss before income taxes $ (4,438 ) $ 879 $ (5,317 ) n/m
Provision for income taxes 64 49 15 31 %
Net (loss) income $ (4,502 ) $ 830 $ (5,332 ) n/m
n/m - percentage not meaningful
Revenue
Revenue for the three months endedSeptember 30, 2022 and 2021 was$23.6 million and$18.7 million , respectively. The increase of$4.9 million , or 26%, is primarily due to a$2.5 million increase in subscription revenue, and a$3.2 million increase in license fee revenue, partially offset by a$0.8 million decrease in other revenue. The increase in subscription revenue of$2.5 million resulted primarily from a$1.4 million increase in corporate subscriptions related to the bulk agreements executed in the last quarter of 2021 and a$1.1 million net increase in subscriber fees received from Direct Subscribers for annual and monthly plans.
The increase in license fees of
The decrease in other revenue of$0.8 million is primarily due to a one-time services agreement entered into with an affiliate during the three months endedSeptember 30, 2021 that did not have any corresponding revenue during the three months endedSeptember 30, 2022 .
Operating Expenses
Operating expenses for the three months endedSeptember 30, 2022 and 2021 were$27.9 million and$26.9 million , respectively. The increase of$1.0 million , or 4%, primarily resulted from the following: Cost of Revenues: Cost of revenues for the three months endedSeptember 30, 2022 increased to$13.6 million from$9.6 million for the three months endedSeptember 30, 2021 . Cost of revenues primarily includes content amortization, hosting and streaming delivery costs, payment processing costs and distribution fees, commission costs and subtitling and broadcast costs. The increase of$4.0 million , or 42%, is primarily due to an increase in content amortization of$3.2 million , which is primarily driven by an increase in accelerated amortization on certain content licensing arrangements and an increase in the number and cost of titles published during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The balance of the increase in cost of revenues is primarily due to a$0.9 million increase in revenue share expense related to bundled and premier tier arrangements with other streaming services. 23
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Advertising & Marketing: Advertising and marketing expenses for the three months endedSeptember 30, 2022 , decreased to$5.6 million from$9.3 million for the three months endedSeptember 30, 2021 . This decrease of$3.7 million , or 40%, is primarily due to a decrease in digital and TV advertising, partner platforms and agency fees of$5.9 million , partially offset by an increase of$2.2 million in radio advertising compared to the prior year period. General and Administrative: General and administrative expenses for the three months endedSeptember 30, 2022 increased to$8.8 million from$8.1 million for the three months endedSeptember 30, 2021 . This increase of$0.7 million , or 9%, is primarily attributable to an increase in legal, tax and accounting fees of$1.6 million , partially offset by a decrease of$0.9 million in salaries and other compensation expenses.
Operating Loss
Operating loss for the three months endedSeptember 30, 2022 and 2021 was$4.4 million and$8.2 million , respectively. The decrease in our operating loss of$3.8 million , or 47%, resulted primarily from the increase in revenue of$4.9 million , or 26%, partially offset by the increase in operating expenses of$1.0 million , or 4%, in each case during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , as described above.
Change in Fair Value of Warrant Liability
For the three months ended
Interest and Other (Expense) Income
Interest and other (expense) income for the three months endedSeptember 30, 2022 was$0.5 million in expense compared to$0.6 million in income for the three months endedSeptember 30, 2021 , primarily due to lower interest income from debt investments compared to the prior year period.
Equity Interests Loss
For the three months ended
Provision for Income Taxes
Due to generating losses before income taxes in each of the three months endedSeptember 30, 2022 and 2021, we had a provision for income taxes of$0.1 million in each respective period. The provision for income taxes is primarily related to foreign withholding income taxes. Our provision for income taxes differs from the federal statutory rate primarily due to the Company being in a full valuation allowance position and not recognizing a tax benefit attributable to generated losses for either federal or state income tax purposes. 24
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Net (Loss) Income
Net loss for the three months endedSeptember 30, 2022 was$4.5 million , compared to net income for the three months endedSeptember 30, 2021 of$0.8 million . The increase to the net loss of$5.3 million , is primarily due to the increase in total operating expenses of$1.0 million , a decrease in the change in the fair value of the warrant liability of$7.8 million , and a decrease in interest and other (expense) income of$1.1 million , partially offset by the increase in total revenues of$4.9 million . In each case the impacts to net (loss) income compare the three months endedSeptember 30, 2022 to the three months endedSeptember 30, 2021 , as described above.
Comparison of the nine months ended
Nine months ended September 30,
2022 2021 $ Change % Change
(unaudited)
(in thousands)
Revenues
Subscriptions $ 26,128 41 % $ 16,942 39 % $ 9,186 54 %
License fee 35,433 56 % 25,990 59 % 9,443 36 %
Other 1,983 3 % 1,053 2 % 930 88 %
Total Revenues $ 63,544 100 % $ 43,985 100 % $ 19,559 44 %
Operating expenses
Cost of revenues 38,404 37 % 19,433 25 % 18,971 98 %
Advertising and marketing 31,602 31 % 33,089 42 % (1,487 ) (4 %)
General and administrative 29,863 29 % 25,943 33 % 3,920 15 %
Impairment of goodwill and intangible
assets 3,603 3 % - 0 % 3,603 n/m
Total operating expenses $ 103,472 100 % $ 78,465 100 % $ 25,007 32 %
Operating loss (39,928 ) (34,480 ) (5,448 ) 16 %
Other income (expense)
Change in fair value of warrant
liability 4,852 6,323 (1,471 ) (23 %)
Interest and other (expense) income (564 ) 1,891 (2,455 ) (130 %)
Equity interests (loss) income (566 ) 165 (731 ) n/m
Loss before income taxes $ (36,206 ) $ (26,101 ) $ (10,105 ) 39 %
Provision for income taxes 165 128 37 29 %
Net loss $ (36,371 ) $ (26,229 ) $ (10,142 ) 39 %
n/m - percentage not meaningful
Revenue
Revenue for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 was$63.5 million and$44.0 million , respectively. The increase of$20.0 million , or 44%, is due to a$9.2 million increase in subscription revenue, a$9.4 million increase in license fee revenue and a$0.9 million increase in other revenue. The increase in subscription revenue of$9.2 million resulted primarily from a$5.2 million increase in subscriber fees received from Direct Subscribers for annual and monthly plans and a$4.0 million increase in corporate subscriptions related to subscription bulk agreements. The increase in license fees of$9.4 million is primarily due to a$9.4 million increase in license fees as a result of a larger volume of content licensing arrangements, an increase of$0.4 million in Partner Direct revenues from an increase in subscribers to our partner's respective platforms and$1.0 million in revenue from new bundled distribution agreements, partially offset by a decrease of$1.4 million from the non-renewal of a bundled distribution agreement in the third quarter of 2022.
Operating Expenses
Operating expenses for the nine months endedSeptember 30, 2022 and 2021 were$103.5 million and$78.5 million , respectively. The increase of$25.0 million , or 32%, primarily resulted from the following: Cost of Revenues: Cost of revenues for the nine months endedSeptember 30, 2022 increased to$38.4 million from$19.4 million for the nine months endedSeptember 30, 2021 . The increase of$19.0 million , or 98%, is primarily due to the increase in content amortization of$15.3 million , which is primarily driven by an increase in accelerated amortization on certain content licensing arrangements and an increase in the number and cost of titles published during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The balance of the increase in cost of revenues is due to a$3.0 million increase in revenue share expense related to bundled and premier tier arrangements with other streaming services and an increase in subtitling and broadcast costs of$0.4 million . 25
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Advertising & Marketing: Advertising and marketing expenses for the nine months endedSeptember 30, 2022 , decreased to$31.6 million from$33.1 million for the nine months endedSeptember 30, 2021 . The decrease of$1.5 million , or 4%, is primarily due to a decrease in digital and TV advertising, partner platforms and agency fees of$9.3 million , partially offset by an increase in radio advertising of$7.8 million compared to the prior year period. General and Administrative: General and administrative expenses for the nine months endedSeptember 30, 2022 increased to$29.9 million from$25.9 million for the nine months endedSeptember 30, 2021 . This increase of$4.0 million , or 15%, is primarily attributable to an increase in legal, tax and accounting fees of$2.4 million and an increase in salaries and other compensation expenses of$0.8 million . Impairment ofGoodwill and Intangible Assets: The increase of$3.6 million in operating expenses for the nine months endedSeptember 30, 2022 is the result of the impairment analysis performed as ofJune 30, 2022 . The analysis resulted in an impairment charge of$2.8 million against the entire balance of goodwill and$0.8 million to intangible assets. There were no such impairment charges recorded during the nine months endedSeptember 30, 2021 .
Operating Loss
Operating loss for the nine months endedSeptember 30, 2022 and 2021 was$39.9 million and$34.5 million , respectively. The increase of$5.4 million , or 16%, resulted from the increase in operating expenses of$25.0 million , including the impairment of goodwill and intangible assets of$3.6 million , offset by an increase in revenue of$20.0 million , in each case during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , as described above.
Change in Fair Value of Warrant Liability
For the nine months ended
Interest and Other (Expense) Income
Interest and other (expense) income for the nine months endedSeptember 30, 2022 was$0.6 million in expense compared to$1.9 million in income for the nine months endedSeptember 30, 2021 , primarily due to lower interest income from investments compared to the prior year period.
Equity Interests (Loss) Income
For the nine months ended
Provision for Income Taxes
Due to generating losses before income taxes in each of the nine months endedSeptember 30, 2022 and 2021, we had a provision for income taxes of$0.2 million and$0.1 million , respectively. The provision for income taxes is primarily related to foreign withholding income taxes. 26
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Net Loss
Net loss for the nine months endedSeptember 30, 2022 and 2021 was$36.4 million and$26.2 million , respectively. The increase in the net loss of$10.2 million , or 39%, is primarily due to the increase in total operating expenses of$25.0 million , consisting of the increase in cost of revenues, general and administrative expenses, and goodwill and intangible assets impairment charges, a decrease in interest and other (expense) income of$2.5 million , and a decrease in the change in fair value of the warrant liability of$1.5 million , partially offset by the increase in total revenues of$20.0 million . In each case the impacts to net loss compare the nine months endedSeptember 30, 2022 to the nine months endedSeptember 30, 2021 , as described above.
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had cash and cash equivalents, including restricted cash, of$47.3 million . In addition, the Company had available for sale investments in debt securities totaling$16.9 million , all of which were classified as short-term investments. All of the Company's investments in debt securities can be readily converted to cash to meet the Company's ongoing operating cash flow needs. For the nine months endedSeptember 30, 2022 , we incurred a net loss of$36.4 million and used$30.7 million of net cash in operating activities, while investing activities provided$60.7 million of net cash, and financing activities used$0.2 million of net cash.
We believe that our current cash levels and investments in debt securities that are readily convertible to cash will be adequate to support our ongoing operations, capital expenditures and working capital for at least the next twelve months.
Our principal uses of cash are to acquire content, promote our service through advertising and marketing, and provide for working capital to operate our business. We have experienced significant net losses since our inception, and, given the significant operating and capital expenditures associated with our business plan, we anticipate that we will continue to incur net losses.
Cash Flows
The following table presents our cash flows from operating, investing and
financing activities for the nine months ended
For the nine months ended September 30,
2022 2021
(unaudited)
(in thousands)
Net cash used in operating activities $ (30,744 ) $ (41,797 )
Net cash provided by (used in) investing
activities 60,701 (100,610 )
Net cash (used in) provided by financing
activities (178 ) 148,700
Net increase in cash, cash equivalents and
restricted cash $ 29,779 $ 6,293
Cash Flows from Operating Activities
Cash flow from operating activities primarily consists of net losses, changes to our content assets (including acquisitions and amortization), and other working capital items. During the nine months endedSeptember 30, 2022 and 2021, we recorded a net cash outflow from operating activities of$30.7 million and$41.8 million , respectively, or a decreased outflow of$11.1 million , or 26%. The decreased cash outflow from operating activities was primarily due to an increase in the change in accounts payable of$2.2 million and other assets of$4.7 million , increased amortization of content assets of$15.3 million , the impairment of goodwill and intangibles of$3.6 million , and increased collections on accounts receivable from our customers of$12.4 million during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The decrease in outflow from operating activities was partially offset by the increase in net loss of$10.2 million , the decrease in the change in accrued expenses and other liabilities of$5.4 million , and the decrease in deferred revenue of$13.5 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . 27
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Cash Flows from Investing Activities
Cash flow from investing activities consists of purchases, sales and maturities of investments, as well as business combinations, equity investments and purchases of property and equipment.
During the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , we recorded a net cash inflow provided by investing activities of$60.7 million and a net cash outflow used in investing activities of$100.6 million , respectively. The net cash inflow provided by investing activities for the nine months endedSeptember 30, 2022 , was primarily due to the sale and maturities of investments in debt securities of$64.8 million , partially offset by investments in Nebula of$2.4 million . The net cash outflow used in investing activities for the nine months endedSeptember 30, 2021 , was primarily due to purchases of investments in debt securities of$151.9 million , investment in Nebula and Spiegel Venture of$9.3 million and business combinations of$5.4 million , which were partially offset by sales and maturities of investments in debt securities of$66.5 million .
Cash Flows from Financing Activities
During the nine months endedSeptember 30, 2022 and 2021, we recorded net cash outflow from financing activities of$0.2 million and a net cash inflow from financing activities of$148.7 million , respectively. The net cash inflow during the nine months endedSeptember 30, 2021 of$148.7 million was attributable to the receipt of proceeds from the issuance of common stock of$94.1 million (net of$6.8 million of underwriting discounts and commissions), the exercise of 4.8 million Public Warrants resulting in cash proceeds of$54.9 million , and the exercise of stock options of$0.4 million , partially offset by the payments of transaction costs related to the issuance of common stock of$0.7 million . There was no comparable activity during the nine months endedSeptember 30, 2022 .
Capital Expenditures
Going forward, we expect to make expenditures for additions to our content assets, and purchases of property and equipment. The amount, timing and allocation of capital expenditures are largely discretionary and within management's control. Depending on market conditions, we may choose to defer a portion of our budgeted expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate cash flow. Subject to financing alternatives, we may also increase our capital expenditures significantly to take advantage of opportunities we consider to be attractive.
Off Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance withU.S. GAAP. Certain amounts included in or affecting the financial statements presented in this Annual Report and related disclosure must be estimated, requiring management to make assumptions with respect to values or conditions which cannot be known with certainty at the time the financial statements are prepared. Management believes that the accounting policies set forth below comprise the most important "critical accounting policies" for the Company. A critical accounting policy is one which is both important to the portrayal of a company's financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management evaluates such policies on an ongoing basis, based upon historical results and experience, consultation with experts and other methods that management considers reasonable in the particular circumstances under which the judgments and estimates are made, as well as management's forecasts as to the manner in which such circumstances may change in the future. Content Assets The Company acquires, licenses and produces content, including original programming, in order to offer customers unlimited viewing of factual entertainment content. The content licenses are for a fixed fee and specific windows of availability. Payments for content, including additions to content assets and the changes in related liabilities, are classified within "Net cash used in operating activities" on the unaudited consolidated statements of cash flows. The Company recognizes its content assets (licensed and produced) as "Content assets, net" on the unaudited consolidated balance sheets. For licenses, the Company capitalizes the fee per title and records a corresponding liability at the gross amount of the liability when the license period begins, the cost of the title is known, and the title is accepted and available for streaming. For productions, the Company capitalizes costs associated with the production, including development costs, direct costs, and production overhead. Based on factors including historical and estimated viewing patterns, the Company previously amortized the content assets (licensed and produced) in "Cost of revenues" on the unaudited consolidated statements of operations on a straight-line basis over the shorter of each title's contractual window of availability or estimated period of use, beginning with the month of first availability. StartingJuly 1, 2021 , the Company amortizes content assets on an accelerated basis in the initial two months after a title is published on the Company's platform, as the Company has observed and expects more upfront viewing of content, generally as a result of additional marketing efforts. Furthermore, the amortization of original content is more accelerated than that of licensed content. We review factors that impact the amortization of the content assets on a regular basis and the estimates related to these factors require considerable management judgment. The Company continues to review factors impacting the amortization of content assets on an ongoing basis and will also record amortization on an accelerated basis when there is more upfront use of a title, for instance due to significant content licensing. 28
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The Company's business model is generally subscription based as opposed to a model generating revenues at a specific title level. Content assets (licensed and produced) are predominantly monetized as a group and therefore are reviewed in aggregate at a group level when an event or change in circumstances indicates a change in the expected usefulness of the content or that the fair value may be less than unamortized cost. If such changes are identified, the aggregated content assets will be stated at the lower of unamortized cost or fair value. In addition, unamortized costs for assets that have been, or are expected to be, abandoned are written off.
Goodwill represents the excess of the cost of acquisitions over the amount assigned to tangible and identifiable intangible assets acquired less liabilities assumed. At least annually, in the fourth quarter of each fiscal year or more frequently if indicators of impairment exist, management performs a review to determine if the carrying value of goodwill is impaired. The identification and measurement of goodwill impairment involves the estimation of fair value at the Company's reporting unit level, which is the same or one level below the operating segment level. The Company determined that it has one reporting unit. The Company performs an initial assessment of qualitative factors to determine whether the existence of events and circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of relevant events and circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit exceeds its carrying value and there is no indication of impairment, no further testing is performed; however, if the Company concludes otherwise, an impairment test must be performed by estimating the fair value of the reporting unit and comparing it with its carrying value, including goodwill. Intangible assets other than goodwill are carried at cost and amortized over their estimated useful lives. Amortization is recorded within General and administrative expenses on the consolidated statements of operations. The Company reviews identifiable finite-lived intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its ultimate disposition. Measurement of any impairment loss is based on the amount by which the carrying value of the asset exceeds its fair value. During the second quarter of 2022, the Company experienced a sustained decrease in its share price, and this triggering event was an indication that it was more likely than not that the fair value of the Company's single reporting unit was below its carrying value. The Company performed an interim goodwill impairment test of its goodwill as ofJune 30, 2022 and recognized a goodwill impairment charge of$2.8 million during the three months endedJune 30, 2022 as the fair value of the reporting unit was less than the related carrying value. This charge is included in impairment of goodwill and intangible assets on the Company's unaudited consolidated statements of operations for that period. The determination of the fair value of the Company's reporting unit was based on a combination of the income and the market approach. The Company applied equal weighting to each of the approaches in determining the fair value of the reporting unit. Under the income approach, the Company utilized discounted cash flows of forecasted future cash flows based on future operational expectations and discounted these cash flows to reflect their relative risk. The cash flows used are consistent with those the Company uses in its internal planning, which reflect actual business trends experienced and the Company's long-term business strategy. Under the market approach, the Company utilized the guideline public company method and guideline transaction method to develop valuation multiples and compare the Company to similar publicly traded companies. The significant assumptions under each of the approaches include, among others: revenue projections (which are dependent on future customer subscriptions and content licensing agreements), operating expenses, discount rate, control premium and a terminal growth rate. The cash flows used to determine the fair values are dependent on a number of significant management assumptions, such as the Company's expectations of future performance and the expected future economic environment, which are partly based upon the Company's historical experience. The Company also considered its market capitalization in assessing the reasonableness of the reporting unit fair value. During the second quarter of 2022, the Company also determined there were impairment indicators with respect to certain of the Company's definite-lived intangible assets. As a result, the Company performed an impairment test by comparing the carrying values of the intangible assets to their respective fair values, which were determined based on forecasted future cash flows. As a result of this impairment test, the Company recorded an impairment charge of$0.8 million during the three months endedJune 30, 2022 , which is reflected as a component of impairment of goodwill and intangible assets on the Company's unaudited consolidated statements of operations for that period. 29
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In order to further validate the reasonableness of fair value as determined by the income and market approaches described above, a reconciliation to market capitalization is then performed by estimating a reasonable control premium and other market factors. Future changes in the judgments, assumptions and estimates that are used in the impairment testing for our asset group could result in significantly different estimates of fair value.
Revenue Recognition
Subscriptions - O&O Service
The Company generates revenue from monthly subscription fees from its O&O Service.CuriosityStream subscribers enter into month-to-month or annual subscriptions with the Company. The Company bills the monthly subscriber on each subscriber's monthly anniversary date and recognizes the revenue ratably over each monthly membership period. The annual subscription fees are collected by the Company at the start of the annual subscription period and are recognized ratably over the subsequent twelve-month period. Revenues are presented net of the taxes that are collected from subscribers and remitted to governmental authorities.
Subscriptions - App Services
The Company also earns subscription revenues through its App Services. These subscriptions are similar to the O&O Service subscriptions but are generated based on agreements with certain streaming media players as well as with Smart TV brands and gaming consoles. Under these agreements, the streaming media player typically bills the subscriber directly and then remits the collected subscriptions to the Company, net of a distribution fee. The Company recognizes the gross subscription revenues when earned and simultaneously recognizes the corresponding distribution fees as an expense. The Company is the principal in these relationships as the Company retains control over service delivery to its subscribers. License Fees - Affiliates The Company generates license fee revenues from MVPDs such as Comcast and Cox as well as from vMVPDs such as Amazon and Sling TV (MVPDs and vMVPDs are also referred to as affiliates). Under the terms of the agreements with these affiliates, the Company receives license fees based upon contracted programming rates and subscriber levels reported by the affiliates. In exchange, the Company licenses its content to the affiliates for distribution to their subscribers. The Company earns revenue under these agreements either based on the total number of subscribers multiplied by rates specified in the agreements or based on fixed fee arrangements. These revenues are recognized over the term of each agreement when earned.
License Fees -
The Company has distribution agreements which grant a licensee limited distribution rights to the Company's programs for varying terms, generally in exchange for a fixed license fee. Revenue is recognized once the content is made available for the licensee to use. The Company's performance obligations include (1) access to its SVoD platform via the Company's O&O Service and App Services, (2) access to the Company's content assets, and (3) licenses of specific program titles. In contracts containing the right to access the Company SVoD platform, the performance obligation is satisfied as access to the SVoD platform is provided post any free trial period. In contracts which contain access to the Company's content assets, the performance obligation is satisfied as access to the content is provided. For contracts with licenses of specific program titles, the performance obligation is satisfied as that content is made available for the customer to use.
Recently Issued Financial Accounting Standards
The information set forth under Note 2 to the unaudited consolidated financial
statements under the caption "Basis of presentation and summary of significant
accounting policies" is incorporated herein by reference.
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