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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________________ 
FORM 10-Q
 ___________________________________________________________ 
(Mark One)
x☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended SeptemberJune 30, 20172020
or
o☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission File Number: 001-35669
 ___________________________________________________________
SHUTTERSTOCK, INC.
(Exact name of registrant as specified in its charter)
 ___________________________________________________________
________________________________________________________
Delaware80-0812659
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Shutterstock, Inc.
350 Fifth Avenue, 21st Floor
New York, NY 10118
(Address of principal executive offices, including zip code)
(646) (646) 710-3417
(Registrant’s telephone number, including area code)
 __________________________________________________________Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 ______________________________________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareSSTKNew York Stock Exchange
Indicate by check mark whether registrant:the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x☒ Yes   o☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x☒ Yes   o☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer ☐
Non-accelerated filer☐Smaller reporting company ☐
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
☐
If an emerging growth company, indicate by check mark if the registrant has elected not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o
☐Yesx☒No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding at October 27, 2017
Common Stock, $0.01 par value per share34,674,947
As of July 24, 2020, 35,695,665 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.


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Shutterstock, Inc.
FORM 10-Q
Table of Contents
For the Quarterly Period Ended SeptemberJune 30, 2017
2020
Page No.
Page No.
4
Consolidated Balance Sheets
4
Consolidated Statements of Operations
5
Consolidated Statements of Comprehensive Income
6
Consolidated Statements of Stockholders’ Equity
7
Consolidated Statements of Cash Flows
78
Notes to Consolidated Financial Statements
89
19
3134
3236
3337
3337
3337
Signatures
3439

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, particularly in the discussionsdiscussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. TheseOperations.” All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, are forward-looking. Examples of forward-looking statements include, but are not limited to, statements that involve expectations, plans or intentions (such as those relating toregarding future business, future results of operations or financial condition, future dividends, new or planned features, products or services, or management strategies) based on our management’s current beliefsstrategies and assumptions. Thesethe COVID-19 pandemic. You can identify many forward-looking statements can be identified by words such as “may”, “will”, “would”, “should”, “could”, “expect”, “anticipate”, “believe”, “estimate”, “intend”,“may,” “will,” “would,” “should,” “could,” “expect,” “aim,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. However, not all forward-looking statements contain these words. These forward-lookingForward-looking statements involve known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in ourthe forward-looking statements. Such risks and uncertainties include, among others, those discussed under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or the SEC, on February 27, 2017,13, 2020, under the caption “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which was filed with the SEC on April 28, 2020, and in our consolidated financial statements, related notes, and the other information appearing elsewhere in such report, as well as information appearing inAnnual Report, this reportQuarterly Report on Form 10-Q and our other filings with the SEC. AnyGiven these risks and uncertainties, you should not place undue reliance on these forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may occur and it is not possible for us to predict them all.statements. We do not intend, and, except as required by law, we undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless the context otherwise indicates, references in this Quarterly Report on Form 10-Q and our other filings with the SEC to the terms “Shutterstock”,“Shutterstock,” “the Company”, “we”,Company,” “we,” “our” and “us” refer to Shutterstock, Inc. and its subsidiaries. “Shutterstock”, “Bigstock”, “Offset”,“Shutterstock,” “Offset,” “Bigstock,” “Rex Features,” “PremiumBeat”, “Rex Features” and “Webdam”“Shutterstock Editor” and their logos are registered trademarks or logos appearing in this Quarterly Report on Form 10-Q and are the property of Shutterstock, Inc. or one of our subsidiaries. All other trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.
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PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.
Shutterstock, Inc.
Consolidated Balance Sheets
(In thousands, except par value amount)
(unaudited)
September 30, December 31,June 30,December 31,
2017 201620202019
   
ASSETS   ASSETS
Current assets:   Current assets:
Cash and cash equivalents$212,782
 $224,190
Cash and cash equivalents$311,157  $303,261  
Short-term investments22,500
 54,972
Accounts receivable, net44,896
 38,107
Accounts receivable, net of allowance of $3,608 and $3,579Accounts receivable, net of allowance of $3,608 and $3,57948,744  47,016  
Prepaid expenses and other current assets35,878
 22,569
Prepaid expenses and other current assets26,590  26,703  
Total current assets316,056
 339,838
Total current assets386,491  376,980  
Property and equipment, net77,770
 56,101
Property and equipment, net54,240  58,834  
Right-of-use assetsRight-of-use assets42,097  45,453  
Intangible assets, net43,015
 30,157
Intangible assets, net25,182  26,669  
Goodwill90,524
 49,271
Goodwill88,167  88,974  
Deferred tax assets, net18,342
 23,013
Deferred tax assets, net13,727  14,387  
Other assets6,842
 3,398
Other assets16,427  19,215  
Total assets$552,549
 $501,778
Total assets$626,331  $630,512  
LIABILITIES AND STOCKHOLDERS’ EQUITY
   
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:   Current liabilities:
Accounts payable$10,210
 $7,305
Accounts payable$4,504  $6,104  
Accrued expenses51,989
 41,106
Accrued expenses51,554  53,864  
Contributor royalties payable20,072
 20,473
Contributor royalties payable24,248  25,193  
Deferred revenue146,430
 122,235
Deferred revenue138,229  141,922  
Other liabilities1,665
 12,378
Other current liabilitiesOther current liabilities10,347  18,811  
Total current liabilities230,366
 203,497
Total current liabilities228,882  245,894  
Deferred tax liability, net1,664
 2,147
Lease liabilitiesLease liabilities44,280  47,313  
Other non-current liabilities13,139
 9,438
Other non-current liabilities9,669  9,160  
Total liabilities245,169
 215,082
Total liabilities282,831  302,367  
Commitments and contingencies (Note 6)
 
Commitments and contingencies (Note 12)Commitments and contingencies (Note 12)
Stockholders’ equity:   Stockholders’ equity:
Common stock, $0.01 par value; 200,000 shares authorized; 37,219 and 36,926 shares issued and 34,660 and 34,816 shares outstanding as of September 30, 2017 and December 31, 2016, respectively373
 369
Treasury stock, at cost; 2,559 and 2,110 shares as of September 30, 2017 and December 31, 2016, respectively(100,027) (77,567)
Common stock, $0.01 par value; 200,000 shares authorized; 38,245 and 38,055 shares issued and 35,687 and 35,497 shares outstanding as of June 30, 2020 and December 31, 2019, respectivelyCommon stock, $0.01 par value; 200,000 shares authorized; 38,245 and 38,055 shares issued and 35,687 and 35,497 shares outstanding as of June 30, 2020 and December 31, 2019, respectively382  381  
Treasury stock, at cost; 2,558 shares as of June 30, 2020 and December 31, 2019Treasury stock, at cost; 2,558 shares as of June 30, 2020 and December 31, 2019(100,027) (100,027) 
Additional paid-in capital268,565
 251,890
Additional paid-in capital319,412  312,824  
Accumulated comprehensive loss(4,601) (17,061)Accumulated comprehensive loss(8,414) (6,220) 
Retained earnings143,070
 129,065
Retained earnings132,147  121,187  
Total stockholders’ equity307,380
 286,696
Total stockholders’ equity343,500  328,145  
Total liabilities and stockholders’ equity$552,549
 $501,778
Total liabilities and stockholders’ equity$626,331  $630,512  
See Notes to Unaudited Consolidated Financial Statements.
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Shutterstock, Inc.
Consolidated Statements of Operations
(In thousands, except for per share data)
(unaudited)
Three Months Ended
September 30,		 Nine Months Ended
September 30,		 Three Months Ended
June 30,		Six Months Ended
June 30,
2017 2016 2017 2016 2020201920202019
       
Revenue$141,063
 $123,073
 $405,282
 $364,144
Revenue$159,230  $161,741  $320,515  $325,073  
       
Operating expenses:       Operating expenses:
Cost of revenue58,812
 50,184
 168,512
 150,492
Cost of revenue63,811  68,526  132,934  137,744  
Sales and marketing36,008
 32,977
 105,620
 91,636
Sales and marketing35,557  44,488  78,217  88,934  
Product development13,340
 11,604
 37,276
 34,800
Product development12,485  13,594  25,554  28,580  
General and administrative27,333
 17,020
 74,716
 54,629
General and administrative24,832  32,063  55,484  58,646  
Total operating expenses135,493
 111,785
 386,124
 331,557
Total operating expenses136,685  158,671  292,189  313,904  
Income from operations5,570
 11,288
 19,158
 32,587
Income from operations22,545  3,070  28,326  11,169  
Other income (expense), net130
 102
 2,095
 (122)
Other income, netOther income, net149  584  662  1,480  
Income before income taxes5,700
 11,390
 21,253
 32,465
Income before income taxes22,694  3,654  28,988  12,649  
Provision for income taxes698
 1,999
 6,582
 9,692
Provision for income taxes3,707  355  5,683  1,828  
Net income$5,002
 $9,391
 $14,671
 $22,773
Net income$18,987  $3,299  $23,305  $10,821  
       
Net income per share:       
Earnings per share:Earnings per share:
Basic$0.14
 $0.27
 $0.42
 $0.65
Basic$0.53  $0.09  $0.65  $0.31  
Diluted$0.14
 $0.26
 $0.42
 $0.64
Diluted$0.53  $0.09  $0.65  $0.30  
       
Weighted average shares outstanding:       Weighted average shares outstanding:
Basic34,643
 35,036
 34,607
 35,123
Basic35,65235,23235,58735,174
Diluted35,177
 35,824
 35,339
 35,855
Diluted35,90635,50435,89435,499
See Notes to Unaudited Consolidated Financial Statements.
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Shutterstock, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
Net income$18,987  $3,299  $23,305  $10,821  
Foreign currency translation gain / (loss)254  (1,027) (2,194) (982) 
Other comprehensive gain / (loss)254  (1,027) (2,194) (982) 
Comprehensive income$19,241  $2,272  $21,111  $9,839  
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
        
Net income$5,002
 $9,391
 $14,671
 $22,773
Foreign currency translation gain (loss)4,325
 (2,236) 12,460
 (4,641)
Unrealized gain on investments—
 34
 —
 252
Other comprehensive income (loss)4,325
 (2,202) 12,460
 (4,389)
Comprehensive income$9,327
 $7,189
 $27,131
 $18,384
 
See Notes to Unaudited Consolidated Financial Statements.
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Shutterstock, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
(unaudited)
Additional
Paid-in
Capital		Accumulated
Other
Comprehensive
Loss		Retained
Earnings
Common StockTreasury Stock
Three Months Ended June 30, 2020SharesAmountSharesAmountTotal
Balance at March 31, 202038,119  $381  2,558  $(100,027) $316,823  $(8,668) $119,218  $327,727  
Equity-based compensation—  —  —  —  3,636  —  —  3,636  
Issuance of common stock in connection with employee stock option exercises and RSU vesting180  2  —  —  627  —  —  629  
Common shares withheld for settlement of taxes in connection with equity-based compensation(54) (1) —  —  (1,674) —  —  (1,675) 
Cash dividends paid—  —  —  —  —  —  (6,058) (6,058) 
Other comprehensive loss—  —  —  —  —  254  —  254  
Net income—  —  —  —  —  —  18,987  18,987  
Balance at June 30, 202038,245  $382  2,558  $(100,027) $319,412  $(8,414) $132,147  $343,500  
Three Months Ended June 30, 2019
Balance at March 31, 201937,759  $378  2,558  $(100,027) $292,458  $(6,426) $108,601  $294,984  
Equity-based compensation—  —  —  —  7,751  —  —  7,751  
Issuance of common stock in connection with employee stock option exercises and RSU vesting83  1  —  —  4  —  —  5  
Common shares withheld for settlement of taxes in connection with equity-based compensation(26) —  —  —  (1,091) —  —  (1,091) 
Other comprehensive income—  —  —  —  —  (1,027) —  (1,027) 
Net income—  —  —  —  —  —  3,299  3,299  
Balance at June 30, 201937,816  $379  2,558  $(100,027) $299,122  $(7,453) $111,900  $303,921  
Six Months Ended June 30, 2020
Balance at December 31, 201938,055  $381  2,558  $(100,027) $312,824  $(6,220) $121,187  $328,145  
Cumulative effect of accounting change (Note 1)—  —  —  —  —  —  (247) (247) 
Balance at January 1, 202038,055  $381  2,558  $(100,027) $312,824  $(6,220) $120,940  $327,898  
Equity-based compensation—  —  —  —  9,396  —  —  9,396  
Issuance of common stock in connection with employee stock option exercises and RSU vesting289  3  —  —  626  —  —  629  
Common shares withheld for settlement of taxes in connection with equity-based compensation(99) (2) —  —  (3,434) —  —  (3,436) 
Cash dividends paid—  —  —  —  —  —  (12,098) (12,098) 
Other comprehensive income—  —  —  —  —  (2,194) —  (2,194) 
Net income—  —  —  —  —  —  23,305  23,305  
Balance at June 30, 202038,245  $382  2,558  $(100,027) $319,412  $(8,414) $132,147  $343,500  
Six Months Ended June 30, 2019
Balance at December 31, 201837,618  $376  2,558  $(100,027) $291,710  $(6,471) $101,079  $286,667  
Equity-based compensation—  —  —  —  12,375  —  —  12,375  
Issuance of common stock in connection with employee stock option exercises and RSU vesting312  4  —  —  218  —  —  222  
Common shares withheld for settlement of taxes in connection with equity-based compensation(114) (1) —  —  (5,181) —  —  (5,182) 
Other comprehensive income—  —  —  —  —  (982) —  (982) 
Net income—  —  —  —  —  —  10,821  10,821  
Balance at June 30, 201937,816  $379  2,558  $(100,027) $299,122  $(7,453) $111,900  $303,921  
See Notes to Unaudited Consolidated Financial Statements.
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Shutterstock, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Nine Months Ended
September 30,		 Six Months Ended
June 30,
2017 2016 20202019
   
CASH FLOWS FROM OPERATING ACTIVITIES 
  
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income$14,671
 $22,773
Net income$23,305  $10,821  
Adjustments to reconcile net income to net cash provided by operating activities:   Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization24,948
 14,181
Depreciation and amortization21,370  25,319  
Deferred taxes4,346
 (3,453)Deferred taxes693  (1,312) 
Non-cash equity-based compensation20,128
 21,110
Non-cash equity-based compensation9,396  12,375  
Change in fair value of contingent consideration—
 2,600
Settlement of contingent consideration liability in excess of acquisition-date fair value(6,255) (1,640)
Bad debt expense981
 3,338
Bad debt expense1,086  (635) 
Chargeback and sales refund reserves—
 (15)
Changes in operating assets and liabilities:   Changes in operating assets and liabilities:
Accounts receivable(5,361) (13,565)Accounts receivable(3,279) (2,746) 
Prepaid expenses and other current and non-current assets(10,551) (2,882)Prepaid expenses and other current and non-current assets49  1,944  
Accounts payable and other current and non-current liabilities11,282
 12,586
Accounts payable and other current and non-current liabilities(4,045) 1,899  
Long-term incentives related to acquisitionsLong-term incentives related to acquisitions(7,759) —  
Contributor royalties payable(681) 1,702
Contributor royalties payable(840) 1,059  
Deferred revenue18,002
 19,443
Deferred revenue(3,633) (1,981) 
Net cash provided by operating activities$71,510
 $76,178
Net cash provided by operating activities$36,343  $46,743  
   
CASH FLOWS FROM INVESTING ACTIVITIES   CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures(37,626) (26,747)Capital expenditures(13,966) (13,726) 
Investment sales (purchases), net32,786
 (5,182)
Acquisition of business, net of cash acquired(49,512) —
Other investments/advances(3,101) —
Acquisition of digital content(2,568) (6,214)
Security deposit (payment)/release30
 (799)
Proceeds from sale of Webdam, netProceeds from sale of Webdam, net—  2,500  
Acquisition of contentAcquisition of content(1,577) (1,277) 
Security deposit releaseSecurity deposit release105  25  
Net cash used in investing activities$(59,991) $(38,942)Net cash used in investing activities$(15,438) $(12,478) 
   
CASH FLOWS FROM FINANCING ACTIVITIES   CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury shares(24,977) (44,916)
Proceeds from exercise of stock options1,369
 8,235
Proceeds from exercise of stock options629  218  
Proceeds from issuance of common stock under 2012 Employee Stock Purchase Plan—
 809
Cash paid related to settlement of employee taxes related to RSU vesting(5,791) —
Cash paid related to settlement of employee taxes related to RSU vesting(3,436) (5,181) 
Settlement of contingent consideration liability(3,745) (2,360)
Net cash (used in) provided by financing activities$(33,144) $(38,232)
Payment of cash dividendPayment of cash dividend(12,098) —  
Net cash used in financing activitiesNet cash used in financing activities$(14,905) $(4,963) 
Effect of foreign exchange rate changes on cash10,217
 (2,311)Effect of foreign exchange rate changes on cash(717) (1,085) 
Net decrease in cash and cash equivalents(11,408) (3,307)
Cash and cash equivalents, beginning of period224,190
 241,304
Cash and cash equivalents, end of period$212,782
 $237,997
Net increase in cash, cash equivalents and restricted cashNet increase in cash, cash equivalents and restricted cash5,283  28,217  
Cash, cash equivalents and restricted cash, beginning of periodCash, cash equivalents and restricted cash, beginning of period305,874  233,465  
Cash, cash equivalents and restricted cash, end of periodCash, cash equivalents and restricted cash, end of period$311,157  $261,682  
   
Supplemental Disclosure of Cash Information:   Supplemental Disclosure of Cash Information:
Cash paid for income taxes$4,137
 $16,316
Cash paid for income taxes$927  $1,480  
See Notes to Unaudited Consolidated Financial Statements.
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Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)









(1) Summary of Operations and Significant Accounting Policies
Summary of Operations
Shutterstock Inc., together with its subsidiaries (collectively, the(the “Company” or “Shutterstock”), is a global technology company that has createdoffering a two-sided marketplace for creative professionalsplatform, which provides high-quality content, tools and services to license content.creative professionals. The content licensed by the Company’s librarycustomers includes:
•Images - consisting of creative content includes: (a) digital imagery, which consists of licensed photographs, vectors illustrations and video clips that customers useillustrations. Images are typically used in their visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and other similar uses.
•Footage - consisting of video content;clips, premium footage filmed by industry experts and (b) commercial music, which consistscinema grade video effects, available in HD and 4K formats. Footage is often integrated into websites, social media, marketing campaigns and cinematic productions.
•Music - consisting of high-quality music tracks and sound effects, and iswhich are often used to complement the digital imagery. images and footage.
The Company licenses creative content to its customers. Contributors upload their creative content to the Company’s websitesweb properties in exchange for royalty payments based on customer download activity. The Company also offers digital asset management services through its cloud-based digital asset management platform. This service provides tools for customers to better manage creative content and brand management assets.
Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all information and footnotes required by GAAP for complete financial statements.
The interim consolidated balance sheetConsolidated Balance Sheet as of SeptemberJune 30, 2017, consolidated statements2020, and the Consolidated Statements of operationsOperations, Comprehensive Income and comprehensive incomeStockholders’ Equity for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, and consolidated statementthe Consolidated Statements of cash flowsCash Flows for the ninesix months ended SeptemberJune 30, 20172020 and 20162019, are unaudited. The consolidated balance sheetConsolidated Balance Sheet as of December 31, 2016,2019, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP. These unaudited interim financial statements have been prepared on a basis consistent with the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, which include onlyall normal recurring adjustments necessary to fairly state fairly the Company’s financial position as of SeptemberJune 30, 20172020, and its consolidated results of operations, comprehensive income, stockholders’ equity for the three and six months ended June 30, 2020 and 2019, and its cash flows for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. The financial data and the other financial information disclosed in the notes to the financial statements related to these periods are also unaudited. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 20172020 or for any other future annual or interim period.
These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 20162019 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February 27, 2017.13, 2020. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
During the second quarter of 2017, the Company recorded Certain immaterial adjustments to its unaudited condensed consolidated financial statements to: (1) reduce revenue by approximately $0.6 million and (2) increase general and administrative expense by approximately $0.1 million, related to prior periods. During the third quarter of 2017, the Company recorded an immaterial adjustment to its unaudited condensed consolidated financial statements to increase revenue by approximately $0.9 million, related to prior periods. The Company has concluded that the impact of these adjustments is not material to the results of operations or financial position for the periods in which these adjustments were recorded nor any prior quarterly or annual period financial statements.
Certain changes in presentation have been made to conform the prior period presentation to current period reporting.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements. Actual results could differ from those estimates. Such estimates include, but are not limited to, the determination of the allowance for doubtful accounts, the volume of expected unused licenses for our subscription-based products, the assessment of recoverability of property and equipment, the fair value of acquired goodwill and intangible assets, the grant-date fair value of non-cash equity-based compensation, the assessment of recoverability of deferred tax assets, and the measurement of certainincome tax and contingent non-income tax liabilities.liabilities and the determination of the incremental borrowing rate used to calculate the lease liability.

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Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)







Cash, Cash Equivalents and Restricted Cash
The following represents the Company’s cash and cash equivalents and restricted cash relates to security deposits for its office leases. Asbalances as of SeptemberJune 30, 20172020 and December 31, 2016,2019 (in thousands):
 As of June 30, 2020As of December 31, 2019
Cash and cash equivalents$311,157  $303,261  
Restricted cash—  2,613  
Total cash, cash equivalents and restricted cash$311,157  $305,874  
The Company’s cash and cash equivalents consist of cash on hand and bank deposits. These assets are stated at cost, which approximates fair value.
As of March 31, 2020, the Company had restrictedwas no longer required to provide cash of approximately $2.6 million in other assets that related to the leasecollateral for its headquarters inletter of credit for its New York City which expires in 2029. The carrying value of restricted cash approximates fair value.headquarters, and, accordingly, these funds are no longer restricted.
Allowance for Doubtful Accounts
The Company’s accounts receivable consistconsists of customer obligations due under normal trade terms, carried at their face value less an allowance for doubtful accounts, if required. The Company determines its allowance for doubtful accounts based on an evaluation of the aging of its accounts receivable and on a customer-by-customer basis where appropriate. The Company’s reserve analysis contemplates the Company’s historical loss rate on receivables, specific customer situations and the economic environments in which the Company operates.
Historically, the Company used an incurred loss model to calculate its allowance for doubtful accounts. Upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”) on January 1, 2020, the Company shifted to a current expected credit loss model.
During the ninesix months ended SeptemberJune 30, 2017,2020, the Company recorded bad debt expense which increased the allowance for doubtful accounts, was $1.0 million, and write-offs and other adjustments, which decreased the allowance for doubtful accounts, were $2.5of $1.1 million. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company’s allowance for doubtful accounts was approximately $4.0 million and $5.5 million, respectively, which was$3.6 million. The allowance for doubtful accounts is included as a reduction of accounts receivable.
Deferred Rent
The Company records rent expense on a straight-line basis over the term of the related lease. The difference between the rent expense recognized and the actual payments made in accordance with the lease agreement is recognized as a deferred rent liabilityreceivable on the Company’s balance sheet. As of September 30, 2017 and December 31, 2016, the Company had deferred rent of $11.1 million and $8.6 million, respectively, which was included in other non-current liabilities.Consolidated Balance Sheets.
Chargeback and Sales Refund Allowance
The majority of the Company’s customers purchase products by making an electronic payment with a credit card at the time of a transaction. The Company establishes a chargeback allowance and sales refund reserve allowance based on factors surrounding historical credit card chargeback trends, historical sales refund trends and other information. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company’s combined allowance for chargebacks and sales refunds was $0.6$0.4 million, which was included inas a component of other liabilities.current liabilities on the Consolidated Balance Sheets.
Recently Adopted Accounting Standard UpdatesRevenue Recognition
In March 2016,The majority of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employees Share-Based Payment Accounting (“ASU 2016-09”). This ASU changes how companies accountCompany’s revenue is earned from the license of content. Content licenses are generally purchased on a monthly or annual basis, whereby a customer pays for certain aspectsa predetermined quantity of share-based payment awards to employees, includingcontent that may be downloaded over a specific period of time, or, on a transactional basis, whereby a customer pays for individual content licenses at the requirement for all income tax effects related to settlementstime of share-based payment awards be reported in earnings as an increase or decrease to income tax expense, providing the Company an accounting policy election to either recognize forfeitures as they occur or record an estimate, and requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows.download. 
The Company adopted ASU 2016-09recognizes revenue upon the satisfaction of performance obligations, which generally occurs when content is downloaded by a customer. The Company recognizes revenue on January 1, 2017. All income tax effects related to settlements of share-based payment awards will be reported as an increase or decrease toboth its subscription-based and transaction-based products when content is downloaded, at which time the provision for income taxes.license is provided. In addition, starting January 1, 2017,management estimates expected unused licenses for subscription-based products and recognizes the Company will accountestimated revenue associated with the unused licenses as digital content is downloaded and licenses are obtained for forfeitures as they occursuch content by the customer during the subscription period. The estimate of unused licenses is based on historical download activity and asfuture changes in the estimate could impact the timing of January 1, 2017, recognized a $0.7 million reduction to retained earnings as the cumulative effect of the change in accounting principle. The Company adopted the cash flow presentation component of ASU 2016-09 retrospectively, and accordingly, decreased cash flows from operating activities by $0.6 million and increased cash flows from financing activities by $0.6 million for the nine months ended September 30, 2016.
Recently Issued Accounting Standard Updates
In November 2016, the FASB issued ASU 2016-18, Statements of Cash Flows (Topic 230): Restricted Cash, which requires entities to present restricted cash with cash and cash equivalents on the statement of cash flows when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact of adopting this new accounting standard on its financial statements. The balancerevenue recognition of the Company’s restricted cash was $2.6 millionsubscription products. The Company expenses contract acquisition costs as incurred, to the extent that the amortization period would otherwise be one year or less.
Collectability is reasonably assured at the time the electronic order or contract is entered. The majority of September 30, 2017.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments. ASU 2016-13 replaces the current incurred loss impairment methodologyCompany’s customers purchase products by making an electronic payment with a methodologycredit card at the time of a transaction. Customer payments received in advance of revenue recognition are contract liabilities and are recorded as deferred revenue. Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms. Collectability for
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Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)







customers who pay on credit terms allowing for payment beyond the date at which service commences is based on a credit evaluation for certain new customers and transaction history with existing customers. 
The Company recognizes revenue gross of contributor royalties because the Company is the principal in the transaction as it is the party responsible for the performance obligation and it controls the product or service before transferring it to the customer. The Company also licenses content to customers through third-party resellers. Third-party resellers sell the Company’s products directly to customers as the principal in those transactions. Accordingly, the Company recognizes revenue net of costs paid to resellers.
Recently Adopted Accounting Standard Updates
In June 2016, the FASB issued ASU 2016-13, which as amended, replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. The ASU is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Adoption of this guidance iswas required, prospectively, for annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Company is evaluatingadopted ASU 2016-13, as amended, effective January 1, 2020 using the impactmodified retrospective method and recorded a cumulative-effect adjustment of adopting this new accounting standard on its financial statements.$0.2 million, net of tax, in retained earnings as of January 1, 2020.
In February 2016,August 2018, the FASB issued ASU 2016-02, Leases (Topic 842). 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2016-02 requires that the rights2018-13”), which eliminates, adds and obligations created by leases with a duration greater than 12 months be recordedmodifies certain disclosure requirements for fair value measurements as assets and liabilities on the balance sheetpart of the lessee. TheFASB’s disclosure framework project. Adoption of this guidance is effectivewas required for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018 and can be applied using a modified retrospective approach for all leases entered into before the effective date. Early adoption is permitted.2019. The Company is evaluating theadopted ASU 2018-13, effective January 1, 2020. The impact of adoptingadoption of this new accounting standard on itsthe consolidated financial statements.statements, including accounting policies, processes and systems, was not material.
In May 2014,August 2018, the FASB issued ASU 2014-09, Revenue from Contracts2018-15, Customer’s Accounting For Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with Customers (Topic 606). ASU 2014-09, and its related amendments, provides a unified model to determine when and how revenue is recognized and requires certain additional disclosures around the nature, amount, timing, and uncertaintyrequirements for capitalizing implementation costs incurred for an internal-use software license. Adoption of revenue and cash flows arising from customers. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchangethis guidance was required for those goods or services. ASU 2014-09 will be effective for the fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and early adoption is permitted. Entities are permitted to choose to adopt the new guidance (1) prospectively for eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company adopted ASU 2018-15 on a prospective basis, effective January 1, 2020. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
Recently Issued Accounting Standard Updates
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes (“ASU-2019-12”). ASU 2019-12 eliminates certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes, enacted changes in tax laws or rates and clarifies the accounting transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. This new guidance may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective).
The Company expects to adopt this guidance2020 and interim periods within those fiscal years. We are currently in the first quarterprocess of fiscal 2018 and apply the modified retrospective approach. The Company is evaluating the impact of adopting this new accounting standardeffect that ASU 2019-12 will have on its financial statements. Management is progressing with its implementation plan and is considering relevant guidance and industry interpretations as it concludes on its performance obligations, variable consideration, and timing of revenue recognition.the Company's Consolidated Financial Statements.

(2) Fair Value Measurements and Other Long-term Investments
Fair Value Measurements
The following tables present the Company’sCompany had no assets or liabilities requiring fair value hierarchy for its assets and liabilities (in thousands):
 As of September 30, 2017
 Aggregate Fair Value Level 1 Level 2 Level 3
Assets:       
Money market accounts$33,141
 $33,141
 $—
 $—
Commercial paper22,500
 —
 22,500
 —
Total assets measured at fair value$55,641
 $33,141
 $22,500
 $—
 As of December 31, 2016
 Aggregate Fair Value Level 1 Level 2 Level 3
Assets:       
Money market accounts$81,623
 $81,623
 $—
 $—
Commercial paper$54,972
 —
 54,972
 —
Total assets measured at fair value$136,595
 $81,623
 $54,972
 $—
Liabilities:       
Acquisition related contingent consideration$10,000
 $—
 $—
 $10,000
Total liabilities measured at fair value$10,000
 $—
 $—
 $10,000
Money Market Accounts
Cash equivalents include money market accounts which are classified as a level 1 measurement based on quoted prices in active markets for identical assets that the Company can access at the measurement date. The total amount of money market accounts included in cash and cash equivalents was $33.1 million and $81.6 milliondisclosures as of SeptemberJune 30, 2017 and2020 or December 31, 2016, respectively.2019.
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Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)







Commercial Paper
The Company’s short-term investments consist of commercial paper with original maturities of 90 days or less. Commercial paper is classified as a level 2 measurement based on quoted market prices for identical assets, which are subject to infrequent transactions. The total amount of commercial paper included in short-term investments was $22.5 million and $55.0 million as of September 30, 2017 and December 31, 2016, respectively.
Acquisition-Related Contingent Consideration
As of December 31, 2016, the settlement amount of the contingent consideration related to the Company’s acquisition of PremiumBeat was determined to be $10.0 million and was included in other liabilities. This contingency was considered a level 3 measurement. No changes in fair value were recorded during the nine months ended September 30, 2017. The contingent consideration of $10.0 million was paid in March 2017, and there was no remaining liability as of September 30, 2017.
Other Fair Value Measurements
Cash,The carrying amounts of cash, accounts receivable, restricted cash, accounts payable and accrued expenses and deferred revenue carrying amounts approximate fair value because of the short-term nature of these instruments. The Company’s non-financial assets, which include property and equipment, intangible assets and goodwill, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and the Company is required to evaluate thea non-financial asset for impairment, whether due to certain triggering events or because annual impairment testing is required, a resulting asset impairment would require that the non-financial assetsasset be recorded at fair value.
Other Long-term Investments
Investment in ZCool Technologies Limited (“ZCool”)
On January 4, 2018, the Company invested $15.0 million in convertible preferred shares issued by ZCool (the “Preferred Shares”), which is equivalent to a 25% fully diluted equity ownership interest. ZCool’s primary business is the operation of an e-commerce platform in China whereby customers can pay to license content contributed by creative professionals. ZCool and its affiliates have been the exclusive distributor of Shutterstock creative content in China since 2014.
ZCool is a variable interest entity that is not consolidated because the Company is not the primary beneficiary. The Preferred Shares are not deemed to be in-substance common stock and are accounted for using the measurement alternative for equity investments with no readily determinable fair value. The Preferred Shares are reported at cost, adjusted for impairments or any observable price changes in orderly transactions for identical or similar investments issued by ZCool.
On a quarterly basis, the Company evaluates the carrying value of the Preferred Shares for impairment, which includes an assessment of ZCool’s revenue growth, earnings performance, working capital and the general regional market conditions. As of June 30, 2020, no adjustments to the carrying value were identified as a result of this assessment. Changes in performance negatively impacting ZCool’s operating results and cash flows could result in the Company recording an impairment charge on the Preferred Shares in future periods.
As of June 30, 2020 and December 31, 2019, the Company’s total investment in ZCool is $15.0 million, which is reported within other assets on the Consolidated Balance Sheets.

(3) Property and Equipment
Property and equipment is summarized as follows (in thousands):
As of September 30, 2017 As of December 31, 2016 As of June 30, 2020As of December 31, 2019
Computer equipment and software$101,496
 $63,711
Computer equipment and software$179,580  $165,950  
Furniture and fixtures9,948
 3,434
Furniture and fixtures10,211  10,199  
Leasehold improvements18,280
 20,944
Leasehold improvements19,260  19,203  
Property and equipment129,724
 88,089
Property and equipment209,051  195,352  
Less accumulated depreciation(51,954) (31,988)Less accumulated depreciation(154,811) (136,518) 
Property and equipment, net$77,770
 $56,101
Property and equipment, net$54,240  $58,834  
Depreciation expense related to property and equipment was $7.9$9.6 million and $3.9$10.5 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $19.9$18.9 million and $10.4$21.1 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. DepreciationCost of revenues includes depreciation expense is included in cost of revenue$8.6 million and general$9.3 million for the three months ended June 30, 2020 and 2019, respectively, and $16.8 million and $18.6 million for the six months ended June 30, 2020 and 2019, respectively. General and administrative expense based onincludes depreciation expense of $1.0 million and $1.2 million for the nature ofthree months ended June 30, 2020 and 2019, respectively, and $2.1 million and $2.5 million for the asset being depreciated.six months ended June 30, 2020 and 2019, respectively.
Capitalized Internal-Use Software
The Company capitalized costs related to the development of internal-use software of $11.2$6.5 million and $6.5$5.8 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $25.8$13.1 million and $12.8$12.3 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Capitalized amounts are included as a component of property and equipment under computer equipment and software.software on the Consolidated Balance Sheets.
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The portion of total depreciation expense related to capitalized internal-use software was $4.1$7.8 million and $1.0$7.5 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $9.2$14.9 million and $2.1$14.8 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Depreciation expense related to capitalized internal-use software is included in cost of revenue and general and administrative expense.in the Consolidated Statements of Operations.
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had capitalized internal-use software of $37.0$39.9 million and $20.3$41.8 million, respectively, net of accumulated depreciation, which was included in property and equipment, net.
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)




(4) Goodwill and Intangible Assets and Acquisition Activity
Goodwill
The Company’s goodwill balance is attributable to its Image (formerly, “Bigstock”), Editorial, Music and WebdamContent reporting unitsunit and is tested for impairment at least annually on October 1 or upon a triggering event. Image, Music and Editorial are included inNo triggering events were identified during the Company's “Content Business” reporting segment while Webdam is included in the non-reportable “Other Category”. six months ended June 30, 2020.
The following table summarizes the changes in the Company’s goodwill balance by reportable and non-reportable segments through Septemberduring the six months ended June 30, 20172020 (in thousands):
Goodwill
Balance as of December 31, 2019$88,974 
Foreign currency translation adjustment(807)
Balance as of June 30, 2020$88,167 
 Consolidated Content Business Other Category
Balance as of December 31, 2016$49,271
 $40,508
 $8,763
Goodwill related to acquisitions$37,834
 37,834
 —
Foreign currency translation adjustment3,419
 3,419
 —
Balance as of September 30, 2017$90,524
 $81,761
 $8,763
No triggering events were identified during the nine months ended September 30, 2017.
Intangible Assets
Intangible assets consisted of the following as of SeptemberJune 30, 20172020 and December 31, 20162019 (in thousands):
As of September 30, 2017 As of December 31, 2016 As of June 30, 2020As of December 31, 2019
Gross
Carrying
Amount
 
Accumulated
Amortization
 Weighted
Average Life
(Years)		 Gross
Carrying
Amount		 Accumulated
Amortization		 Gross
Carrying
Amount		Accumulated
Amortization		Weighted
Average Life
(Years)		Gross
Carrying
Amount		Accumulated
Amortization
Amortizing intangible assets: 
  
      Amortizing intangible assets:   
Customer relationships$23,314
 $(6,404) 9 $16,712
 $(4,344)Customer relationships$16,982  $(9,648) 9$17,729  $(9,294) 
Trade name7,093
 (3,000) 7 6,677
 (2,030)Trade name6,237  (5,778) 76,517  (5,941) 
Developed technology11,399
 (3,472) 3 3,224
 (1,934)Developed technology4,677  (4,368) 44,841  (4,226) 
Contributor content16,452
 (2,648) 11 12,958
 (1,386)Contributor content24,812  (7,883) 923,510  (6,626) 
Patents259
 (64) 18 227
 (52)Patents259  (108) 18259  (100) 
Domain name160
 (73) 12 160
 (55)
Total$58,677
 $(15,662)   $39,958
 $(9,801)Total$52,967  $(27,785)  $52,856  $(26,187) 
Amortization expense was $2.3$1.2 million and $1.2$2.9 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $5.1$2.5 million and $3.8$4.2 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Cost of revenue includes amortization expense of $0.7 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $1.3 million and $0.9 million for the six months ended June 30, 2020 and 2019, respectively. General and administrative expense includes amortization expense of $0.5 million and $2.4 million for the three months ended June 30, 2020 and 2019, respectively, and $1.2 million and $3.3 million for the six months ended June 30, 2020 and 2019, respectively.
The Company determined that there was no indication of impairment of the intangible assets for any period presented. Estimated amortization expense for the next five years is: $2.2$2.9 million for the remaining threesix months of 2017, $7.8 million in 2018, $7.7 million in 2019, $5.5 million in 2020, $3.7$5.1 million in 2021, $3.0$4.8 million in 2022, $4.1 million in 2023, $3.2 million in 2024, $1.9 million in 2025 and $13.1$3.2 million thereafter.
Acquisition Activity
2017 Acquisition Activity
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Flashstock Technology, Inc.
On July 7, 2017, the Company acquired all
Table of the shares of Flashstock Technology, Inc. (“Flashstock”) pursuant to a stock purchase agreement. The transaction was accounted for using the acquisition method and, accordingly, the results of the acquired business have been included in the Company’s results of operations from the acquisition date.
Flashstock is a Toronto-based company that enables the creation of custom content through a propriety software platform. The Company believes this acquisition will strengthen the Company’s strategic position and serve as the foundation for the Company to bring a comprehensive custom content offering to market.
The fair value of consideration transferred in this business combination was allocated to the intangible and tangible assets acquired and liabilities assumed at the acquisition date, with the remaining unallocated amount recorded as goodwill.
The total purchase price was $51.2 million of which $50.9 million was paid with existing cash on hand in the three months ended September 30, 2017 and an estimated $0.3 million is to be paid in the fourth quarter of 2017 for the settlement ofContents
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)







(5) Accrued Expenses
working capital adjustments. The unpaid portionAccrued expenses consisted of the purchase price is included in accrued expenses as of September 30, 2017. As required by the stock purchase agreement, the Company is in the process of finalizing the working capital adjustments; accordingly, management has used their best estimate in the initial purchase price allocation as of the date of these financial statements.
The aggregate purchase price was allocated to the assets acquired and liabilities assumed as followsfollowing (in thousands):
As of June 30, 2020As of December 31, 2019
Compensation$18,902  $20,776  
Non-income taxes16,316  15,332  
Website hosting and marketing fees8,343  8,657  
Other expenses7,993  9,099  
Total accrued expenses$51,554  $53,864  

(6) Stockholders’ Equity and Equity-Based Compensation
Assets: 
Cash and cash equivalents$1,330
Accounts receivable2,439
Prepaid expenses and other current assets205
Intangible Assets: 
Customer relationships5,400
Developed technology8,100
Goodwill37,834
Total assets acquired55,308
Liabilities: 
Accrued expenses(279)
Accounts payable(99)
Deferred tax liability, net(164)
Deferred revenue(3,540)
Total liabilities acquired(4,082)
Net assets acquired$51,226
Stockholders’ Equity
Common Stock
The identifiable intangible assets haveCompany issued approximately 126,000 and 57,000 shares of common stock during the three months ended June 30, 2020 and 2019, respectively, and 190,000 and 198,000 for the six months ended June 30, 2020 and 2019, respectively, primarily related to the exercise of stock options and the vesting of Restricted Stock Units (“RSUs”).
Treasury Stock
In October 2015, the Company’s Board of Directors approved a weighted average lifeshare repurchase program, authorizing the Company to purchase up to $100 million of approximatelyits common stock. In February 2017, the Company’s Board of Directors approved an increase to the share repurchase program, authorizing the Company to repurchase up to an additional $100 million of its outstanding common stock. During the six yearsmonths ended June 30, 2020 and 2019, the Company did not repurchase any shares of its common stock under the share repurchase program. As of June 30, 2020, the Company had $100 million of remaining authorization for purchases under the share repurchase program.
The Company expects to fund future repurchases, if any, through a combination of cash on hand, cash generated by operations and future financing transactions, if appropriate. Accordingly, the share repurchase program is subject to the Company having available cash to fund repurchases. Under the share repurchase program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.
Dividends
The Company declared and paid cash dividends of $0.17 and $0.34 per share of common stock, or $6.1 million and $12.1 million, during the three and six months ended June 30, 2020.
On July 20, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share of outstanding common stock payable on September 17, 2020 to stockholders of record at the close of business on September 3, 2020. Future declaration of dividends are being amortizedsubject to the final determination of the Board of Directors, and will depend on, a straight-line basis. among other things, the Company’s future financial condition, results of operations, capital requirements, capital expenditure requirements, contractual restrictions, anticipated cash needs, business prospects, provisions of applicable law and other factors the Board of Directors may deem relevant.
Equity-Based Compensation
The Company recognizes stock-based compensation expense for all equity-based payment awards, including employee stock options and RSUs granted under the Company’s Amended and Restated 2012 Omnibus Equity Incentive Plan (the “2012 Plan”), based on the fair value of each award on the customer relationships was determined using a variation of the income approach known as the multiple-period excess earnings method. The fair value of the developed technology was determined using the relief-from-royalty method.
The goodwill arising from the transaction is primarily attributable to expected operational synergies and approximately 9% will be deductible for income tax purposes.
In connection with the acquisition, the Company recorded approximately $0.1 million and $0.8 million of professional fees in the three and nine months ended September 30, 2017, respectively. The professional fees are included in general and administrative expense.
The operations of the acquired entity have been integrated into the Company’s operations from the acquisitiongrant date. The following unaudited pro forma consolidated financial information reflects the results of operations of the Company for the three and nine months ended September 30, 2017 and 2016, as if the Flashstock acquisition was had been completed on January 1, 2016, after giving effect to certain purchase accounting adjustments, primarily related to intangible assets and deferred revenue. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of what the Company’s operating results would have been, had the acquisitions actually taken place at the beginning of the period (in thousands):
14
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Revenue       
As reported$141,063
 $123,073
 $405,282
 $364,144
Pro forma141,888
 123,735
 409,618
 365,720
Income before income taxes       
As reported$5,700
 $11,390
 $21,253
 $32,465
Pro forma6,729
 10,013
 19,105
 28,969
The Company has performance-based bonus arrangements with certain Flashstock employees who are now employeesTable of Shutterstock. These employees are entitled to additional compensation if: (i) the custom content business achieves certain financial targets for the 2019 calendar year and (ii) the individual is employed by Shutterstock as of December 31, 2019. TheseContents
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)







performance-based bonuses will be reported as period expenses within “Other (expense) income, net”The following table summarizes non-cash equity-based compensation expense, net of forfeitures, by financial statement line item included in the consolidated statementsaccompanying Consolidated Statements of operations,Operations for the three and are not considered part of the Flashstock purchase price.six months ended June 30, 2020 and 2019 (in thousands): 
2016 Acquisition Activity
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Cost of revenue$99  $105  $150  $190  
Sales and marketing374  675  834  1,257  
Product development1,068  1,252  2,193  2,427  
General and administrative2,095  5,719  6,219  8,501  
Total$3,636  $7,751  $9,396  $12,375  
The Picture Desk
On September 1, 2016,following table summarizes non-cash equity-based compensation expense, net of forfeitures, by award type included in the Company acquired content assetsaccompanying Consolidated Statements of Operations for the three and intellectual property of The Picture Desk Limited, which includes over 700,000 images from two image collections: The Art Archivesix months ended June 30, 2020 and The Kobal Collection, pursuant to an asset purchase agreement.  The total purchase price consisted of a cash payment of $3.9 million including transaction costs, which has been recorded as an addition to intangible assets, of which $3.6 million has been recorded under contributor content with an estimated useful life of 15 years, and the remainder has been recorded under trade name with an estimated useful life of 7 years.
(5) Accrued Expenses
Accrued expenses consisted of the following2019 (in thousands):
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Stock options$414  $2,176  $1,730  $3,067  
RSUs3,222  5,575  7,666  9,308  
Total$3,636  $7,751  $9,396  $12,375  
Stock Option Awards
During the six months ended June 30, 2020, the Company granted 53,000 options to purchase shares of its common stock with a weighted average exercise price of $42.96. As of June 30, 2020, there were approximately 338,000 options vested and exercisable with a weighted average exercise price of $34.59. As of June 30, 2020, the total unrecognized compensation charge related to non-vested options was approximately $2.0 million, which is expected to be recognized through 2023.
Restricted Stock Unit Awards
During the six months ended June 30, 2020, the Company had RSU grants, net of forfeitures, of approximately 292,000. As of June 30, 2020, there are approximately 1,139,000 non-vested RSUs (including performance-based restricted stock units, or PRSUs) outstanding with a weighted average grant-date fair value of $39.83. As of June 30, 2020, the total unrecognized non-cash equity-based compensation charge related to the non-vested RSUs was approximately $26.6 million, which is expected to be recognized through 2023.
During the six months ended June 30, 2020, shares of common stock with an aggregate value of $3.4 million were withheld upon vesting of RSUs and paid in connection with related remittance of employee withholding taxes to taxing authorities.
On July 20, 2020, the Company granted approximately 332,000 PRSUs with a grant date fair value of $12.7 million.

 As of September 30, 2017 As of December 31, 2016
Compensation$19,844
 $13,732
Non-income taxes6,520
 7,383
Royalty tax withholdings7,587
 6,921
Other expenses18,038
 13,070
Total accrued expenses$51,989
 $41,106
(6) Commitments and Contingencies(7) Revenue
The Company leases facilities under agreements accounted for as operating leases. Rental expense for operating leases was $2.3 million and $2.1 million for the three months ended September 30, 2017 and 2016, respectively, and $6.5 million and $5.0 million for the nine months ended September 30, 2017 and 2016, respectively. Some leases have defined escalating rent provisions, which are expensed over the termdistributes its content offerings through two primary channels:
E-commerce: The majority of the related leaseCompany’s customers license content directly through the Company’s self-service web properties. E-commerce customers have the flexibility to purchase a subscription plan that is paid on a straight-linemonthly or annual basis commencing with the date of possession. Any rent allowance or abatement is netted in this calculation. In addition to contractual rent amounts,license content on a transactional basis. These customers generally license content under the Company’s lease payments are also subjectstandard or enhanced licenses, with additional licensing options available to adjustments in real estate taxes and operating expenses.
In 2016,meet customers’ individual needs. E-commerce customers typically pay the Company’s lease for its office facility in New York City was amended to, among other things, provide for the lease of approximately 25,000 square feet of additional office space and extend the termfull amount of the lease. In connectionpurchase price in advance or at the time of license, generally with the underlying lease agreement, thea credit card.
Enterprise: The Company entered into a letter of credit as a security deposit for the leased facilities, which was increased to $2.6 million in connection with the 2016 amendment. The letter of credit was collateralized by $2.6 million of cash as of September 30, 2017, which is recorded as restricted cash and is included in other assets in the consolidated balance sheet. As amended, the lease is scheduled to expire in 2029 and aggregate future minimum payments under the amended lease are approximately $79.2 million.
Other Commitments
On October 20, 2016, the Company entered into a multi-part transaction with an unrelated third-party contributor (the “Transaction Party”). The transaction included three primary components: (a) a revolving credit facility pursuant to which the Company would be obligated to lend up to $4.6 million under certain conditions (the “Facility”) to the Transaction Party. The Facilityalso has a termbase of five yearscustomers with unique content, licensing and requires the Transaction Partyworkflow needs. These customers benefit from communication with dedicated sales professionals, service and research teams which provide a number of tailored enhancements to make quarterly paymentstheir creative workflows including non-standard licensing rights, multi-seat access, ability to pay on credit terms, multi-brand licensing packages, increased indemnification protection and content licensed for use-cases outside of principal to the Company beginningthose available on the fourth anniversaryE-commerce platform.
15
Table of the Facility. The Facility bears interest at 10.0%, with all interest payments deferred until maturity, and the entire unpaid balance of principal and accrued interest due upon maturity; (b) the Company will be the exclusive distributor of the Transaction Party’s content in certain markets subject to certain limitations; and (c) the Company, at its option, may acquire the Transaction Party at any time after the third anniversary of the Facility or match any third-party acquisition offer with respect to the Transaction Party at any time until the fifth anniversary of the Facility. 
On March 27, 2017, the Facility was amended to reduce the maximum lending amount to $3.0 million. The Transaction Party has borrowed $1.3 million under the Facility, all of which remains outstanding as of September 30, 2017. The Company has reported this amount in other non-current assets.

Simultaneously, the Company invested $1.6 million in a convertible note issued by the Transaction Party, which matures on October 20, 2021.  The convertible note bears interest at 10%, with all interest payments deferred until maturity, and theContents
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)







The Company’s revenues by distribution channel for the three and six months ended June 30, 2020 and 2019 are as follows (in thousands):
entire unpaid
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
E-commerce$98,164  $96,993  $197,900  $195,106  
Enterprise61,066  64,748  122,615  129,967  
Total Revenues$159,230  $161,741  $320,515  $325,073  
The June 30, 2020 deferred revenue balance will be earned as content is downloaded or upon the expiration of principalsubscription-based products, and accrued interest due upon maturity. nearly all is expected to be earned within the next twelve months. $91.0 million of total revenue recognized for the six months ended June 30, 2020 was reflected in deferred revenue as of December 31, 2019.

(8) Other Income, net
The principal amountfollowing table presents a summary of the convertible noteCompany’s other income and expense activity included in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (in thousands):
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Foreign currency gain / (loss)$132  $(569) $(466) $(730) 
Interest income17  1,153  1,128  2,210  
Total other income$149  $584  $662  $1,480  

(9) Income Taxes
The Company’s effective tax rates yielded a net expense of 16.3% and 9.7% for the three months ended June 30, 2020 and 2019, respectively, and a net expense of 19.6% and 14.5% for the six months ended June 30, 2020 and 2019, respectively.
During the three months ended June 30, 2020, the net effect of discrete items decreased the effective tax rate by 0.3%. For the six months ended June 30, 2020, the effective tax rate increased by 1.6% as a result of a loss jurisdiction with no tax benefit. Discrete items further increased the effective tax rate by 1.4%. Excluding the discrete items, our effective tax rate would have been 16.6% for the three and six months ended June 30, 2020. In the three and six months ended June 30, 2019, the impact of discrete tax items decreased the effective tax rate by 3.4% and 1.8%, respectively.
The Company has computed the provision for income taxes based on the estimated annual effective tax rate excluding a loss jurisdiction with no tax benefit and the application of discrete items, if any, accruedin the applicable period. The estimated annual effective tax rate differs from the statutory tax rate due primarily to the effect of the foreign-derived intangible income deduction and unpaid interestthe U.S. Research and Development tax credit.
During the three and six months ended June 30, 2020 and during the three months ended June 30, 2019, uncertain tax positions recorded by the Company were not significant. During the six months ended June 30, 2019, uncertain tax positions recorded by the Company resulted in an expense of $1.0 million. To the extent the remaining uncertain tax positions are ultimately recognized, the Company’s effective tax rate may be converted into equityimpacted in future periods.
The Company recognizes interest expense and tax penalties related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Operations. The Company’s accrual for interest and penalties related to unrecognized tax benefits was not significant for the three and six months ended June 30, 2020 and 2019.
During the six months ended June 30, 2020 and 2019, the Company paid net cash taxes of $0.9 million and $1.5 million, respectively.

16
Table of Contents
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)



(10) Net Income Per Share
Basic net income per share is computed using the weighted average number of shares of common stock outstanding for the period, excluding unvested RSUs and stock options. Diluted net income per share is based upon the weighted average shares of common stock outstanding for the period plus dilutive potential shares of common stock, including unvested RSUs and stock options using the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share for the three and six months ended June 30, 2020 and 2019 (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net income$18,987  $3,299  $23,305  $10,821  
Shares used to compute basic net income per share35,652  35,232  35,587  35,174  
Dilutive potential common shares
Stock options39  102  53  104  
Unvested restricted stock awards215  170  254  221  
Shares used to compute diluted net income per share35,906  35,504  35,894  35,499  
Basic net income per share$0.53  $0.09  $0.65  $0.31  
Diluted net income per share$0.53  $0.09  $0.65  $0.30  
Dilutive shares included in the calculation1,304  1,005  1,080  992  
Anti-dilutive shares excluded from the calculation1,152  1,206  1,148  1,171  

(11) Geographic Information
The following table presents the Company’s revenue based on customer location (in thousands): 
 Three Months Ended June 30,Six Months Ended
June 30,
 2020201920202019
North America$56,211  $57,657  $113,229  $115,171  
Europe52,207  53,647  106,003  109,132  
Rest of the world50,812  50,437  101,283  100,770  
Total revenue$159,230  $161,741  $320,515  $325,073  
 The United States, included in North America in the above table, accounted for 32% of consolidated revenue for the six months ended June 30, 2020 and 2019. No other country accounts for more than 10% of the Transaction Party atCompany’s revenue in any period presented.
The Company’s long-lived tangible assets were located as follows (in thousands):
As of June 30,As of December 31,
20202019
North America$47,361  $51,954  
Europe6,557  6,541  
Rest of the world322  339  
Total long-lived tangible assets$54,240  $58,834  
The United States, included in North America in the above table, accounted for 77% and 79% of total long-lived tangible assets as of June 30, 2020 and December 31, 2019, respectively. No other country accounts for more than 10% of the Company’s option on the maturity date, or earlier upon certain events. The $1.6 million investmentlong-lived tangible assets in the convertible note is reported in other non-current assets.any period presented.
Other Obligations
17
Table of Contents
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)



(12) Commitments and Contingencies
As of SeptemberJune 30, 2017,2020, the Company had othertotal non-lease obligations in the amount of approximately $42.1$39.2 million, which consisted primarily of minimum royalty guarantees and unconditional purchase obligations related to contracts for infrastructure and other business services. As of SeptemberJune 30, 2017,2020, the Company’s othernon-lease obligations for the remainder of 20172020 and for the years ending December 31, 2018, 20192021 and 20202022 were approximately $5.6$18.2 million, $16.2 million, $11.7$16.5 million and $8.6$4.4 million, respectively.
Legal Matters
From time to time, the Company may become party to litigation in the ordinary course of business, including direct claims brought by or against the Company with respect to intellectual property, contracts, employment and other matters, as well as claims brought against the Company’s customers for whom the Company has a contractual indemnification obligation. The Company assesses the likelihood of any adverse judgments or outcomes with respect to these matters and determines loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, the Company considers other relevant factors that could impact its ability to reasonably estimate a loss. A determination of the amount of reserves required, if any, for these contingencies is made after analyzing each matter. The Company reviews reserves, if any, at least quarterly and may change the amount of any such reserve in the future due to new developments or changes in strategy in handling these matters. Although the results of litigation and threats of litigation, investigations and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these matters will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company currently has no material active litigation matters and, as such,accordingly, no material reserves related to litigation.litigation.
Indemnification and Employment Agreements
In the ordinary course of business, the Company enters into contractual agreementsarrangements under which it agrees to provide indemnification of varying scope and terms to customers with respect to certain matters, including, but not limited to, losses arising out of the breach of the Company’s intellectual property warranties for damages to the customer directly attributable to the Company’s breach. The Company is not responsible for any damages, costs, or losses to the extent such damages, costs or losses arise as a result of any modifications made by the customer, or the context in which an imagecontent is used. The Company’s license agreementsstandard maximum aggregate obligation and liability to any one customer for any single claim is generally cap indemnification obligations at amounts ranging from $10,000limited to 10000 dollars but can range to $250,000, with certain exceptions for certain products for which the Company’sour indemnification obligationsobligation are uncapped. As of SeptemberJune 30, 2017,2020, the Company had recorded no0 material liabilities related to indemnification obligations in accordance with the authoritative guidance for loss contingencies. Additionally, the Company believes that it has the appropriate insurance coverage in place to adequately cover such indemnification obligations, if necessary.
Pursuant to the Company'sCompany’s charter documents and separate written indemnification agreements, the Company has certain indemnification obligations to its executive officers, certain employees and directors, as well as certain former officers and directors.
The Company has also entered into employment agreements with its executive officers and certain employees. These agreements specify various employment-related matters, including annual compensation, performance incentive bonuses, and severance benefits in the event of termination with or without cause and in the event of a change in control.control or otherwise, with or without cause.
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)
18




(7) Stockholders’ Equity and Equity-Based Compensation
Stockholders’ Equity
Common Stock
During the nine months ended September 30, 2017, the Company issued approximately 293,000 sharesTable of common stock, primarily related to the exercise of stock options and the vesting of restricted stock units (“RSUs”).
Treasury Stock
In October 2015, the Company’s Board of Directors approved a share repurchase program, pursuant to which the Company is authorized to purchase up to $100 million of its common stock. In February 2017, the Company’s Board of Directors approved an increase to the share repurchase program, pursuant to which the Company is authorized to repurchase up to an additional $100 million of its outstanding common stock. The Company expects to fund future repurchases through a combination of cash on hand, cash generated by operations and future financing transactions, if needed. Accordingly, the Company’s share repurchase program is subject to the Company having available cash to fund repurchases. Under the program, the Company is authorized to purchase shares from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.
During the nine months ended September 30, 2017, the Company repurchased approximately 449,000 shares of its common stock under the share repurchase program at an average per-share cost of approximately $50.04. As of September 30, 2017, the Company had $100.0 million remaining for purchases under the share repurchase program.
Equity-Based Compensation
The Company recognizes stock-based compensation expense for all share-based payment awards, including employee stock options and RSUs granted under the 2012 Omnibus Equity Incentive Plan and sales of shares of common stock under the 2012 Employee Stock Purchase Plan (the “2012 ESPP”), based on the fair value of each award on the grant date.
The following table summarizes non-cash equity-based compensation expense, net of forfeitures, by financial statement line item included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (in thousands): 
Contents
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Cost of revenue$176
 $498
 $608
 $1,552
Sales and marketing1,092
 1,524
 3,535
 4,072
Product development1,819
 1,580
 5,079
 5,732
General and administrative3,798
 2,903
 10,905
 9,754
Total$6,885
 $6,505
 $20,128
 $21,110
The following table summarizes non-cash equity-based compensation expense, net of forfeitures, by award type included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Stock options$1,663
 $1,751
 $5,087
 $5,379
RSUs5,222
 4,602
 15,041
 15,254
ESPP shares—
 152
 —
 477
Total$6,885
 $6,505
 $20,128
 $21,110
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)




Stock Option Awards
During the nine months ended September 30, 2017, the Company granted options to purchase approximately 86,000 shares of its common stock with a weighted average exercise price of $48.05. As of September 30, 2017, there were approximately 312,000 options vested and exercisable with a weighted average exercise price of $36.27. As of September 30, 2017, the total unrecognized compensation charge related to non-vested options was approximately $15.9 million, which is expected to be recognized through 2021.
Restricted Stock Units
During the nine months ended September 30, 2017, the Company granted approximately 366,000 RSUs, net of forfeitures. As of September 30, 2017 there are approximately 1,290,000 non-vested RSUs outstanding. As of September 30, 2017, the total unrecognized non-cash equity-based compensation charge related to the non-vested RSUs was approximately $45.0 million, which is expected to be recognized through 2021.
During the nine months ended September 30, 2017, shares with an aggregate value of $5.8 million were withheld upon vesting of RSUs and in connection with related remittance to taxing authorities.
ESPP Shares
In December 2016, the Company’s Board of Directors suspended the 2012 ESPP. During the nine months ended September 30, 2017, no shares of the Company’s common stock were issued under the 2012 ESPP.
(8) Employee Benefit Plans
The Company has a 401(k) defined contribution plan and provides for annual discretionary employer matching contributions not to exceed 3% of employees’ base compensation per year. Matching contributions are fully vested and non-forfeitable at all times. The Company recorded expenses related to employer matching contributions of $0.7 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, and $1.5 million and $1.5 million for the nine months ended September 30, 2017 and 2016, respectively.
(9) Other Expense, Net
The following table presents a summary of the Company’s other income and expense activity included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Foreign currency gain (loss)$(192) $192
 $1,467
 $739
Change in fair value of contingent consideration—
 (130) —
 (974)
Interest income322
 40
 628
 113
Total income (expense)$130
 $102
 $2,095
 $(122)
(10) Income Taxes
The Company’s effective tax rates were 12.2% and 17.6% for the three months ended September 30, 2017 and 2016, respectively, and 31.0% and 29.9% for the nine months ended September 30, 2017 and 2016, respectively.  In the three and nine months ended September 30, 2017, the Company incurred a discrete benefit relating primarily to the tax effect of the domestic production activities deduction claimed on the Company’s 2016 tax return, which was substantially completed in the third quarter of 2017. The net effect of discrete items decreased the effective tax rate for the three and nine months ended September 30, 2017 by 17.5% and 2.0%, respectively. In the three and nine months ended September 30, 2016, the Company incurred a discrete tax benefit related primarily to the Company’s completion of a study which determined the amount of the U.S. Research and Development tax credit for the years 2013 to 2015 to which it was entitled. The net effect of discrete items decreased the effective tax rate for the three and nine months ended September 30, 2016 by 22.3% and 10.0%, respectively.
The Company has computed the provision for income taxes based on the estimated annual effective tax rate and the application of discrete items, if any, in the applicable period. The estimated annual effective tax rate differs from the statutory tax rate due primarily to an increase of income in foreign jurisdictions with lower statutory rates.
During the three and nine months ended September 30, 2017 and 2016, unrecognized tax benefits recorded by the Company for uncertain tax positions taken in prior years increased by $0.3 million. During the three months ended
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)




September 30, 2016, unrecognized tax benefits recorded by the Company for uncertain tax positions taken in prior years were $1.0 million. During the nine months ended September 30, 2016, the Company’s recognized tax benefits of $1.0 million were offset by a recognized tax benefit of approximately $1.0 million related to the release of a reserve for uncertain tax positions due to a lapse in the statute of limitations, resulting in a net amount recorded that was not material. To the extent the remaining unrecognized tax benefits are ultimately recognized, the Company’s effective tax rate may be impacted in future periods.
The Company recognizes interest expense and tax penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. The Company’s accrual for interest and penalties related to unrecognized tax benefits was not material for the three and nine months ended September 30, 2017 and 2016.
As of September 30, 2017, the Company had approximately $12.8 million of undistributed earnings attributable to its foreign subsidiaries. It is the Company’s practice and intention to indefinitely reinvest the earnings of its foreign subsidiaries in those operations. The Company has not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences resulting from the earnings indefinitely reinvested outside the United States. It is currently not practicable for the Company to calculate the associated unrecognized deferred tax liability.
(11) Net Income Per Share
Basic net income per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Any potential issuance of common shares, including those that are contingent and do not participate in dividends, is excluded from weighted average number of common shares outstanding. Income available to common stockholders is computed by deducting income allocated to participating securities, if any, including unvested shares for the restricted award holder since these unvested shares have participating rights.
Diluted net income per share is computed by dividing the net income attributable to common stockholders by the weighted average common shares outstanding and all potential common shares, if they are dilutive.
A reconciliation of assumed exercised shares used in calculating basic and diluted net income per share follows (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Weighted average shares outstanding:       
Basic34,643
 35,036
 34,607
 35,123
Stock options and ESPP shares408
 473
 458
 434
Unvested RSUs and restricted stock awards126
 315
 274
 298
Diluted35,177
 35,824
 35,339
 35,855
        
Dilutive securities included in the calculation1,066
 2,097
 1,543
 1,940
Anti-dilutive securities excluded from the calculation1,554
 856
 1,244
 1,061
(12) Geographic Information
The following table presents the Company’s revenue based on customer location (in thousands): 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
North America$55,827
 $49,221
 $161,396
 $145,928
Europe45,075
 39,382
 131,712
 119,662
Rest of the world40,161
 34,470
 112,174
 98,554
Total revenue$141,063

$123,073

$405,282

$364,144
The United States, included in North America in the above table, accounted for 36% of consolidated revenue for the three months ended September 30, 2017 and 2016, and 36% of total revenue for the nine months ended September 30, 2017 and 2016. The United Kingdom, included in Europe in the above table, accounted for 9% of total revenue for the three months ended September 30, 2017 and 2016, and 9% and 10% of total revenue for the nine months ended September 30, 2017 and 2016, respectively. No other country accounts for more than 10% of the Company’s revenue in any period presented.
Shutterstock, Inc.
Notes to Consolidated Financial Statements 
(unaudited)




The Company’s long-lived tangible assets were located as follows (in thousands): 
 September 30, December 31,
 2017 2016
North America$75,771
 $54,913
Europe1,925
 1,141
Rest of the world74
 47
Total long-lived tangible assets$77,770
 $56,101
The United States, included in North America in the above table, accounted for 95% of total long-lived tangible assets as of September 30, 2017 and December 31, 2016.
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our interim consolidated unaudited financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q and with information contained in our other filings, including the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162019 filed with the SEC on February 27, 2017.13, 2020.
In addition to historical consolidated financial information, this discussion may containcontains forward-looking statements that reflectincluding statements about our plans, estimates and beliefs. These statements involve risks and uncertainties and our actual results could differ materially from those discussed below.expressed or implied in forward-looking statements. See the “Special Note on Forward“Forward Looking Statements” disclosure included above for a discussion of the uncertainties, risks and assumptions associated with these statements.above. See also the “Risk Factors” disclosure ofdisclosures contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162019, which was filed with the SEC on February 13, 2020, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which was filed with the SEC on April 28, 2020 for additional discussion of such risks.the risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements.
For a discussion as to how COVID-19 has affected our business, see “COVID-19 Update” below.
Overview and Recent Developments
Shutterstock is a leading global technology company offering a creative platform, which provides high-quality content, tools and services to creative professionals. Our platform brings together users and contributors of content by providing readily-searchable content that operates a two-sided marketplace for creative professionalsour customers pay to license content. Our libraryand by compensating contributors as their content is licensed.
The content licensed by our customers include:
•Images - consisting of creative content includes: (a) digital imagery, which consists of licensed photographs, vectors illustrations and video clips that customers useillustrations. Images are typically used in their visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and other similar uses.
•Footage - consisting of video content;clips, premium footage filmed by industry experts and (b) commercial music, which consistscinema grade video effects, available in HD and 4K formats. Footage is often integrated into websites, social media, marketing campaigns and cinematic productions.
•Music - consisting of high-quality music tracks and sound effects, and which isare often used to complement the digital imagery. We also offer digital asset management services through Webdam, our cloud-based digital asset management platform, which provides tools for customers to better manage contentimages and brand management assets. footage.
Our global marketplaceplatform brings together users and contributors of creative content by providing a readily-searchable collection of content that our customers can pay to license and incorporate into their work and by compensating contributors as their content is licensed tolicensed. For customers seeking specialized content that goes beyond our customers. More than 1.7library of stock content, our platform also connects customers with contributors who can produce custom branded content.
Over 1.9 million active, paying customers contributed to our revenue for the twelve-month period ended SeptemberJune 30, 2017.2020. As of SeptemberJune 30, 2017,2020, more than 300,0001.4 million approved contributors made their creative contentimages, footage and music tracks available in our collection, which has grown to more than 150340 million images and has grown to include more than 8.319 million videofootage clips. This makes our collection of creative content one of the largest of its kind, and we delivered more than 128approximately 90.8 million paid downloads to our customers across all of our brands during the ninesix months ended SeptemberJune 30, 2017. We believe that we delivered the highest volume of commercial image downloads in this period of any single brand in our industry during that period.
During the three months ended September 30, 2017, in addition to the increase in creative content provided by our contributors, we also launched several new and improved product features, including enhanced product offerings as follows:
In July 2017, we completed our acquisition of Flashstock Technologies, Inc. (“Flashstock”) for a total purchase price of $51.2 million. Flashstock is a Toronto-based company that enables the creation of custom content through a proprietary software platform, and will serve as the foundation for Shutterstock Custom, which was launched in September 2017.
In September 2017, we unveiled a number of enhancements to our suite of plugins for the Adobe Creative Cloud® desktop applications. These enhancements add compatibility directly within the Adobe Premiere Pro®, Adobe Illustrator®, and Adobe InDesign® applications, marking the first time that we have made our high-quality video collection available through a plugin. In addition to added compatibility, the plugins provide feature enhancements such as streamlined workflow, design previews, content curation, and simple licensing within the applications.
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In September 2017, we launched direct integration in the Google Slides application, allowing users to search our image library and edit any visual content within their presentations using Shutterstock Editor.2020.
Through our two-sided marketplace,platform, we generate revenue by licensing creative content to our customers, which is offset by paying royalties to contributors each time their content is delivered to a customer for use.customers. During the ninesix months ended SeptemberJune 30, 2017, 63%2020, 62% of our revenue and the majority of our content licenses came from users of our e-commerce platform. E-commerce sales channel.
E-commerce customers have the flexibility of choosing content subscription plans that provide a large volume of content for their creative process without concern for the incremental cost of each license, or for customers with other content needs, weprocess. We also offer simple, affordable, a la cartesmaller plans and other products where customers have an option to pay for individual content licenses. For larger organizations or those withlicenses at the time of delivery. Customers in our Enterprise sales channel generally have unique content, licensing and workflow needs, ourneeds. Our dedicated enterpriseEnterprise sales, service, client success and research teams are able to provide a number of enhancements to their creative workflows beyond theincluding non-standard licensing rights, multi-seat access, multi-brand licensing packages and content licensed for use-cases outside of those available for license on our e-commerceE-commerce platform. Our Enterprise sales channel provided approximately 38% of our revenue during the six months ended June 30, 2020.
Each time an image, videofootage clip or music track is delivered to a customer for use, we record a royalty expense for the amount due to the associated contributor. RoyaltiesDepending on the content licensed by our customers, royalties are calculated using either a fixed dollar amount or a fixed percentage of revenue,the price per asset downloaded and are typically paid to contributors on a monthly basis, subject to withholding taxes and certain payout minimums. Royalties represent the largest component of our operating expenses, (and are
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reported within cost of revenue) andrevenue, tend to increase proportionallyfluctuate proportionately with revenue. In addition to content sourced through direct submission through our web properties, contentrevenue and paid downloads and may also be obtained through exclusive distribution agreements with strategic partners or through the direct acquisition of a content library or archive. In certain cases, we will enter into arrangements with contributors whereby we guarantee a minimum royalty to a contributor or strategic partner, usually paid up-front, in exchange for exclusive rights to distribute content when we believe such exclusivity provides us with a distinct competitive advantage. In recent years, we have made a number of enhancements to our content libraries through the direct acquisition of content and through entering into several such agreements and partnerships.
Our cost of revenue is substantially similar as a percentage of revenue for our e-commerce and enterprise customers. While contributors earn a fixed amount per download for some of our plans, we have set the per-download amount paid to our contributors for each of our purchase options so that contributors earn more per download from plans where we collect higher revenue per download. In other words, we strive to deliver a similar percentage of revenue to contributors regardless of which purchase option a customer chooses. We expect that shifts in the relative popularity of these two purchase options will not materially impact our cost of revenue.
As a provider of digital asset management technology, we also generate revenueimpacted by licensing the use of our Webdam platform to customers on a contract basis, which is typically twelve months.
We manage customer acquisition costs based on the expected blended customer lifetime value across our purchase options so that we are able to manage our marketing expenses to achieve certain desired growth targets. As a result, we do not believe that shifts in the mix between e-commerce and enterprise sales channels will materially impact our operating margins.of products sold.
An important driver of our growth is customer acquisition, which we achieve primarily through online marketing efforts includingand directly through our sales force. Online marketing includes paid search, organic search, online display advertising, brand marketing, email marketing, affiliate marketing, social media and strategic partnerships. Over the past several years, our investments in marketing have beenrepresented a significant percentage of revenue. SinceThis spend considers, among other things, the blended average customer lifetime value across our various purchase options so we believe the market for creative content is at an early stage, we plan to continue to invest aggressively incan manage customer acquisition costs and aim to achieve revenue and market share growth. targeted returns.
We believe that another important driver of growth is the quality of the user experience we provide on our websites, especially the efficiency and speed with which our search interfaces and algorithms help customers find and download the creative content that they need, the degree to which our websites have been localized for our global user base, the degree to which we make use of the large quantity of data we collect about images, videosimage, footage and music and search patterns, and the degree to whichsecurity of user information on our websites have been localized for international audiences.platform. To this end, we have invested aggressively in product development and cloud-based hosting infrastructure, and we intend to continue to invest in these areas, to the extent that we can improve the customer experience and increase the efficiency with which we deploy new products and features. Finally,
COVID-19 Update
In December 2019, a novel coronavirus disease (“COVID-19”) was initially reported and on March 11, 2020, the qualityWorld Health Organization characterized COVID-19 as a pandemic. Our operations have been impacted by office closures globally and quantity of content thatrestrictions on employee travel and in-person meetings, however, we make availablehave generally been able to deliver our services remotely. The economic uncertainty caused by COVID-19 has had an impact on our customers and their ability to spend marketing budgets on our products, which has resulted in an unfavorable impact, to varying degrees geographically, on our revenue growth for the six months ended June 30, 2020. See Item 1A. Risk Factors in our collection is another key driver of our growth. Approved and licensable high-quality content inQuarterly Report on Form 10-Q for the Shutterstock collection exceeded 150 million images and 8.3 million video clips as of September 30, 2017, making it onequarter ended March 31, 2020, which was filed with the SEC on April 28, 2020, for further discussion of the largest librariespossible impact of its kind.the COVID-19 pandemic on our business.

Key Operating Metrics
In addition to key financial metrics, weWe regularly review a number of key operating metrics to evaluate our business, determine the allocation of resources and make decisions regarding business strategies. We believe that these metrics can be useful for understanding the underlying trends in our business. The following table summarizes our key operating metrics, which are unaudited, for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:

Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
 
Subscribers (end of period)223,000  173,000  223,000  173,000  
Subscriber revenue (in millions)$62.7  $57.9  $126.6  $115.8  
Average revenue per customer (trailing twelve months)$326  $325  $326  $325  
Paid downloads (in millions)44.0  46.6  90.8  93.8  
Revenue per download$3.61  $3.44  $3.51  $3.43  
Content in our collection (end of period, in millions):
Images340  280  340  280  
Footage clips19  15  19  15  
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Subscribers
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (in millions, except revenue per download)
Paid downloads (during the period)41.9
 41.2
 128.1
 125.8
Revenue per download (during the period)$3.23
 $2.91
 $3.06
 $2.83
Content in Our Collection (end of period):       
Images155.8
 102.7
 155.8
 102.7
Video Clips8.3
 5.4
 8.3
 5.4
Paid Downloads
MeasuringWe define subscribers as those customers who purchase one or more of our monthly recurring products for a continuous period of at least three months, measured as of the end of the reporting period. We believe the number of paid downloadssubscribers is an important metric that provides insight into our customers makemonthly recurring business and its growth. We believe that an increase in any given periodour number of subscribers is important because downloads arean indicator of engagement in our platform and potential for future growth.
Subscriber Revenue
We define subscriber revenue as the primary methodrevenue generated from subscribers during the period. We believe subscriber revenue, together with our number of delivering licensed content, which drives a significantsubscribers, provide insight into the portion of our business and growth driven by our monthly recurring products.
Average Revenue Per Customer
Average revenue and contributor royalties. Forper customer is calculated by dividing total revenue for the trailing twelve month period by customers. We define customers as total active, paying customers that choosecontributed to purchase content à la carte, each incremental content license resultstotal revenue over the trailing twelve month period. Changes in incremental recognitionour average revenue per customer will be driven by changes in the mix of revenue. For customers that choose our subscription purchase options, we do not recognize revenue from each incremental content license, but we believe that download activity is an important measure ofsubscription-based products and the value that a customer is getting from a subscription. pricing in our transactional business.
Paid Downloads
We define paid downloads as the number of downloads that our customers make in a given period of our photographs, vectors, illustrations, video clips or music tracks, excludingcontent. Paid downloads exclude custom content re-downloads of content that a customer has downloaded in the past (which do not generate incremental revenue or contributor royalty expense) and downloads of content that isare offered to customers for no charge, including our free image of the weekweek. Measuring the number of paid downloads that our customers make in a given period is important because they are the primary method of delivering licensed content, which drives a significant portion of the Company’s revenue and content made available through our Freestock product (which we make available as a means of acquiring new customers and attracting existing customers to return to our websites more frequently).contributor royalties.
Revenue per Download
We define revenue per download as the amount of revenue recognized in a given period divided by the number of paid downloads in that period excluding the impact ofrevenue from custom content and revenue that is not derived from or associated with paid downloads.content licenses. This metric captures any changes in our pricing, including changes resulting from the impact of competitive pressures, as well as the mix of purchaselicensing options that our customers choose, some of which generate more revenue per download than others, and the impact that changes in foreign currency rates have on our pricing. For example, when a customer pays $49 for five images, we earn moreChanges in revenue per download ($9.80 per download) than when a customer purchases a one-month subscription for $249 and downloads 100 images duringare primarily driven by the month ($2.49 per download). Revenue per download has increased over the last three years, almost entirely due to the changeintroduction of new product offerings, changes in product mix. During this period, pricing has remained relatively constant.mix and the customer utilization of our products.
Content in our Collection
We define content in our collection as the total number of (a)approved images (photographs, vectors and illustrations) and (b) video clips available to customers for commercial licensefootage (in number of clips) in our library on shutterstock.com at any point in time.the end of the period. We exclude content from this collection metric that is not uploaded directly to our site but is available tofor license by our customers through an application program interface, custom content and certain content that may be licensed for editorial use only. We record this metric as of the end of a period. Offering abelieve that our large selection of high-quality content allowsenables us to acquireattract and retain customers and therefore, we believe that broadeningdrives our selection of high-quality content is an important driver of our revenue growth.network effect.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains a calculation of period-over-period revenue growth on a constant-currency basis, which is a financial measure that has not been calculated in accordance with GAAP, and should be considered in addition to our results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, our results prepared in accordance with GAAP.
Revenue growth on a constant-currency basis (expressed as a percentage) is calculated by determining the increase in current period revenues over prior period revenues, utilizing fixed exchange rates for translating foreign currency revenues for both periods.
Our management uses this non-GAAP financial measure, in conjunction with GAAP financial measures, as an operating measure to help evaluate our business and in making financial and operational decisions. Management believes that providing a measure of period-over-period revenue growth on a constant-currency basis is useful to investors to provide them with disclosures of our revenue trends and overall business on the same basis as that which is used by management and because this metric eliminates the effect of foreign currency fluctuations that are not directly attributable to our underlying operating performance and are outside management’s control. Additionally, management believes that providing this non-GAAP financial measure enhances the comparability for investors in assessing our financial reporting. However, non-GAAP financial
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information, by its nature, departs from traditional accounting conventions; accordingly, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, medical self-insurance accruals, chargeback and sales refund reserve, the fair valuevolume of goodwill, intangibles and other long-lived assets, non-cashexpected unused licenses for our subscription-based products, equity-based compensation expense, the fair value of contingent consideration, the provision forand income taxes and the amount of certain non-income tax accruals.provisions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
We believe that the policies, assumptions and estimates associated with our revenue recognition, allowance for doubtful accounts, chargebackequity-based compensation and sales refund reserve, stock-based compensation, self-insurance accruals, accounting for non-income and income taxes goodwill and intangible assets and advertising costs have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
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A description of our critical accounting policies that involve significant management judgments appears in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162019 that wewas filed with the SEC on February 27, 2017, or the 201613, 2020 (our “2019 Form 10-K,10-K”), under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”
During the first quarter of 2017, we adopted the Financial Accounting Standards Board’s Accounting Standards Update 2016-09: Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which simplified the accounting for stock-based compensation in a number of areas, including the accounting for awards expected to be forfeited and the accounting for the tax effects of stock-based compensation. See Note 1 to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of the impact of the adoption of thisnew accounting standardstandards on our financial statements. Apart from the item described above, thereThere have been no material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in the 2016our 2019 Form 10-K.

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Key Components of Our Results of Operations
Revenue
We record revenue net of credit card chargebacks and refunds.distribute our content offerings through two primary channels:
E-commerce: The majority of our revenue is generated through the licensing of creativecustomers license content and the majority of our licensing revenue is generated by salesdirectly through our e-commerce platform.
We generate revenue through our e-commerce platform from the sale of subscriptions that provideself-service web properties. E-commerce customers have the flexibility of high-volumeto purchase a subscription-based plan that is paid on a monthly or annual basis or to license content subscriptions as well ason a variety of other purchase options. Our subscriptions typically vary in length from one month to one year. In addition to sales throughtransactional basis. These customers generally license content under our e-commerce platform, we offerstandard or enhanced licenses, with additional purchaselicensing options to enterprise customers that can be tailoredavailable to meet our customers’ specificindividual needs.
We E-commerce customers typically receivepay the full amount of e-commerce purchasesthe purchase price in advance or at the time of sale; however, revenue is recognized ratably over the courselicense, generally with a credit card.
Enterprise: We also have a base of customers with unique content, licensing and workflow needs. These customers benefit from communication with our dedicated sales professionals, service and research teams which provide a subscription period or as content is downloaded. Somenumber of our larger custom and enterprise accounts are invoiced andtailored enhancements to their creative workflows including non-standard licensing rights, multi-seat access, ability to pay us on credit terms. For certainterms, multi-brand licensing packages, increased indemnification protection and content licensed for use-cases outside of these accounts, we receive payment in installments overthose available on the course of an annual commitment.E-commerce platform.
We also generate revenue through Webdam, which licenses digital asset management software services to marketingThe Company’s revenues by distribution channel for the three and creative teamssix months ended June 30, 2020 and enterprise organizations through its cloud-based software platform. Software licensing fees are recognized ratably as revenue over the course of the contractual term, which is typically one year.
Our deferred revenue consists of amounts paid by customers for which revenue recognition criteria have not been met. For content revenue, deferred revenue is recognized as revenue when content is licensed or when the right to license content expires, and all other revenue recognition criteria have been met. For Webdam, deferred revenue is recognized as revenue through passage of time and when all other revenue recognition criteria have been met.
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Revenues generated from each of the sales channels2019 are as follows (in thousands):
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
E-commerce$98,164  $96,993  $197,900  $195,106  
Enterprise61,066  64,748  122,615  129,967  
Total Revenues$159,230  $161,741  $320,515  $325,073  
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
E-Commerce$85,910
 $80,803
 $255,613
 $244,190
Enterprise49,322
 38,175
 134,129
 108,683
Other5,831
 4,095
 15,540
 11,271
Total Revenue$141,063
 $123,073
 $405,282
 $364,144

Costs and Expenses
Cost of Revenue. Cost of revenue consists of royalties paid to contributors, credit card processing fees, content review costs, customer service expenses, the infrastructure and hosting costs related to maintaining our e-commercecreative platform and cloud-based software platform, depreciation and associated employee compensation, including non-cash equity-based compensation, bonuses and benefits, amortization of capitalized internal-use software, content and technology intangible assets, allocated facility costs and other supporting overhead costs. We expect that our costCost of revenue will increase in absolute dollars inalso includes employee compensation, including non-cash equity-based compensation, bonuses and benefits, associated with the foreseeable future asmaintenance of our revenue grows.creative platform and cloud-based software platform.
Sales and Marketing. Sales and marketing expenses include third-party marketing, advertising, branding, public relations and sales expenses. Sales and marketing expenses also include associated employee compensation, including non-cash equity-based compensation, bonuses and benefits, and commissions as well as allocated facility and other supporting overhead costs. We expect sales and marketing expenses to increase in absolute dollars in the foreseeable future as we continue to invest in new customer acquisition.
Product Development. Product development expenses consist of employee compensation, including non-cash equity-based compensation, bonuses and benefits, and expenses related to contractorsvendors engaged in product management, design, development and testing of our websites and products. Product development costs also include allocated facility and other supporting overhead costs. We expense product development expenses as incurred, except for costs that are capitalized for internal-use software development projects and subsequently depreciated over the expected useful life of the developed software. We expect product development expenses, of which a portion will be capitalized, to increase in absolute dollars in the foreseeable future as we continue to invest in developing new products and internal tools and enhancing the functionality of our existing products and technology.
General and Administrative. General and administrative expenses include employee compensation, including non-cash equity-based compensation, bonuses and benefits for executive, finance, business development, accounting, legal, human resources, internal information technology, internet security, business intelligence and other administrative personnel. In addition, general and administrative expenses include outside legal, tax and accounting services, bad debt expense, insurance, facilities costs, and other supporting overhead costs. We expect to incur incremental generalcosts and administrative expenses to support our global operational growthdepreciation and enhancements to support our reporting and planning functions.amortization expense.
Other Expense,Income, Net. Other expenseincome, net consists of non-operating costs such as foreign currency transaction gains and losses in addition to interest income and expense and prior to 2017, changes in the fair value of contingent consideration related to acquisitions. As we increase the volume of business transacted in foreign currencies resulting from international expansion and as currency rates fluctuate, we expect foreign currency gains and losses to continue to fluctuate.income.
Income Taxes. We compute income taxes using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted statutory income tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized.
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Results of Operations
The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods.
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
 (in thousands)
Consolidated Statements of Operations:    
Revenue$159,230  $161,741  $320,515  $325,073  
Operating expenses:
Cost of revenue63,811  68,526  132,934  137,744  
Sales and marketing35,557  44,488  78,217  88,934  
Product development12,485  13,594  25,554  28,580  
General and administrative24,832  32,063  55,484  58,646  
Total operating expenses136,685  158,671  292,189  313,904  
Income from operations22,545  3,070  28,326  11,169  
Other income, net149  584  662  1,480  
Income before income taxes22,694  3,654  28,988  12,649  
Provision for income taxes3,707  355  5,683  1,828  
Net income$18,987  $3,299  $23,305  $10,821  

The following table presents the components of our results of operations for the periods indicated as a percentage of revenue:
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Consolidated Statements of Operations:    
Revenue100 %100 %100 %100 %
Operating expenses:
Cost of revenue40 %42 %41 %42 %
Sales and marketing22 %28 %24 %27 %
Product development8 %8 %8 %9 %
General and administrative16 %20 %17 %18 %
Total operating expenses86 %98 %91 %97 %
Income from operations14 %2 %9 %3 %
Other income, net— %— %— %— %
Income before income taxes14 %2 %9 %4 %
Provision for income taxes2 %— %2 %1 %
Net income12 %2 %7 %3 %

Note: Due to rounding, percentages may not sum to totals.
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Comparison of the Three Months Ended June 30, 2020 and 2019
The following table presents our results of operations for the periods indicated:
 Three Months Ended June 30,
 20202019$ Change% Change
 (in thousands) 
Consolidated Statements of Operations:    
Revenue$159,230  $161,741  $(2,511) (2)%
Operating expenses:  
Cost of revenue63,811  68,526  (4,715) (7) 
Sales and marketing35,557  44,488  (8,931) (20) 
Product development12,485  13,594  (1,109) (8) 
General and administrative24,832  32,063  (7,231) (23) 
Total operating expenses136,685  158,671  (21,986) (14) 
Income from operations22,545  3,070  19,475  634  
Other income, net149  584  (435) (74) 
Income before income taxes22,694  3,654  19,040  521  
Provision for income taxes3,707  355  3,352  *
Net income$18,987  $3,299  $15,688  476 %

* Percentage change is not meaningful
Revenue
Revenue decreased by $2.5 million, or 2%, to $159.2 million in the three months ended June 30, 2020 compared to the same period in 2019. On a constant currency basis, revenue decreased approximately 1%, in the three months ended June 30, 2020, compared to the same period in 2019.
The Company’s E-commerce revenues increased by 1%, to $98.2 million in the three months ended June 30, 2020, compared to the same period in 2019. On a constant currency basis, the Company’s E-commerce revenues increased by 2% in the three months ended June 30, 2020, compared to the same period in 2019. During the three months ended June 30, 2020, growth in our E-commerce sales channel was driven by shifting resources to more efficient performance marketing channels.
The Company’s Enterprise revenues decreased by 6%, to $61.1 million in the three months ended June 30, 2020, compared to the same period in 2019. On a constant currency basis, the Company’s Enterprise revenues decreased by 5% in the three months ended June 30, 2020, compared to the same period in 2019. We continue to face headwinds in our Enterprise sales channel, and are in the midst of implementing changes to improve performance, including optimizing the sales organization, updating product offerings and making further platform investments, which we believe will improve our Enterprise sales channel operations.
Revenue growth for the three months ended June 30, 2020 was also unfavorably affected by the global COVID-19 pandemic and its impact on our customers and their ability to spend marketing budgets on our products. We expect COVID-19 to continue to have an unfavorable impact on our 2020 revenues.
In the three months ended June 30, 2020 and 2019, we delivered 44.0 million and 46.6 million paid downloads, respectively, and our revenue per download was $3.61 and $3.44 for the three months ended June 30, 2020 and 2019, respectively. During the three months ended June 30, 2020, the 6% decrease in the number of paid downloads compared to the same period in 2019, is due to lower customer utilization of our products. We believe that COVID-19 is a leading driver of the decline in usage during the quarter.
Changes in our revenue by region were as follows: revenue from North America decreased by $1.4 million, or 3%, to $56.2 million, revenue from Europe decreased by $1.4 million, or 3%, to $52.2 million and revenue from outside Europe and North America increased by $0.4 million, or 1%, to $50.8 million, in the three months ended June 30, 2020 compared to the same period in 2019.
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Costs and Expenses
Cost of Revenue. Cost of revenue decreased by $4.7 million, or 7% to $63.8 million in the three months ended June 30, 2020 compared to the same period in 2019, due to lower royalty expense, content procurement costs and depreciation and amortization expense, partially offset by higher costs associated with website hosting, hardware and software licenses as well as increased credit card fees. The reduction in royalty expenses was driven by the 6% decline in paid downloads due to the impact of COVID-19 as well as a change in the way we remunerate contributors. We expect that our cost of revenue will fluctuate in line with changes in revenue and paid downloads.
Sales and Marketing. Sales and marketing expenses decreased by $8.9 million, or 20%, to $35.6 million in the three months ended June 30, 2020 compared to the same period in 2019. As a percent of Septemberrevenue, sales and marketing expenses decreased to 22% for the three months ended June 30, 2020, from 28% for the same period in 2019. This decrease was primarily driven by a $9.7 million decline in marketing spend as we focused resources on more efficient customer acquisition and improved marketing return on investment. In addition, travel and related expense costs declined by $0.7 million due to travel restrictions resulting from COVID-19. These declines were partially offset by severance charges of approximately $1.5 million incurred during the three months ended June 30, 2020. We expect sales and marketing expenses to fluctuate as we optimize our sales channels and invest in new customer acquisition, products and geographies.
Product Development. Product development expenses decreased by $1.1 million, or 8%, to $12.5 million in the three months ended June 30, 2020 compared to the same period in 2019. This decrease was primarily driven by a reduction in software and other IT-related costs for the three months ended June 30, 2020, as compared to the same period in the prior year. We expect product development expenses, of which a portion will be capitalized, to continue in the foreseeable future, as we pursue opportunities to invest in developing new products and internal tools and enhance the functionality of our existing products and technologies.
General and Administrative. General and administrative expenses decreased by $7.2 million, or 23%, to $24.8 million in the three months ended June 30, 2020 compared to the same period in 2019. This decrease was primarily driven by: (i) lower non-cash compensation expense of $3.6 million, resulting from the Company recognizing non-cash compensation expense for the acceleration of equity awards associated with the departure of an executive officer in the three months ended June 30, 2019, three months of expense recognized in the second quarter of 2019 for certain performance-based stock awards compared to only one month of expense in the same period in 2020 since these awards became fully expensed in April 2020, and the recognition of forfeitures, reducing the non-cash compensation expense in three months ended June 30, 2020; (ii) lower depreciation and amortization expense of $2.1 million, driven by the recognition of $1.5 million of accelerated amortization expense in the second quarter of 2019 in conjunction with the Company’s re-branding of its Editorial product; (iii) lower professional and consulting fees of $1.1 million, during the three months ended June 30, 2020, compared to the same period in 2019; and (iv) a reduction in expense of $0.9 million, associated with the 2019 accrual of long-term incentives, related to our 2017 acquisition of Flashstock Technology, Inc. (“Flashstock”). These declines were partially offset by higher employee-related costs, excluding non-cash compensation, of $1.0 million and an increase in bad debt expense of $0.4 million. Employee-related costs included $0.7 million of severance expense during the three months ended June 30, 2020, compared to $2.0 million in the same period in 2019.
Other Income, Net. In the three months ended June 30, 2020, other income substantially consisted of $0.1 million of unfavorable foreign currency fluctuations.
During the three months ended June 30, 2019, approximately $1.2 million of other income consisted of interest income which was partially offset by $0.6 million of unfavorable foreign currency fluctuations. As we increase the volume of business transacted in foreign currencies resulting from international expansion and as currency rates fluctuate, we expect foreign currency gains and losses to continue to fluctuate.
Income Taxes. Income tax expense increased by $3.4 million for the three months ended June 30, 2020 as compared to the same period in 2019. Our effective tax rates yielded a net expense of 16.3% and 9.7% for the three months ended June 30, 2020 and 2019, respectively.
For the three months ended June 30, 2020, the net effect of discrete items decreased the effective tax rate by 0.3%. Excluding these items, our effective tax rate would have not recorded any such valuation allowances.been 16.6% for the three months ended June 30, 2020. For the three months ended June 30, 2019, the net effect of discrete items decreased the effective tax rate by 3.4%.
As we continue to expand our operations outside of the United States, we have been and may continue to become subject to taxation in additional non-U.S. jurisdictions and our effective tax rate could fluctuate accordingly.


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Results of Operations
The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods.
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (in thousands)
Consolidated Statements of Operations: 
  
  
  
Revenue$141,063
 $123,073
 $405,282
 $364,144
Operating expenses:       
Cost of revenue58,812
 50,184
 168,512
 150,492
Sales and marketing36,008
 32,977
 105,620
 91,636
Product development13,340
 11,604
 37,276
 34,800
General and administrative27,333
 17,020
 74,716
 54,629
Total operating expenses135,493
 111,785
 386,124
 331,557
Income from operations5,570
 11,288
 19,158
 32,587
Other income (expense), net130
 102
 2,095
 (122)
Income before income taxes5,700
 11,390
 21,253
 32,465
Provision for income taxes698
 1,999
 6,582
 9,692
Net income$5,002
 $9,391
 $14,671
 $22,773
The following table presents the components of our results of operations for the periods indicated as a percentage of revenue:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Consolidated Statements of Operations: 
  
  
  
Revenue100% 100% 100% 100 %
Operating expenses:       
Cost of revenue42% 41% 42% 41 %
Sales and marketing26% 27% 26% 25 %
Product development9% 9% 9% 10 %
General and administrative19% 14% 18% 15 %
Total operating expenses96% 91% 95% 91 %
Income from operations4% 9% 5% 9 %
Other income (expense), net—% —% 1% — %
Income before income taxes4% 9% 5% 9 %
Provision for income taxes—% 2% 2% 3 %
Net income4% 8% 4% 6 %

Note: Percent totals may not sum exactly, due to rounding
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Comparison of the ThreeSix Months Ended SeptemberJune 30, 20172020 and 20162019
The following table presents our results of operations for the periods indicated:
Six Months Ended June 30,
Three Months Ended September 30, 20202019$ Change% Change
2017 2016 $ Change % Change (in thousands) 
(in thousands)  
Consolidated Statements of Operations: 
  
  
  
Consolidated Statements of Operations Data:Consolidated Statements of Operations Data:    
Revenue$141,063
 $123,073
 $17,990
 15 %Revenue$320,515  $325,073  $(4,558) (1)%
Operating expenses:     
  
Operating expenses:  
Cost of revenue58,812
 50,184
 8,628
 17
Cost of revenue132,934  137,744  (4,810) (3)%
Sales and marketing36,008
 32,977
 3,031
 9
Sales and marketing78,217  88,934  (10,717) (12)%
Product development13,340
 11,604
 1,736
 15
Product development25,554  28,580  (3,026) (11)%
General and administrative27,333
 17,020
 10,313
 61
General and administrative55,484  58,646  (3,162) (5)%
Total operating expenses135,493
 111,785
 23,708
 21
Total operating expenses292,189  313,904  (21,715) (7)%
Income from operations5,570
 11,288
 (5,718) (51)Income from operations28,326  11,169  17,157  154 %
Other income (expense), net130
 102
 28
 *
Other income, netOther income, net662  1,480  (818) *
Income before income taxes5,700
 11,390
 (5,690) (50)Income before income taxes28,988  12,649  16,339  129 %
Provision for income taxes698
 1,999
 (1,301) *
Provision for income taxes5,683  1,828  3,855  *
Net income$5,002
 $9,391
 $(4,389) (47)%Net income$23,305  $10,821  $12,484  115 %

* Not meaningful
Revenue
Revenue increaseddecreased by $18.0$4.6 million, or 15%1%, to $141.1$320.5 million in the threesix months ended SeptemberJune 30, 20172020 compared to the same period in 2016. Excluding the impact of foreign2019. On a constant currency fluctuations,basis, revenue increased 14%decreased approximately 1% in the threesix months ended SeptemberJune 30, 20172020, compared to the same period in 2016. Increased activity2019.
The Company’s E-Commerce revenues increased by our enterprise customers was1%, to $197.9 million in the primary driver of our revenue growth during the period, which in turn drove an 11% increase in revenue per download assix months ended June 30, 2020, compared to the prior year. In addition, we continuedsame period in 2019. On a constant currency basis, the Company’s E-commerce revenues increased 2% in the six months ended June 30, 2020, compared to growthe same period in 2019. During the six months ended June 30, 2020, growth in our e-commerce customer baseE-commerce sales channel was driven by shifting resources to more efficient performance marketing channels.
The Company’s Enterprise revenues decreased by 6%, to $122.6 million in the six months ended June 30, 2020, compared to the same period in 2019. On a constant currency basis, the Company’s Enterprise revenues decreased by 5% in the six months ended June 30, 2020, compared to the same period in 2019. We continue to face headwinds in our Enterprise sales channel, and undertake initiatives focused on broadening our subscriptionare in the midst of implementing changes to improve performance, including optimizing the sales organization, updating product offerings givingand making further platform investments, which we believe will improve our Enterprise sales channel operations.
Revenue growth for the six months ended June 30, 2020 was also unfavorably affected by the global COVID-19 pandemic and its impact on our customers a greater choice of content plansand their ability to meet their needs.spend marketing budgets on our products. We believe these offerings will leadexpect COVID-19 to sustained customer engagement over longer periods. continue to have an unfavorable impact on our 2020 revenues.
In the threesix months ended SeptemberJune 30, 20172020 and 2016,2019, we delivered 41.990.8 million and 41.293.8 million paid downloads, respectively, and our revenue per download increased to $3.23$3.51 for the threesix months ended SeptemberJune 30, 20172020, from $2.91$3.43 for the threesix months ended SeptemberJune 30, 2016.
In addition, revenue from North America increased by $6.6 million, or 13%, to $55.8 million2019. During the six months ended June 30, 2020, the 3% decrease in the three months ended September 30, 2017number of paid downloads compared to the same period in 2016,2019, is due to lower customer utilization of our products. We believe that COVID-19 is a leading driver of the decline in usage during the quarter.
Changes in our revenue by region were as follows: revenue from North America decreased by $1.9 million, or 2%, to $113.2 million, revenue from Europe decreased by $3.1 million, or 3%, to $106.0 million and revenue from outside Europe and North America increased by $5.7$0.5 million, or 14%1%, to $45.1$101.3 million, in the threesix months ended SeptemberJune 30, 20172020 compared to the same period in 2016,2019.
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Costs and Expenses
Cost of Revenue.   Cost of revenue from the rest of the world increaseddecreased by $5.7$4.8 million, or 17%3%, to $40.2$132.9 million in the threesix months ended SeptemberJune 30, 20172020 compared to the same period in 2016.
Costs2019, due to lower royalty expense, content procurement costs and Expenses
Costdepreciation and amortization expense, partially offset by higher costs associated with website hosting, hardware and software licenses as well as increased credit card fees. In addition, severance charges of Revenue. Cost$1.2 million were recorded during the six months ended June 30, 2020. The reduction in royalty expenses was driven by the 3% decline in paid downloads due to the impact of COVID-19 as well as a change in the way we remunerate contributors. We expect that our cost of revenue increasedwill fluctuate in line with changes in revenue and paid downloads.
Sales and Marketing.   Sales and marketing expenses decreased by $8.6$10.7 million, or 17%12%, to $58.8$78.2 million in the threesix months ended SeptemberJune 30, 20172020 compared to the same period in 2016. Royalties increased $3.0 million, or 9%, which is attributable to the increase in revenue during the period. We anticipate royalties will continue growing in absolute dollars as revenue grows, although royalties as2019. As a percentagepercent of revenue, may vary somewhat from periodsales and marketing expenses decreased to period primarily due to customer usage and product mix and to a lesser extent due to the contributors’ achievement of royalty target thresholds. Costs associated with website hosting and depreciation and amortization increased by $5.9 million to $9.9 million24% for the three months ended SeptemberJune 30, 20172020, from 27% for the same period in 2019. This decrease was primarily driven by a $11.2 million decline in marketing spend as we focused resources on more efficient customer acquisition and improved marketing return on investment. In addition, travel and related expense costs declined by $1.0 million due to travel restrictions resulting from COVID-19. These declines were partially offset by $1.8 million in higher employee-related costs, substantially consisting of severance charges. We expect sales and marketing expenses to fluctuate as we optimize our sales channels and invest in new customer acquisition, products and geographies.
Product Development.   Product development expenses decreased by $3.0 million, or 11%, to $25.6 million in the six months ended June 30, 2020 as compared to $28.6 million for the same period in 2019. This decrease was primarily driven by a$3.7 million reduction in software and other IT-related costs for the six months ended June 30, 2020, as compared to the same period in 2016, related primarily to increased costs associated with technology and infrastructure enhancements.
Sales and Marketing. Sales and marketing expenses increased by $3.0 million, or 9%, to $36.0 million in the three months ended September 30, 2017 compared to the same period in 2016. Employee-related expenses increased by $5.1 million as a result of increased headcount, which wasprior year, partially offset by a number$1.4 million of cost reductions, the largesthigher employee-related costs, including severance charges. We expect product development expenses, of which was a $0.8 million decreaseportion will be capitalized, to continue in advertising costs in the three months ended September 30, 2017 compared to the same period in 2016. We anticipate that our global sales and marketing spend will continue to increase in absolute dollars for the foreseeable future, as we continue to pursue growth through new products and geographies as well as growth from new customers.
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Product Development. Product development expenses increased by $1.7 million, or 15%, from $11.6 million for the three months ended September 30, 2016 to $13.3 million for the three months ended September 30, 2017. The most significant component of this increase relates to employee-related expenses and consulting costs, which increased by $2.0 million, net of capitalized amounts. We continue to increase our investment in product, engineering and quality assurance to support the increasing number of product development initiatives for our websites, including ongoing efforts to improve our search capabilities. A significant portion of this investment is capitalized as internal-use software. We anticipate product development expenses to increase in the foreseeable future, of which a portion will continue to be capitalized, as we continueopportunities to invest in developing new products and internal tools and enhancingenhance the functionality of our existing products and technology.technologies.
General and Administrative.Administrative.   General and administrative expenses increaseddecreased by $10.3$3.2 million, or 61%5%, to $27.3$55.5 million in the threesix months ended SeptemberJune 30, 20172020 compared to the same period in 2016. The most significant component2019. This decrease was primarily driven by: (i) lower depreciation and amortization expense of this increase is$2.5 million, driven by recognition of $1.5 million of accelerated amortization expense in the second quarter of 2019 in conjunction with the Company’s re-branding of its Editorial product; (ii) lower non-cash compensation expense of $2.2 million, resulting from the Company recognizing non-cash compensation expense for the acceleration of equity awards associated with the departure of an executive officer in the six months ended June 30, 2019, and six months of expense recognized in the six months ended June 30, 2019 for certain performance-based stock awards compared to only four months of expense in the same period in 2020 since these awards became fully expensed in April 2020; (iii) a reduction in expense of $1.8 million, associated with the 2019 accrual of long-term incentives, related to our 2017 acquisition of Flashstock; and (iv) lower professional and consulting fees of $1.8 million for the six months ended June 30, 2020, compared to the same period in 2019. These declines were partially offset by (i) higher employee-related expenses whichcosts of $3.9 million, primarily associated with increased by $5.8 million, or 75%,headcount related to $13.5ensuring the stability and security of the Company’s technology infrastructure and (ii) a year over year increase of $1.7 million in bad debt expense, driven by $1.1 million of bad debt expense recorded for the threesix months ended SeptemberJune 30, 2017 due to increases in our workforce to support our growth2020 and improved efficiency and effectivenessa benefit of our infrastructure. In addition,$0.6 million recorded in the three months ended September 30, 2017, we recorded $0.5 million of expense relatedsame period in 2019. We expect to ongoing long-term performance-based bonus arrangements that were entered into concurrently with the acquisition of Flashstock and are expectedcontinue to be paid in 2020. The remaining change inincur general and administrative expenses is attributable to various operating expenses associated with the overallsupport our global operational growth inand enhancements to support our business.reporting and planning functions.
Other Income, (Expense), Net. Other expenses generally include foreign currency gains and losses and changes in the fair value of contingent consideration related to the passage of time. Net. During the threesix months ended SeptemberJune 30, 2017, the $0.12020, approximately $1.1 million of other income related toconsisted of interest income which was partially offset by the remeasurement$0.5 million of our non-functionalunfavorable foreign currency assets and liabilities. fluctuations.
During the threesix months ended SeptemberJune 30, 2016, we incurred expense related to the change in the fair value2019, approximately $2.2 million of contingent consideration,other income consisted of interest income which was mostlypartially offset by $0.7 million of unfavorable foreign currency gains and interest income. Foreign currency transaction gains and losses could fluctuate in future periods asfluctuations. As we continue to expand our international operations and increase the volume of business transacted in foreign currencies other than the U.S. dollar.resulting from international expansion and as currency rates fluctuate, we expect foreign currency gains and losses to continue to fluctuate.
Income Taxes.Taxes.   Income tax expense decreasedincreased by $1.3$3.9 million to $0.7 million infor the threesix months ended SeptemberJune 30, 20172020 as compared to the same period in 2016.2019. Our effective tax raterates for the threesix months ended SeptemberJune 30, 20172020 and 2016 was 12.2%2019 were 19.6% and 17.6%14.5%, respectively. During
For the threesix months ended SeptemberJune 30, 2017, we incurred2020, the effective tax rate increased by 1.6% as a net discreteresult of a loss jurisdiction with no tax benefit related primarily tobenefit. Discrete items further increased the tax effect the domestic production activities deduction claimed on the Company’s 2016 tax return that was substantially completed in the third quarter of 2017, which decreased our effective tax rate by 17.5%. During the three months ended September 30, 2016, we incurred a net discrete tax benefit related to the U.S. Research and Development credit claimed for the years 2013-2015, which decreased our effective tax rate by 22.3%1.4%. Excluding thesethe discrete items, our effective tax rate would have been 29.7% and 39.9%16.6% for the threesix months ended SeptemberJune 30, 2017 and 2016, respectively. The decrease in2020. For the six months ended June 30, 2019, the impact of discrete tax items decreased the effective tax rate excluding discrete items for the three months ended September 30, 2017 resulted from benefits relating to the 2017 U.S. Research & Development tax credit and an increase of income in foreign jurisdictions with lower statutory rates.
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by 1.8%.

Comparison of the Nine Months Ended September 30, 2017 and 2016
The following table presents our results of operations for the periods indicated:
 Nine Months Ended September 30,
 2017 2016 $ Change % Change
 (in thousands)  
Consolidated Statements of Operations Data: 
  
  
  
Revenue$405,282
 $364,144
 $41,138
 11 %
Operating expenses:     
  
Cost of revenue168,512
 150,492
 18,020
 12 %
Sales and marketing105,620
 91,636
 13,984
 15 %
Product development37,276
 34,800
 2,476
 7 %
General and administrative74,716
 54,629
 20,087
 37 %
Total operating expenses386,124
 331,557
 54,567
 16 %
Income from operations19,158
 32,587
 (13,429) (41)%
Other expense, net2,095
 (122) 2,217
 *
Income before income taxes21,253
 32,465
 (11,212) (35)%
Provision for income taxes6,582
 9,692
 (3,110) *
Net income$14,671
 $22,773
 $(8,102) (36)%

*    Not meaningful
Revenue
Revenue increased by $41.1 million, or 11%, to $405.3 million in the nine months ended September 30, 2017 compared to the same period in 2016. Excluding the impact of foreign currency fluctuations, revenue for the nine months ended September 30, 2017 increased 12% as compared to the same period in the prior year. We continue to grow our customer base and undertake initiatives focused on broadening our subscription product offerings, giving customers a greater choice of content plans to meet their needs. We believe these offerings will lead to sustained customer engagement over longer periods. As a result of these initiatives, the increase in revenue was primarily attributable to a 2% increase in the number of paid downloads, the acquisition of new customers and increased activity by our enterprise customers, driving an 8% increase in revenue per download. In the nine months ended September 30, 2017 and 2016, we delivered 128.1 million and 125.8 million paid downloads, respectively, and our average revenue per download during these periods was $3.06 and $2.83, respectively.
In addition, revenue from North America increased by $15.5 million, or 11%, to $161.4 million in the nine months ended September 30, 2017 compared to the same period in 2016, revenue from Europe increased by $12.1 million, or 10%, to $131.7 million in the nine months ended September 30, 2017 compared to the same period in 2016, and revenue from the rest of the world increased by $13.6 million, or 14%, to $112.2 million in the nine months ended September 30, 2017 compared to the same period in 2016.
Cost and Expenses
Cost of Revenue.   Cost of revenue increased by $18.0 million, or 12%, to $168.5 million in the nine months ended September 30, 2017 compared to the same period in 2016. Royalties increased $5.2 million, or 5%,  which was attributable to the increases in revenue and paid downloads during the period. We anticipate royalties will continue growing in absolute dollars as revenue grows, although royalties as a percentage of revenue may vary somewhat from period to period primarily due to customer usage and product mix and to a lesser extent due to the contributors’ achievement of royalty target thresholds. Costs associated with website hosting and depreciation and amortization increased by $14.5 million to $26.0 million in the nine months ended September 30, 2017 compared to the same period in 2016, related primarily to increased costs associated with technology and infrastructure enhancements, which were partly offset by a decline in various other costs related to revenue.
Sales and Marketing.   Sales and marketing expenses increased by $14.0 million, or 15%, to $105.6 million in the nine months ended September 30, 2017 compared to the same period in 2016. Expenses related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by $8.2 million, or 18%, for the nine months ended September 30, 2017 compared to the same period in 2016 as a result of increased spending on affiliate, search advertising and other new channels. We anticipate that our global advertising spend will continue to increase in absolute dollars for the foreseeable future, as we continue to pursue growth through new products and geographies as well as growth from new customers.
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Product Development.   Product development expenses increased by $2.5 million, or 7%, to $37.3 million for the nine months ended September 30, 2017 as compared to $34.8 million for the same period in 2016. The increase was driven by a $1.4 million increase in employee-related expenses, excluding compensation, and a $1.1 million increase in employee compensation and consulting costs, net of capitalized amounts. We continue to increase our investment in product, engineering and quality assurance to support the increasing number of product development initiatives for our websites, including ongoing efforts to improve our search capabilities. A significant portion of this investment is capitalized as internal use software. We anticipate product development expenses to increase in the foreseeable future, of which a portion will continue to be capitalized, as we continue to invest in developing new products and internal tools and enhancing the functionality of our existing products and technology.
General and Administrative.   General and administrative expenses increased by $20.1 million, or 37%, to $74.7 million in the nine months ended September 30, 2017 compared to the same period in 2016. The most significant component of this increase is related to employee-related expenses, which increased by $11.6 million, or 46%, to $36.9 million in the nine months ended September 30, 2017 due to increases in our workforce to support our growth and improved efficiency and effectiveness of our infrastructure. Additionally, professional service fees increased $6.0 million as compared to the nine months ended September 30, 2016, primarily related to specialized services pertaining to the implementation of several large-scale business solutions aimed at increasing internal efficiency and functionality to best support our organizational growth. In the nine months ended September 30, 2017, we also recorded $0.5 million of expense related to ongoing long-term performance-based bonus arrangements that were entered into concurrently with the acquisition of Flashstock and are expected to be paid in 2020. The remaining growth in general and administrative expenses is attributable to various operating expenses associated with the overall growth in our business.
Other Income/(Expense), Net. Other expenses generally include foreign currency gains and losses and changes in the fair value of contingent consideration related to the passage of time.  During the nine months ended September 30, 2017, $2.1 million of other income related to the remeasurement of our non-functional currency assets and liabilities and interest income. During the nine months ended September 30, 2016, we incurred expense related to the change in the fair value of contingent consideration, which was mostly offset by foreign currency gains. Foreign currency transaction gains and losses could fluctuate in future periods as we continue to expand our international operations and increase the volume of business transacted in currencies other than the U.S. dollar.
Income Taxes.   Income tax expense decreased by $3.1 million to $6.6 million in the nine months ended September 30, 2017 compared to the same period in 2016. Our effective tax rate for the nine months ended September 30, 2017 and 2016 was 31.0% and 29.9%, respectively. During the nine months ended September 30, 2017, we incurred a net discrete tax benefit relating primarily to the tax effectoutside of the domestic production activities deduction claimed on the Company’s 2016 tax return that was substantially completedUnited States, we have been and may continue to become subject to taxation in the third quarter of 2017, which decreasedadditional non-U.S. jurisdictions and our effective tax rate by 2.0%. During the nine months ended September 30, 2016, we incurred a net discrete tax benefit related primarily to the U.S. Research and Development tax credit for the years 2013 to 2015, which decreased our effective tax rate by 10.0%. Excluding these discrete items, the effective tax rate would have been 33.0% and 39.9% during the nine months ended September 30, 2017 and 2016, respectively. The decrease in the effective tax rate excluding discrete items for the nine months ended September 30, 2017 resulted from benefits relating to the 2017 U.S. Research & Development tax credit and an increasecould fluctuate accordingly.
28
Table of income in foreign jurisdictions with lower statutory rates.Contents
Quarterly Trends
Our operating results may fluctuate from quarter to quarter as a result of a variety of factors, including the effects of some seasonal trends in customer behavior. For example, we expect certain customers’ usage may decrease during the third quarter of each calendar year and may increase in the fourth quarter of each calendar year dueas demand is generally higher to support marketing campaigns in advance of the year-endfourth quarter holiday vacation season and may increase in the first quarter of each calendar year as many customers return to work.season. While we believe seasonal trends have affected and will continue to affect our quarterly results, our growth trajectory of rapid growth may have overshadowed these effects to date. Additionally, because a significant portion of our revenue is derived from repeat customers who have purchased subscription plans, our revenues tend to be smoother and less volatile than if we had no subscription-based customers.
In addition, expenditurescustomers’ expenditure on digital content by customers tendtends to be discretionary in nature reflecting overall economic conditions, the economic prospects of specific industries, budgeting constraints, buying patterns and has been impacted by COVID-19. We cannot estimate when a variety of other factors, many of which are outside our control. As a result of theserecovery will occur and other factors,therefore, the results of any prior quarterly or annual periodsperiod should not be relied upon as indicators of our future operating performance.
TableSee Part II, Item 1A Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which was filed with the SEC on April 28, 2020, for further discussion of Contents
the possible impact of the COVID-19 pandemic on our business.


Liquidity and Capital Resources
As of SeptemberJune 30, 2017,2020, we had cash and cash equivalents and short-term investments totaling $235.3 million. Cash and cash equivalents,$311.2 million which consist primarily consisted of money market mutual funds and checking account balances, were $212.8 million. Our short-term investments, all of which mature in 90 days or less, were $22.5 million.bank balances. Since inception, we have financed our operations primarily through cash flows generated from operations.
Historically, our principal uses of cash have beenincluded funding our operations, capital expenditures, content acquisition,acquisitions, business combinations that enhance our strategic position, cash dividend payments and share purchases under our share repurchase program. We plan to finance our operations and capital expenses largely through cash generated by our operations. Since our results of operations are sensitive to the level of competition we face, increased competition could adversely affect our liquidity and capital resources.
AcquisitionDividends
We declared and paid cash dividends of Flashstock Technology, Inc.$0.34 per share of common stock, or $12.1 million during the six months ended June 30, 2020.
On July 7, 2017, we completed20, 2020, our acquisitionBoard of Flashstock Technology, Inc. (“Flashstock”) for approximately $51.2 million, pursuantDirectors declared a quarterly cash dividend of $0.17 per share of outstanding common stock payable on September 17, 2020 to a definitive agreement dated June 27, 2017. The total purchase price consistsstockholders of record at the close of business on September 3, 2020. Future declaration of dividends are subject to the final determination of our Board of Directors, and will depend on, among other things, our future financial condition, results of operations, capital requirements, capital expenditure requirements, contractual restrictions, anticipated cash paymentsneeds, business prospects, provisions of $50.9 million paid from existing cash on hand during the three months ended September 30, 2017,applicable law and an additional estimated cash paymentother factors our Board of $0.3 million is expected to be paid for the settlement of working capital adjustments in the fourth quarter of 2017.  Directors may deem relevant.
Share Repurchase Program
In October 2015, our boardBoard of directorsDirectors approved a share repurchase program, pursuant to which we are authorizedauthorizing us to repurchase up to $100 million of our common stock, and in February 2017, our Board of Directors approved an additionalincrease to the share repurchase program, under which we are authorizedauthorizing us to repurchase up to an additional $100 million of our outstanding common stock. We expect to fund future repurchases, if any, through a combination of cash on hand, cash generated by operations and future financing transactions, if appropriate. Accordingly, our share repurchase program is subject to us having available cash to fund repurchases. Under thisthe share repurchase program, management is authorized to purchase shares of our common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.
As of SeptemberJune 30, 2017,2020, we have repurchased approximately 2,558,000 shares of our common stock under the share repurchase program at an average per-share cost of $39.09. During the six months ended June 30, 2020, we did not repurchase any shares of our common stock under the share repurchase program. As of SeptemberJune 30, 2017,2020, we had $100.0$100 million of remaining authorization for share repurchases under thisthe share repurchase program.
Equity-Based Compensation
Upon the vesting of restricted stock units (“RSUs”), the Company has a practice of net share settlement, to cover any required withholding taxes by retaining the number of shares with a value equal to the amount of the tax and remitting an equal amount of cash to the appropriate taxing authorities, rather than requiring employees to sell a portion of the shares that they receive upon vesting to fund the required withholding taxes (“sell-to-cover”). The net share settlement approach has increased our cash outflows compared to the cash outflows under the sell-to-cover approach. In addition, as compared to the sell-to-cover approach, net share settlement has resulted in fewer shares being issued into the market as employees’ RSUs vest, thereby reducing the dilutive impact of our equity-based compensation programs on stockholders.
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During the six months ended June 30, 2020, shares with an aggregate value of $3.4 million were withheld upon vesting of RSUs and paid in connection with related remittance to taxing authorities.
Sources and Uses of Funds
We believe, based on our current operating plan, that our cash and cash equivalents, and cash from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Consistent with previous periods, we expect that futureFuture capital expenditures will primarilycould relate to acquiring additional servers and network connectivity hardware and software,building enhancements to the functionality of our current platform, the acquisition of additional storage, servers, network connectivity hardware, security apparatus and software, leasehold improvements and furniture and fixtures related to office expansion and relocation, digital content and general corporate infrastructure. In March 2017, we paid the full amount of the contingent purchase price for PremiumBeat of approximately $10.0 million. See Note 612 to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding our existing capital commitments as of SeptemberJune 30, 2017.2020.
Cash Flows
The following table summarizes our cash flow data for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands).
 Nine Months Ended September 30,
 2017 2016
Net cash provided by operating activities$71,510
 $76,178
Net cash used in investing activities$(59,991) $(38,942)
Net cash used in financing activities(1)
$(33,144) $(38,232)

(1)Includes repurchase of common stock under the share repurchase program for the nine months ended September 30, 2017 and 2016. No distributions or dividends have been paid during the periods presented.
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 Six Months Ended June 30,
 20202019
Net cash provided by operating activities$36,343  $46,743  
Net cash used in investing activities$(15,438) $(12,478) 
Net cash used in financing activities$(14,905) $(4,963) 
Operating Activities
Our primary source of cash from operating activities is cash collections from our customers. The majority of our revenue is generated from credit card transactions and is typically settled within one to five business days. Our primary uses of cash for operating activities are for the payment of royalties to content contributors, employee-related expenditures and the payment of other operating expenses incurred in the ordinary course of business.
Net cash provided by operating activities was $71.5$36.3 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $76.2$46.7 million for the ninesix months ended SeptemberJune 30, 2016.2019. In the ninesix months ended SeptemberJune 30, 2017,2020, operating cash flows were unfavorably impacted favorably by $7.8 million of one-time payments associated with long-term incentives related to our 2017 acquisition of Flashstock. Operating cash flows were also unfavorably impacted by the reduction in revenues and other changes in the timing of payments pertaining to operating expenses, which can cause operating cash flow to fluctuate from period to period. The impact
In addition, the Company paid net cash taxes of these changes were partly offset by$0.9 million and $1.5 million, for the March 2017 payment of the contingent consideration related to the PremiumBeat acquisition.six months ended June 30, 2020 and 2019, respectively.
Investing Activities
Cash used in investing activities infor the ninesix months ended SeptemberJune 30, 20172020 was $60.0$15.4 million, consisting primarily of cash used in the acquisition of Flashstock of $49.5 million, net of cash acquired, capital expenditures of $37.6$14.0 million to purchasefor internal-use software and equipment related to our data centers, capitalization of leasehold improvements and website development costs and $2.6purchases of software and equipment and $1.6 million paid to acquire the rights to distribute certain digital content in perpetuity. In addition, we decreased our position in short-term investments by $32.8 million, net of purchases.
Cash used in investing activities in the ninesix months ended SeptemberJune 30, 20162019 was $38.9$12.5 million, consisting primarily of capital expenditures of $26.7$13.7 million to purchasefor internal-use software and equipment related to our data centers, capitalization of leasehold improvements and website development costs and $6.2purchases of software and equipment, and $1.3 million paid to acquire the rights to distribute certain digital content in perpetuity. Included in these amounts is approximately $3.9into perpetuity, partially offset by $2.5 million of cash received during the six months ended June 30, 2019 from escrowed funds related to the sale of Webdam, our acquisition of the intellectual property and content assets of The Picture Desk Limited during the third quarter of 2016. In addition, we increased our positionformer digital asset management business, which was sold in short-term investments by $5.2 million, net of sales.February 2018.
Financing Activities
Cash used in financing activities in the ninesix months ended SeptemberJune 30, 20172020 was $33.1$14.9 million, consisting primarily of $25.0$12.1 million paid for share repurchases during the period. Cash used in financing activities also included $3.7 million, which was paid in settlement of contingent consideration liabilities related to the 2015 acquisitionpayment of PremiumBeatthe quarterly cash dividend and $5.8$3.4 million, which was paid in settlement of tax withholding obligations related to employee stock-based compensation awards. These amounts were partially offset by proceeds of approximately $1.4$0.6 million from the issuance of common stock in connection with the exercise of stock options.
Cash used in financing activities in the ninesix months ended SeptemberJune 30, 20162019 was $38.2$5.0 million, consisting primarily of $44.9 million paid for share repurchases during the period and $2.4$5.2 million, which was paid to certain former shareholders of Webdam in settlement of the contingent purchase price liability established at the acquisition date, which wastax withholding obligations related to employee stock-based compensation awards. These amounts were partially offset by proceeds of approximately $9.0$0.2 million from the issuance of common stock in connection with the exercise of stock options and the saleoptions.

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Table of stock under our employee stock purchase plan.Contents
Contractual Obligations and Commitments
We lease office facilitiesreal estate under operating lease agreements that expire on various dates during the period from 2020 through 2029. We do not have any material capitalfinance lease obligations and our property, equipment and software have been purchased primarily with cash. We anticipate expanding our office and co-location facilities as our revenue and customer base continue to grow and diversify. We do not anticipate any difficulties in renewing those leases and co-location agreements that expire within the next several years and that we currently plan to renew, or in leasing other space or hosting facilities, if required. 
On March 21, 2013, we entered into an operating lease agreement to lease our headquarters in New York City, which was amended in 2016. The aggregate undiscounted future minimum lease payments under the lease, as amended, are approximately $79.2$59.2 million. We are also party to a letter of credit as a security deposit for this leased facility, which was increased toreduced from $2.6 million to $1.7 million in January 2016 in connection with an amendment of the lease.February 2020. As of September 30, 2017,March 31, 2020, the Company is no longer required to provide cash collateral for its letter of credit, is collateralized by $2.6 million of cash, which is reported as restricted cash on our consolidated balance sheet as of September 30, 2017.and, accordingly, these funds are no longer restricted.
Additionally, as of SeptemberJune 30, 2017,2020, aggregate undiscounted future minimum lease payments under other operating leases are approximately $7.3$9.2 million.
We enter into unconditional purchase obligations related to contracts for cloud-based services, infrastructure and other business services as well as minimum royalty guarantees in connection with certain content licenses. As of SeptemberJune 30, 2017,2020, our guaranteed royalty payments and unconditional purchase obligations for the remainder of 20172020 and for the fiscal years ending December 31, 2018, 20192021 and 20202022 were approximately $5.6$18.2 million, $16.2 million, $11.7$16.5 million and $8.6$4.4 million, respectively.

Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with the accounting principles generally accepted in the United States, or GAAP, our management considers certain financial measures that are not prepared in accordance with GAAP, collectively referred to as non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage), and free cash flow. These non-GAAP financial measures are included solely to provide investors with additional information regarding our financial results and are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled measures presented by other companies.

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Non-GAAP Financial Measures:(in thousands)
Adjusted EBITDA$37,032  $25,106  $59,092  $50,648  
Adjusted net income22,162  11,785  31,321  24,189  
Free cash flow$22,383  $19,829  $28,559  $31,740  
Revenue growth on a constant currency basis(1)%5 %(1)%7 %

These non-GAAP financial measures have not been calculated in accordance with GAAP, should be considered only in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP measures. In addition, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis and free cash flow should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions; accordingly, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.
Our management uses these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing the business and to, among other things: (i) monitor and evaluate the performance of our business operations, financial performance and overall liquidity; (ii) facilitate management’s internal comparisons of the historical operating performance of its business operations; (iii) facilitate management’s external comparisons of the results of its overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (iv) review and assess the operating performance of our management team and, together with other operational objectives, as a measure in evaluating employee compensation and bonuses; (v) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (vi) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments. 
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Other Commitments
On October 20, 2016, we entered intoManagement believes that adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share and revenue growth (including by distribution channel) on a multi-part transactionconstant currency basis are useful to investors because these measures enable investors to analyze our operating results on the same basis as that used by management. Additionally, management believes that adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted common share provide useful information to investors about the performance of the Company’s overall business because such measures eliminate the effects of unusual or other infrequent charges that are not directly attributable to our underlying operating performance; and that revenue growth (including by distribution channel) on a constant currency basis, provides useful information to investors by eliminating the effect of foreign currency fluctuations that are not directly attributable to our business. Management also believes that providing these non-GAAP financial measures enhances the comparability for investors in assessing our financial reporting. Management believes that free cash flow is useful for investors because it provides them with an unrelated third-party contributor (the “Transaction Party”). The transaction included three primary components: (a) a revolving credit facility pursuant to which we would be obligated to lend up to $4.6 million under certain conditions, (the “Facility”) to the Transaction Party. The Facility has a term of five years and requires the Transaction Party to make quarterly payments of principal to us beginningimportant perspective on the fourth anniversarycash available for strategic measures, after making necessary capital investments in property and equipment to support the Company’s ongoing business operations and after excluding the impact of nonrecurring payments associated with long-term incentives related to our 2017 acquisition of Flashstock, and provides them with the same measures that management uses as the basis for making resource allocation decisions.
Our use of non-GAAP financial measures has limitations as an analytical tool, and these measures should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. When evaluating our performance, these non-GAAP financial measures should be considered in addition to other financial performance measures, including various cash flow metrics, net income and our other GAAP results.
Our method for calculating adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis and free cash flow, as well as a reconciliation of the Facility. The Facility bears interest at 10.0%, with all interest payments deferred until maturity,differences between adjusted EBITDA, adjusted net income, revenue growth (including by distribution channel) on a constant currency basis and free cash flow, and the entire unpaid balancemost comparable financial measures calculated and presented in accordance with GAAP, are presented below.
Adjusted EBITDA
We define adjusted EBITDA as net income adjusted for depreciation and amortization, non-cash equity-based compensation, foreign currency transaction gains and losses, expenses related to long-term incentives and contingent consideration related to acquisitions, interest income and expense and income taxes. We define adjusted EBITDA margin as the ratio of principal and accrued interest due upon maturity; (b) we will be the exclusive distributoradjusted EBITDA to revenue.
The following is a reconciliation of net income to adjusted EBITDA for each of the Transaction Party’s contentperiods indicated:
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
(in thousands)
Net income$18,987  $3,299  $23,305  $10,821  
Add / (less) Non-GAAP adjustments:
Depreciation and amortization10,851  13,403  21,370  25,319  
Non-cash equity-based compensation3,636  7,751  9,396  12,375  
Other adjustments, net(1)
(149) 298  (662) 305  
Provision for income taxes3,707  355  5,683  1,828  
Adjusted EBITDA$37,032  $25,106  $59,092  $50,648  
Adjusted EBITDA margin23.3 %15.5 %18.4 %15.6 %

(1)Included in certain markets subjectother adjustments, net is foreign currency transaction gains and losses, expenses related to certain limitations;long-term incentives and (c) we may, at our option, may acquirecontingent consideration related to acquisitions, and interest income and expense.
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Adjusted Net Income
We define adjusted net income as net income adjusted for the Transaction Party at any time afterimpact of non-cash equity-based compensation, the third anniversaryamortization of acquisition-related intangible assets, expenses related to long-term incentives and contingent consideration related to acquisitions and the estimated tax impact of such adjustments. We define adjusted net income per diluted common share as adjusted net income divided by weighted average diluted shares.
The following is a reconciliation of net income to adjusted net income for each of the Facility or match any third-partyperiods indicated:
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
(in thousands)
Net income$18,987  $3,299  $23,305  $10,821  
Add / (less) Non-GAAP adjustments:
Non-cash equity-based compensation3,636  7,751  9,396  12,375  
Tax effect of non-cash equity-based compensation(854) (1,822) (2,208) (2,909) 
Acquisition-related amortization expense514  2,407  1,082  3,297  
Tax effect of acquisition-related amortization expense(121) (498) (254) (707) 
Acquisition-related long-term incentives and contingent consideration(1)
—  882  —  1,786  
Tax effect of acquisition-related long-term incentives and contingent consideration—  (234) —  (474) 
Adjusted net income$22,162  $11,785  $31,321  $24,189  
Adjusted net income per diluted common share$0.62  $0.33  $0.87  $0.68  
(1)Represents expenses related to long-term incentives and contingent consideration related to our 2017 acquisition offerof Flashstock.

Revenue Growth (including by distribution channel) on a Constant Currency Basis
We define revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage) as the increase in current period revenues over prior period revenues, utilizing fixed exchange rates for translating foreign currency revenues for all periods in the comparison.
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
(in thousands)
Reported revenue (in thousands)$159,230  $161,741  $320,515  $325,073  
Revenue growth(2)%3 %(1)%5 %
Revenue growth on a constant currency basis(1)%5 %(1)%7 %
E-commerce reported revenue (in thousands)$98,164  $96,993  $197,900  $195,106  
E-commerce revenue growth1 %6 %1 %8 %
E-commerce revenue growth on a constant currency basis2 %7 %2 %10 %
Enterprise reported revenue (in thousands)$61,066  $64,748  $122,615  $129,967  
Enterprise revenue growth(6)%— %(6)%4 %
Enterprise revenue growth on a constant currency basis(5)%2 %(5)%6 %

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Free Cash Flow
We define free cash flow as our cash provided by operating activities, adjusted for capital expenditures and content acquisition, and, with respect to the Transaction Party at any time until the fifth anniversarythree months ended March 31, 2020, a payment associated with long-term incentives related to our 2017 acquisition of Flashstock.
The following is a reconciliation of net cash provided by operating activities to free cash flow for each of the Facility. periods indicated:

 Six Months Ended June 30,
 20202019
(in thousands)
Net cash provided by operating activities$36,343  $46,743  
Capital expenditures(13,966) (13,726) 
Content acquisitions(1,577) (1,277) 
Payments related to long-term incentives related to acquisitions7,759  —  
Free Cash Flow$28,559  $31,740  
On March 27, 2017, the Facility was amended to reduce the maximum lending amount to $3.0 million.  As of September 30, 2017, the Transaction Party has borrowed $1.3 million under the Facility. The Company has reported this amount in other non-current assets.


Simultaneously, we invested $1.6 million in a convertible note issued by the Transaction Party, which matures on October 20, 2021.  The convertible note bears interest at 10.0%, with all interest payments deferred until maturity, and the entire unpaid balance of principal and accrued interest due upon maturity. The principal amount of the convertible note and any accrued and unpaid interest may be converted into equity of the Transaction Party at our option on the maturity date, or earlier upon certain events.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2017,2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.


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Item 3.   Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business, including risks related to interest rate fluctuation, foreign currency exchange rate fluctuation, interest rate fluctuation and inflation.
Interest Rate Fluctuation Risk
Our investments include cash and cash equivalents, which consist of cash, commercial paper and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because our cash and cash equivalents have a maximum term of 90 days, our portfolio’s fair value is not particularly sensitive to interest rate changes.
We did not have any long-term borrowings as of September 30, 2017. 
Foreign Currency Exchange Risk
Our sales to international customers are denominated in multiple currencies, including but not limited to the U.S. dollar, the euro, the British pound, the Australian dollar and the Japanese yen. Revenue denominated in foreign currencies as a percentage of total revenue was approximately 34% and 32%35% for the threesix months ended SeptemberJune 30, 20172020 and 2016, respectively. We have foreign currency exchange risks related to non-U.S. dollar denominated revenues. All amounts earned by and paid to our foreign contributors are denominated in the U.S. dollar. However, changes2019. Changes in exchange rates will affect our revenue and certain operating expenses to the extent that our revenue is generated and expenses are incurred in currencies other than the U.S. dollar. Royalties earned by and paid to contributors are denominated in the U.S. dollar and will not be affected by changes in exchange rates. Based on our foreign currency denominated revenue for the ninesix months ended SeptemberJune 30, 2017,2020, we estimate that a 10% change in the exchange rate of the U.S. dollar against all foreign currency denominated revenues would result in an approximately 3% impact on our revenue.
We have established foreign subsidiaries in various countries and have concluded theirthat the functional currency of these entities is generally the local currency. Business transacted in currencies other than each entity’s functional currency results in transactional gains and losses. Translation adjustments resulting from converting the foreign subsidiaries’ financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive income (loss)loss in stockholders’ equity. We do not currently enter into derivatives or other financial instruments in order to hedge our foreign currency exchange risk, but we may do so in the future.
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Our historical revenue by currency is as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
U.S. DollarsOriginating CurrencyU.S. DollarsOriginating CurrencyU.S. DollarsOriginating CurrencyU.S. DollarsOriginating Currency
Euro$32,756  €29,717  $33,460  €29,467  $66,448  €60,095  $66,535  €58,138  
British pounds11,274  £9,039  11,918  £9,191  23,477  £18,509  24,032  £18,447  
All other non-U.S. currencies(1)
11,408  11,752  23,203  23,514  
Total foreign currency55,438  57,130  113,128  114,081  
U.S. dollar103,792  104,611  207,387  210,992  
Total revenue$159,230  $161,741  $320,515  $325,073  
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  U.S. Dollars Originating Currency U.S. Dollars Originating Currency U.S. Dollars Originating Currency U.S. Dollars Originating Currency
Euro $25,663
 €21,852
 $19,734
 €17,688
 $72,847
 €65,454
 $58,941
 €52,804
British pounds 12,676
 £9,689
 11,097
 £8,450
 35,451
 £27,802
 34,633
 £24,863
All other non-U.S. currencies(1)
 10,199
   8,941
   28,363
   24,897
  
Total foreign currency 48,538
   39,772
   136,661
   118,471
  
                 
U.S. dollar 92,525
   83,301
   268,621
   245,673
  
Total revenue $141,063
   $123,073
   $405,282
   $364,144
  
                 
                 
(1)Includes no single currency which exceeded 5% of total revenue for any of the periods presented.
(1)Includes no single currency which was greater than 5% of total revenue for any of the periods presented
Interest Rate Fluctuation Risk
Our cash and cash equivalents consist of cash and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. The fair value of our cash and cash equivalents is not particularly sensitive to interest rate changes.
We did not have any long-term borrowings as of June 30, 2020. 
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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Item 4.   Controls and Procedures.
Evaluation of Disclosure Controls and Procedures 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017.2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes thatHowever, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.objective.
Based on the evaluation of our disclosure controls and procedures as of SeptemberJune 30, 2017,2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Our management is in the process of reviewing the operations of Flashstock, which we acquired in July 2017, and implementing our internal control structure over the operations of the recently acquired entity. Except for the preceding change, thereThere were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings.
Although we are not currently a party to any material active litigation, from time to time, third parties assert claims against us regarding intellectual property rights, employment matters,’ privacy issues and other matters arising during the ordinary course of business. Although we cannot be certain of the outcome of any litigation or the disposition of any claims, nor the amount of damages and exposure, if any, that we could incur, we currently believe that the final disposition of all existing matters will not have a material adverse effect on our business, results of operations, financial condition or cash flows. In addition, in the ordinary course of our business, we are also subject to periodic threats of lawsuits, investigations and claims. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors.
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 20162019 Form 10-K, and Part II, “Item 1. Risk Factors” in our first quarter 2020 Form 10-Q, which could materially affect our business, financial condition or future results. During the three months ended SeptemberJune 30, 2017,2020, there were no material changes to thethese risk factors as described in our 20162019 Form 10-K.10-K and first quarter 2020 Form 10-Q.


Item 6.  Exhibits.
See the Exhibit Index, which immediately followingprecedes the signature page of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
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EXHIBIT INDEX

Exhibit
NumberExhibit Description
10.1#
10.2#
10.3
31.1#
31.2#
32#
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
______________________________________ 
# Filed herewith.

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SHUTTERSTOCK, INC.
Dated: July 28, 2020By:/s/ Jarrod Yahes
Jarrod Yahes
Chief Financial Officer
(Principal Financial Officer)
Dated: July 28, 2020By:/s/ Steven Ciardiello
Steven Ciardiello
Chief Accounting Officer
(Principal Accounting Officer)
SHUTTERSTOCK, INC.
Dated: October 31, 2017By:/s/ Steven Berns
Steven Berns
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
Dated: October 31, 2017By:/s/ Steven Ciardiello
Steven Ciardiello
Chief Accounting Officer
(Principal Accounting Officer)

Table of Contents

EXHIBIT INDEX


39
Exhibit
NumberExhibit Description
10.1
Transition Agreement and General Release, dated August 3, 2017 between the Company and David Giambruno (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 4, 2017 (File No. 001-35669))
31.1#
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2#
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32#
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
______________________________________ 
#    Filed herewith.