CURIOSITYSTREAM INC. The following discussion and analysis provides 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," "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 theSEC . 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. 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 theSecurities and Exchange Commission ("SEC"). 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. OverviewCuriosityStream 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 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, Program Sales,Corporate & Association Partnerships and Other. The table below shows our revenue generated through each of the foregoing products and services for the three months endedMarch 31 ,
2022 andMarch 31, 2021 : Three Months Ended March 31, 2022 2021 (in thousands) Direct to Consumer (Subscriptions - O&O and App Services)$ 7,192 41 %$ 4,816 48 % Partner Direct Business (License Fees - Affiliates) 1,143 6 % 977 10 % Bundled Distribution (License Fees - Affiliates) 3,767 21 % 3,526 35 % Program Sales 4,248 24 % 486 5 % Corporate & Association Partnerships (Subscriptions - O&O Service) 1,163 7 % 61 1 % Other 114 1 % 70 1 % Revenues$ 17,627 $ 9,936 Our award-winning video content library features thousands of nonfiction episodes, including more than 1,000 original, commissioned or co-produced documentaries, of short-form, mid-form and long-form duration. Our content, approximately one-third of which is originally produced with the remaining two-thirds consisting of licensed programming, 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. 18 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, Roku Channels, 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 Program Sales Business, we sell to certain media companies a collection of our existing titles in a traditional program sales deal. We also sell selected rights (such as in territories or on platforms that are lower priority for us) to content we create before we even begin production. This latter model reduces risk in our content development decisions and creates program sales revenue. Our Corporate & Association Partnerships 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." To date, over 27 companies have purchased annual subscriptions at bulk discounts for their employees. In the future, we also hope to continue developing integrated digital brand partnerships with advertisers. These sponsorship campaigns offer companies the chance to be associated withCuriosityStream content in a variety of forms, including short and long form program integration, branded social media promotional videos, broadcast advertising spots, and digital display ads. We believe the impressions accumulated in these multi-faceted campaigns would roll up to verifiable metrics for the clients. We executed one such advertising agreement in 2021 with Nebula.
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 last fiscal quarter 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"), and (iv) license fees from program sales arrangements. As ofMarch 31, 2022 , we had approximately 24 million total paying subscribers, including Direct Subscribers, Partner Direct Subscribers and Bundled MVPD Subscribers. Since our founding in 2015, we have generated the majority of our revenues from Direct Subscribers in the form of monthly or annual subscription plans. We charge$2.99 per month or$19.99 per year for our standard Direct Service, or$9.99 per month or$69.99 per year for our premium Direct Service. 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. As ofMarch 31, 2022 , licensed content represented 3,322 titles and original titles represented 1,100 titles. 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. 19 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 months endedMarch 31, 2022 andMarch 31, 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 . Three months ended March 31, 2022 2021 $ Change % Change (unaudited) (in thousands) Revenues Subscriptions$ 8,355 47 %$ 4,877 49 %$ 3,478 71 % License fee 9,158 52 % 4,989 50 % 4,169 84 % Other 114 1 % 70 1 % 44 63 % Total Revenues$ 17,627 100 %$ 9,936 100 %$ 7,691 77 % Operating expenses Cost of revenues 11,850 32 % 4,158 17 % 7,692 185 % Advertising and marketing 14,768 40 % 12,248 48 % 2,520 21 % General and administrative 10,503 28 % 8,733 35 % 1,770 20 % Total operating expenses$ 37,121 100 %$ 25,139 100 %$ 11,982 48 % Operating loss (19,494 ) (15,203 ) (4,291 ) 28 % Other income (expense) Change in fair value of warrant liability 3,860 (3,786 ) 7,646 (202 %) Interest and other (expense) income (57 ) 260 (317 ) (122 %) Equity interests loss (156 ) - (156 ) n/m Loss before income taxes$ (15,847 ) $ (18,729 ) $ 2,882 (15 %) Provision for income taxes 45 26 19 73 % Net loss$ (15,892 ) $ (18,755 ) $ 2,863 (15 %)
n/m - percentage not meaningful
Revenue Revenue for the three months endedMarch 31, 2022 andMarch 31, 2021 was$17.6 million and$9.9 million , respectively. The increase of$7.7 million , or 77%, is due to a$3.5 million increase in subscription revenue and a$4.2 million increase in license fee revenue. The increase in subscription revenue of$3.5 million resulted primarily from a$2.4 million increase in subscriber fees received from Direct Subscribers for annual plans which resulted from increased brand awareness from greater advertising and marketing spending and a$1.1 million increase in corporate subscriptions related to the bulk agreement with Redbox executed in the last quarter of 2021. The increase in license fees of$4.2 million resulted primarily from a$3.8 million increase in license fees related to a larger volume of program sales arrangements and a$0.4 million increase in bundled distribution due to new agreements launched in the second half of 2021. Operating Expenses
Operating expenses for the three months endedMarch 31, 2022 and 2021 were$37.1 million and$25.1 million , respectively. This increase of$12.0 million , or 48%, primarily resulted from the following: Cost of Revenues: Cost of revenues for the three months endedMarch 31, 2022 increased to$11.9 million from$4.2 million for the three months endedMarch 31, 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. This increase of$7.7 million , or 185%, is primarily due to the increase in content amortization of$6.3 million , which is primarily driven by the increase in program sales arrangements resulting in significant accelerated amortization, as well as an increase in the number and cost of titles published during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The balance of the increase in cost of revenues is primarily due to a$1.2 million increase in revenue share expense related to bundled and premier tier arrangements with other streaming services and an increase of$0.2 million in subtitling and broadcast costs. 20 Advertising & Marketing: Advertising and marketing expenses for the three months endedMarch 31, 2022 , increased to$14.8 million from$12.2 million for the three months endedMarch 31, 2021 . This increase of$2.5 million , or 21% is primarily due to an increase in digital advertising of$1.4 million , an increase in radio advertising of$3.6 million , partially offset by a decrease of$1.6 million in TV advertising and a decrease of$0.9 million in partner platforms, brand awareness, and other advertising compared to the prior year period. General and Administrative: General and administrative expenses for the three months endedMarch 31, 2022 increased to$10.5 million from$8.7 million for the three months endedMarch 31, 2021 . This increase of$1.8 million , or 20%, is primarily attributable to$1.4 million for incremental salaries and benefits in addition to several other changes that were not individually significant. We expect to incur additional expenses in future periods as we continue to invest in corporate infrastructure to support the Company's activities, including adding personnel and systems to our administrative and revenue-generating functions. Operating Loss
Operating loss for the three months endedMarch 31, 2022 andMarch 31, 2021 was$19.5 million and$15.2 million , respectively. The increase of$4.3 million , or 28%, in operating loss resulted from the increase in operating expenses of$12.0 million , or 48%, offset by an increase in revenue of$7.7 million , or 77%, in each case during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , as described above.
Change in Fair Value of Warrant Liability
For the three months endedMarch 31, 2022 , the Company recognized a$3.9 million gain related to the change in fair value of the warrant liability, which was due to a decrease in the fair value of the Private Placement Warrants for the quarter, compared to a loss of$3.8 million recognized during the three months endedMarch 31, 2021 , which was due to an increase in the fair value of the Private Placement Warrants in the prior period.
Interest and other income (expense)
Interest and other income (expense) for the three months endedMarch 31, 2022 was a$0.1 million expense compared to$0.3 million in income for the three months endedMarch 31, 2021 , primarily due to amortization of the Company's investment account with no comparable amount during the three months ended
March 31, 2021 . Equity Interests Loss For the three months endedMarch 31, 2022 , the Company recorded$0.2 million equity interests loss related to the equity investments in the Spiegel Venture and Nebula with no comparable income or loss in the three months endedMarch 31, 2021 . Provision for Income Taxes Due to generating a loss before income taxes in each of the three months endedMarch 31, 2022 andMarch 31, 2021 , we had a provision for income taxes of$45 thousand and$26 thousand , respectively. This increase of$19 thousand , or 73%, was primarily due to an increase in foreign withholding tax expense due to an increase in contracts executed with parties in foreign jurisdictions. The Company's 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 benefit for either federal or state income tax purposes.
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Net Loss
Net loss for the three months ended March 31, 2022 and March 31, 2021 was $15.9
million and $18.8 million , respectively. The decrease of net loss of $2.9
million , or 15%, is primarily due to the change in the fair value of the warrant
liability that resulted in a gain of $3.9 million for the three months ended
March 31, 2022 compared to a loss of $3.7 million for the three months ended
March 31, 2021 and the increase in revenue, partially offset by higher operating
expenses and equity interest loss.
Liquidity and Capital Resources
As ofMarch 31, 2022 , we had cash and cash equivalents, including restricted cash, of$24.9 million . In addition, the Company had available for sale investments in debt securities totaling$60.0 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 three months endedMarch 31, 2022 , we incurred a net loss of$15.9 million and used$12.3 million of net cash in operating activities, used$19.8 million of net cash in investing activities, while financing activities used$0.1 million of net cash.
We believe that our current cash levels and investments in debt securities that are readily convertible to cash will be adequate to support our ongoing operations, capital expenditures and working capital for at least the next twelve months.
Our principal uses of cash are to acquire content, promote our service through advertising and marketing, and provide for working capital to operate our business. We have experienced significant net losses since our inception, and, given the significant operating and capital expenditures associated with our business plan, we anticipate that we will continue to incur net losses. Cash Flows The following table presents our cash flows from operating, investing and financing activities for the three months endedMarch 31, 2022 andMarch 31, 2021 : Three months endedMarch 31, 2022 2021 (in thousands)
Net cash used in operating activities$ (12,287 ) $ (12,590 ) Net cash provided by (used in) investing activities 19,773 (135,653 ) Net cash (used in) provided by financing activities (137 )
148,879
Net increase in cash, cash equivalents and restricted cash
Cash Flow 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 three months endedMarch 31, 2022 andMarch 31, 2021 , we recorded a net cash outflow from operating activities of$12.3 million and$12.6 million , respectively, or a decreased outflow of$0.3 million , or 2%. The decreased outflow from operating activities was primarily due to a change in fair value of warrant liability of$7.7 million (from a loss of$3.8 million during the three months endedMarch 31, 2021 to a gain of$3.9 million during the three months endedMarch 31, 2022 ), an increase in the investment of content assets of$5.4 million , an increase in the change in content liabilities of$7.1 million , and a decrease in the change of deferred revenue of$1.9 million . These outflows are partially offset by an increase in the change in accounts receivable of$9.7 million due to larger collections in the current year period than in the prior year period, an increase in amortization of content assets of$6.3 million , an increase in the change in accrued expenses and other liabilities of$1.1 million and a decrease in net loss of$2.3 million during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . 22
Cash Flow Provided by (Used in) Investing Activities
Cash flow from investing activities consists of purchases, sales and maturities of investments, as well as equity investments and purchases of property and equipment.
During the three months endedMarch 31, 2022 andMarch 31, 2021 , we recorded a net cash inflow from investing activities of$19.8 million and a net cash outflow from investing activities of$135.6 million , respectively, or a decrease of cash outflow of$155.4 million , or 114%. The decrease in cash outflow from investing activities was primarily due to the decrease on purchases of available for sale investments of$140.1 million and a net increase in sales and maturities of$16.6 million . The Company also had cash outflows of$0.8 million related to quarterly contributions to the Nebula equity method investment during the three months endedMarch 31, 2022 , with no comparable activity during the three months endedMarch 31, 2021 .
Cash Flow Provided by (Used in) Financing Activities
During the three months endedMarch 31, 2022 andMarch 31, 2021 , we recorded net cash outflow from financing activities of$0.1 million and a net cash inflow from financing activities of$148.9 million , respectively. The net cash inflow during the three months endedMarch 31, 2021 of$148.9 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 of$54.9 million , and the exercise of stock options of$0.3 million , partially offset by the payments of transaction costs related to the issuance of common stock of$0.4 million . There was no comparable activity during the three months endedMarch 31, 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. 23 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 program sales. 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.
As a result of a sustained decrease in the Company's share price during the three months endedMarch 31, 2022 , we concluded that a triggering event had occurred and conducted impairment testing of our content assets. As a result of this review, we determined no impairment charges were necessary. Refer to the "Goodwill and intangible assets" section below for further details with respect to the impairment testing performed by the Company over its goodwill, definite-lived intangibles and other long-lived assets (including content assets) as ofMarch 31, 2022 .
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. As a result of a sustained decrease in the Company's share price during the three months endedMarch 31, 2022 , we concluded that a triggering event had occurred and conducted impairment testing of our goodwill and intangible assets. We determined that for purposes of this recoverability test, the lowest level of identifiable cash flows that are largely independent of other asset groups is at the entity level and as a result, we conducted the recoverability test at the entity level.
To determine the fair value of our identified entity level asset group, we used
a weighting of fair values derived from the income approach and the market
approach. Under the income approach, we project our future cash flows and
discount these cash flows to reflect their relative risk. The cash flows used
are consistent with those the Company uses in its internal planning, which
reflects actual business trends experienced and our long-term business strategy.
As such, key estimates and factors used in this method include, but are not
limited to, revenue, margin, and operating expense growth rates, as well as a
discount rate, and a terminal growth rate. Under the market approach, we use the
guideline company and guideline transaction methods to develop valuation
multiples and compare our company to similar publicly traded companies.
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.
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As a result of this review, we determined our asset group passed the
recoverability test as the carrying value of our asset group exceeded our
carrying value by approximately 10% and as a result, no impairment charges were
necessary. Overall, in the event there are future adverse changes in our
projected cash flows and/or changes in key assumptions, including but not
limited to an increase in our discount rate, lower market multiples, lower
revenue growth, lower margin, higher operating expenses, and/or a lower terminal
growth rate, we may be required to record a non-cash impairment charge to our
goodwill and intangible assets as well as other long-lived assets (including our
content assets). Such a non-cash charge would likely have a material adverse
effect on our consolidated statement of operations and balance sheet in the
reporting period of the charge. While management believes the assumptions used
in our impairment test are reasonable, the fair value estimate is most sensitive
to our discount rate and market multiple assumptions as these amounts are
reflective of the market's perception of our ability to achieve our projected
cash flows.
In the period followingMarch 31, 2022 , there has been a further decline in the Company's market capitalization, based upon the Company's publicly quoted share price, below the Company's carrying or book value. If this decline in our share price is sustained for the following reporting period, this would require further testing of our identified asset group, which may result in an impairment. Absent changes to our projected cash flows, we would adjust our discount rate and market multiple assumptions as these amounts are reflective of the market's perception of risks to achieving our projected cash flows and other economic factors. Those factors alone, or in combination with other factors, could cause our asset group carrying value to exceed its fair value, resulting in impairment. 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 Altice, 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 - Program Sales 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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