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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~___________________________________________________________~~__________________________________________________________________________________________________

FORM 10-Q

~~___________________________________________________________~~___________________________________________________________________________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2020~~March 31, 2021

☐ 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)

________________________________________________________


Delaware						80-0812659
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

350 Fifth Avenue, 21st Floor

New York, NY 10118

(Address of principal executive offices, including zip code)

(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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	SSTK	New York Stock Exchange

Indicate by check mark whether 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. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically 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). ☒ Yes ☐ 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

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not 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.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐

Yes

☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of ~~July 24, 2020, 35,695,665~~April 23, 2021, 36,555,123 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.

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Shutterstock, Inc.

FORM 10-Q

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For the Quarterly Period Ended ~~June 30, 2020~~March 31, 2021

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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 discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 regarding future business, future results of operations or financial condition, future dividends, new or planned features, products or services, management strategies and the COVID-19 pandemic. You can identify many forward-looking statements by words such as “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. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the 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 ~~13, 2020,~~11, 2021 (our “2020 Form 10-K”), 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 Annual Report, this Quarterly Report on Form 10-Q and our other filings with the SEC. Given these risks and uncertainties, you should not place undue reliance on these forward-looking 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.

Unless the context otherwise indicates, references in this Quarterly Report on Form 10-Q to the terms “Shutterstock,” “the Company,” “we,” “our” and “us” refer to Shutterstock, Inc. and its subsidiaries. “Shutterstock,” Shutterstock Editorial,” “Shutterstock Select,” “Asset Assurance,” “Offset,” “Bigstock,” “Rex Features,” ~~“PremiumBeat”~~“PremiumBeat,” “TurboSquid” and “Shutterstock Editor” and their logos are registered trademarks 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)


		June 30,		December 31,			March 31,		December 31,
		2020		2019			2021		2020

ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	311,157	$	303,261	Cash and cash equivalents	$	363,926	$	428,574

Accounts receivable, net of allowance of $3,608 and $3,579		48,744		47,016
Accounts receivable, net of allowance of $5,487 and $4,942						Accounts receivable, net of allowance of $5,487 and $4,942	49,261		43,846
Prepaid expenses and other current assets	Prepaid expenses and other current assets	26,590		26,703		Prepaid expenses and other current assets	27,401		16,650

Total current assets	Total current assets	386,491		376,980		Total current assets	440,588		489,070
Property and equipment, net	Property and equipment, net	54,240		58,834		Property and equipment, net	50,366		50,906
Right-of-use assets	Right-of-use assets	42,097		45,453		Right-of-use assets	37,908		39,552
Intangible assets, net	Intangible assets, net	25,182		26,669		Intangible assets, net	45,762		25,765
Goodwill	Goodwill	88,167		88,974		Goodwill	149,040		89,413
Deferred tax assets, net	Deferred tax assets, net	13,727		14,387		Deferred tax assets, net	10,156		13,566
Other assets	Other assets	16,427		19,215		Other assets	21,324		21,372
Total assets	Total assets	$	626,331	$	630,512	Total assets	$	755,144	$	729,644
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	4,504	$	6,104	Accounts payable	$	6,088	$	2,442
Accrued expenses	Accrued expenses	51,554		53,864		Accrued expenses	65,453		67,909
Contributor royalties payable	Contributor royalties payable	24,248		25,193		Contributor royalties payable	28,228		26,336

Deferred revenue	Deferred revenue	138,229		141,922		Deferred revenue	153,630		149,843

Other current liabilities	Other current liabilities	10,347		18,811		Other current liabilities	11,924		10,399
Total current liabilities	Total current liabilities	228,882		245,894		Total current liabilities	265,323		256,929

Lease liabilities	Lease liabilities	44,280		47,313		Lease liabilities	40,062		41,620
Other non-current liabilities	Other non-current liabilities	9,669		9,160		Other non-current liabilities	9,255		9,170
Total liabilities	Total liabilities	282,831		302,367		Total liabilities	314,640		307,719
Commitments and contingencies (Note 12)
Commitments and contingencies (Note 13)						Commitments and contingencies (Note 13)	0		0

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:

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, respectively		382		381
Treasury stock, at cost; 2,558 shares as of June 30, 2020 and December 31, 2019		(100,027)		(100,027)
Common stock, $0.01 par value; 200,000 shares authorized; 39,010 and 38,803 shares issued and 36,452 and 36,245 shares outstanding as of March 31, 2021 and December 31, 2020, respectively						Common stock, $0.01 par value; 200,000 shares authorized; 39,010 and 38,803 shares issued and 36,452 and 36,245 shares outstanding as of March 31, 2021 and December 31, 2020, respectively	391		389
Treasury stock, at cost; 2,558 shares as of March 31, 2021 and December 31, 2020						Treasury stock, at cost; 2,558 shares as of March 31, 2021 and December 31, 2020	(100,027)		(100,027)
Additional paid-in capital	Additional paid-in capital	319,412		312,824		Additional paid-in capital	357,422		360,939
Accumulated comprehensive loss	Accumulated comprehensive loss	(8,414)		(6,220)		Accumulated comprehensive loss	(7,455)		(7,681)
Retained earnings	Retained earnings	132,147		121,187		Retained earnings	190,173		168,305
Total stockholders’ equity	Total stockholders’ equity	343,500		328,145		Total stockholders’ equity	440,504		421,925
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	626,331	$	630,512	Total liabilities and stockholders’ equity	$	755,144	$	729,644

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 June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020

Revenue	Revenue	$	159,230	$	161,741	$	320,515	$	325,073	Revenue	$	183,281	$	161,285

Operating expenses:	Operating expenses:									Operating expenses:
Cost of revenue	Cost of revenue	63,811		68,526		132,934		137,744		Cost of revenue	61,832		69,123
Sales and marketing	Sales and marketing	35,557		44,488		78,217		88,934		Sales and marketing	41,921		42,660
Product development	Product development	12,485		13,594		25,554		28,580		Product development	10,731		13,069
General and administrative	General and administrative	24,832		32,063		55,484		58,646		General and administrative	30,679		30,652
Total operating expenses	Total operating expenses	136,685		158,671		292,189		313,904		Total operating expenses	145,163		155,504
Income from operations	Income from operations	22,545		3,070		28,326		11,169		Income from operations	38,118		5,781

Other income, net		149		584		662		1,480
Other (expense) / income, net										Other (expense) / income, net	(2,462)		513
Income before income taxes	Income before income taxes	22,694		3,654		28,988		12,649		Income before income taxes	35,656		6,294
Provision for income taxes	Provision for income taxes	3,707		355		5,683		1,828		Provision for income taxes	6,142		1,976
Net income	Net income	$	18,987	$	3,299	$	23,305	$	10,821	Net income	$	29,514	$	4,318

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.53	$	0.09	$	0.65	$	0.31	Basic	$	0.81	$	0.12
Diluted	Diluted	$	0.53	$	0.09	$	0.65	$	0.30	Diluted	$	0.79	$	0.12

Weighted average shares outstanding:	Weighted average shares outstanding:									Weighted average shares outstanding:
Basic	Basic	35,652		35,232		35,587		35,174		Basic	36,336		35,521
Diluted	Diluted	35,906		35,504		35,894		35,499		Diluted	37,249		35,882

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,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020

Net income	Net income	$	18,987	$	3,299	$	23,305	$	10,821	Net income	$	29,514	$	4,318
Foreign currency translation gain / (loss)	Foreign currency translation gain / (loss)	254		(1,027)		(2,194)		(982)		Foreign currency translation gain / (loss)	226		(2,448)

Other comprehensive gain / (loss)	Other comprehensive gain / (loss)	254		(1,027)		(2,194)		(982)		Other comprehensive gain / (loss)	226		(2,448)
Comprehensive income	Comprehensive income	$	19,241	$	2,272	$	21,111	$	9,839	Comprehensive income	$	29,740	$	1,870

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																			Additional Paid-in Capital			Accumulated Other Comprehensive Income / (Loss)			Retained Earnings
		Common Stock				Treasury Stock																					Common Stock					Treasury Stock									Additional Paid-in Capital		Accumulated Other Comprehensive Income / (Loss)	Retained Earnings
Three Months Ended June 30, 2020		Shares	Amount		Shares	Amount													Total
Balance at March 31, 2020		38,119	$	381	2,558	$	(100,027)	$	316,823	$	(8,668)	$	119,218	$	327,727
Three Months Ended March 31, 2021																Three Months Ended March 31, 2021		Shares			Amount			Shares		Amount			Additional Paid-in Capital			Accumulated Other Comprehensive Income / (Loss)						Retained Earnings	Total
Balance at December 31, 2020																Balance at December 31, 2020				38,803		$	389		2,558		$	(100,027)						$	421,925

Equity-based compensation	Equity-based compensation	—	—		—	—		3,636		—		—		3,636		Equity-based compensation				—		—			—		—				8,210					—					—		8,210

Issuance of common stock in connection with employee stock option exercises and RSU vesting	Issuance of common stock in connection with employee stock option exercises and RSU vesting	180	2		—	—		627		—		—		629		Issuance of common stock in connection with employee stock option exercises and RSU vesting				357		4			—		—		1,305			—				—			1,309
Common shares withheld for settlement of taxes in connection with equity-based compensation	Common shares withheld for settlement of taxes in connection with equity-based compensation	(54)	(1)		—	—		(1,674)		—		—		(1,675)		Common shares withheld for settlement of taxes in connection with equity-based compensation				(150)		(2)			—		—		(13,032)			—				—			(13,034)

Cash dividends paid	Cash dividends paid	—	—		—	—		—		—		(6,058)		(6,058)		Cash dividends paid				—		—			—		—		—			—				(7,646)			(7,646)
Other comprehensive loss		—	—		—	—		—		254		—		254
Net income		—	—		—	—		—		—		18,987		18,987
Balance at June 30, 2020		38,245	$	382	2,558	$	(100,027)	$	319,412	$	(8,414)	$	132,147	$	343,500

Three Months Ended June 30, 2019
Balance at March 31, 2019		37,759	$	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 vesting		83	1		—	—		4		—		—		5
Common shares withheld for settlement of taxes in connection with equity-based compensation		(26)	—		—	—		(1,091)		—		—		(1,091)

Other comprehensive income	Other comprehensive income	—	—		—	—		—		(1,027)		—		(1,027)		Other comprehensive income				—		—			—		—		—			226				—			226
Net income	Net income	—	—		—	—		—		—		3,299		3,299		Net income				—		—			—		—		—			—				29,514			29,514
Balance at June 30, 2019		37,816	$	379	2,558	$	(100,027)	$	299,122	$	(7,453)	$	111,900	$	303,921
Balance at March 31, 2021																Balance at March 31, 2021				39,010		$	391		2,558		$	(100,027)	$	357,422		$	(7,455)			$	190,173		$	440,504

Six Months Ended June 30, 2020
Three Months Ended March 31, 2020																Three Months Ended March 31, 2020
Balance at December 31, 2019	Balance at December 31, 2019	38,055	$	381	2,558	$	(100,027)	$	312,824	$	(6,220)	$	121,187	$	328,145	Balance at December 31, 2019				38,055		$	381		2,558		$	(100,027)	$	312,824		$	(6,220)			$	121,187		$	328,145
Cumulative effect of accounting change (Note 1)	Cumulative effect of accounting change (Note 1)	—	—		—	—		—		—		(247)		(247)		Cumulative effect of accounting change (Note 1)				—		—			—		—		—			—				(247)			(247)
Balance at January 1, 2020	Balance at January 1, 2020	38,055	$	381	2,558	$	(100,027)	$	312,824	$	(6,220)	$	120,940	$	327,898	Balance at January 1, 2020				38,055		$	381		2,558		$	(100,027)	$	312,824		$	(6,220)			$	120,940		$	327,898

Equity-based compensation	Equity-based compensation	—	—		—	—		9,396		—		—		9,396		Equity-based compensation				—		—			—		—		5,760			—				—			5,760

Issuance of common stock in connection with employee stock option exercises and RSU vesting	Issuance of common stock in connection with employee stock option exercises and RSU vesting	289	3		—	—		626		—		—		629		Issuance of common stock in connection with employee stock option exercises and RSU vesting				109		1			—		—		(1)			—				—			0
Common shares withheld for settlement of taxes in connection with equity-based compensation	Common shares withheld for settlement of taxes in connection with equity-based compensation	(99)	(2)		—	—		(3,434)		—		—		(3,436)		Common shares withheld for settlement of taxes in connection with equity-based compensation				(45)		(1)			—		—		(1,760)			—				—			(1,761)

Cash dividends paid	Cash dividends paid	—	—		—	—		—		—		(12,098)		(12,098)		Cash dividends paid				—		—			—		—		—			—				(6,040)			(6,040)
Other comprehensive income		—	—		—	—		—		(2,194)		—		(2,194)
Other comprehensive loss																Other comprehensive loss				—		—			—		—		—			(2,448)				—			(2,448)
Net income	Net income	—	—		—	—		—		—		23,305		23,305		Net income				—		—			—		—		—			—				4,318			4,318
Balance at June 30, 2020		38,245	$	382	2,558	$	(100,027)	$	319,412	$	(8,414)	$	132,147	$	343,500

Six Months Ended June 30, 2019
Balance at December 31, 2018		37,618	$	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 vesting		312	4		—	—		218		—		—		222
Common shares withheld for settlement of taxes in connection with equity-based compensation		(114)	(1)		—	—		(5,181)		—		—		(5,182)
Balance at March 31, 2020																Balance at March 31, 2020				38,119		$	381		2,558		$	(100,027)	$	316,823		$	(8,668)			$	119,218		$	327,727

Other comprehensive income		—	—		—	—		—		(982)		—		(982)
Net income		—	—		—	—		—		—		10,821		10,821
Balance at June 30, 2019		37,816	$	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)


		Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019			2021		2020

CASH FLOWS FROM OPERATING ACTIVITIES	CASH FLOWS FROM OPERATING ACTIVITIES					CASH FLOWS FROM OPERATING ACTIVITIES
Net income	Net income	$	23,305	$	10,821	Net income	$	29,514	$	4,318
Adjustments to reconcile net income to net cash provided by operating activities:	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 amortization	Depreciation and amortization	21,370		25,319		Depreciation and amortization	10,091		10,519

Deferred taxes	Deferred taxes	693		(1,312)		Deferred taxes	(433)		(386)
Non-cash equity-based compensation	Non-cash equity-based compensation	9,396		12,375		Non-cash equity-based compensation	8,210		5,760

Bad debt expense	Bad debt expense	1,086		(635)		Bad debt expense	526		658

Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:

Accounts receivable	Accounts receivable	(3,279)		(2,746)		Accounts receivable	(5,892)		673
Prepaid expenses and other current and non-current assets	Prepaid expenses and other current and non-current assets	49		1,944		Prepaid expenses and other current and non-current assets	(9,306)		(2,207)

Accounts payable and other current and non-current liabilities	Accounts payable and other current and non-current liabilities	(4,045)		1,899		Accounts payable and other current and non-current liabilities	(72)		(2,286)
Long-term incentives related to acquisitions	Long-term incentives related to acquisitions	(7,759)		—		Long-term incentives related to acquisitions	0		(7,759)
Contributor royalties payable	Contributor royalties payable	(840)		1,059		Contributor royalties payable	(369)		551

Deferred revenue	Deferred revenue	(3,633)		(1,981)		Deferred revenue	3,559		(2,982)
Net cash provided by operating activities	Net cash provided by operating activities	$	36,343	$	46,743	Net cash provided by operating activities	$	35,828	$	6,859

CASH FLOWS FROM INVESTING ACTIVITIES	CASH FLOWS FROM INVESTING ACTIVITIES					CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	Capital expenditures	(13,966)		(13,726)		Capital expenditures	(8,548)		(7,719)

Business combination, net of cash acquired						Business combination, net of cash acquired	(72,165)		0

Proceeds from sale of Webdam, net		—		2,500

Acquisition of content	Acquisition of content	(1,577)		(1,277)		Acquisition of content	(489)		(723)

Security deposit release		105		25
Security deposit (payment) / release						Security deposit (payment) / release	(11)		31
Net cash used in investing activities	Net cash used in investing activities	$	(15,438)	$	(12,478)	Net cash used in investing activities	$	(81,213)	$	(8,411)

CASH FLOWS FROM FINANCING ACTIVITIES	CASH FLOWS FROM FINANCING ACTIVITIES					CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercise of stock options	Proceeds from exercise of stock options	629		218		Proceeds from exercise of stock options	1,309		0

Cash paid related to settlement of employee taxes related to RSU vesting	Cash paid related to settlement of employee taxes related to RSU vesting	(3,436)		(5,181)		Cash paid related to settlement of employee taxes related to RSU vesting	(13,034)		(1,761)
Payment of cash dividend	Payment of cash dividend	(12,098)		—		Payment of cash dividend	(7,646)		(6,040)

Net cash used in financing activities	Net cash used in financing activities	$	(14,905)	$	(4,963)	Net cash used in financing activities	$	(19,371)	$	(7,801)

Effect of foreign exchange rate changes on cash	Effect of foreign exchange rate changes on cash	(717)		(1,085)		Effect of foreign exchange rate changes on cash	108		(810)
Net increase in cash, cash equivalents and restricted cash		5,283		28,217
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(64,648)		(10,163)

Cash, cash equivalents and restricted cash, beginning of period	Cash, cash equivalents and restricted cash, beginning of period	305,874		233,465		Cash, cash equivalents and restricted cash, beginning of period	428,574		305,874
Cash, cash equivalents and restricted cash, end of period	Cash, cash equivalents and restricted cash, end of period	$	311,157	$	261,682	Cash, cash equivalents and restricted cash, end of period	$	363,926	$	295,711

Supplemental Disclosure of Cash Information:	Supplemental Disclosure of Cash Information:					Supplemental Disclosure of Cash Information:
Cash paid for income taxes	Cash paid for income taxes	$	927	$	1,480	Cash paid for income taxes	$	3,363	$	494

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. (the “Company” or “Shutterstock”) is a ~~global technology company offering a~~leading creative platform ~~which provides~~offering full-service solutions, high-quality content, and tools for brands, businesses and ~~services~~media companies. The Company’s platform brings together users and contributors of content by providing readily-searchable content that our customers pay to ~~creative professionals.~~ license and by compensating contributors as their content is licensed.

The content licensed by the Company’s customers includes:

•Images - consisting of photographs, vectors and illustrations. Images are typically used in visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and other similar uses.

•Footage - consisting of video clips, premium footage filmed by industry experts and cinema 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, which are often used to complement images and footage.

•3D Models - following the Company’s acquisition of TurboSquid, Inc. on February 1, 2021, Shutterstock now offers 3D models, used in industries such as advertising, media & video production, gaming, retail, education, design and architecture. See Note 3 Acquisition.

The Company licenses content to its customers. Contributors upload their content to the Company’s web properties in exchange for royalty payments based on customer download activity.

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 Sheet as of ~~June 30, 2020,~~March 31, 2021, and the Consolidated Statements of Operations, Comprehensive Income, ~~and~~ Stockholders’ Equity ~~for the three~~ and ~~six months ended June 30, 2020 and 2019, and the Consolidated Statements of~~ Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ are unaudited. The Consolidated Balance Sheet as of December 31, ~~2019,~~2020, 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 all normal recurring adjustments necessary to fairly state the Company’s financial position as of ~~June 30, 2020,~~March 31, 2021, 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 ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. 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 ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, ~~2020~~2021 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, ~~2019~~2020 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February ~~13, 2020.~~11, 2021. 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. Certain immaterial changes in presentation have been made to conform the prior period presentation to current period reporting.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

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~~amount of non-cash equity-based compensation, the assessment of recoverability of deferred tax assets, the measurement of income tax and contingent non-income tax 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 and Cash Equivalents ~~and Restricted Cash~~

~~The following represents the Company’s cash and cash equivalents and restricted cash balances as of June 30, 2020 and December 31, 2019 (in thousands):~~

As of June 30, 2020 As 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 primarily of cash on hand, bank deposits, money market funds and ~~bank deposits. These assets are stated at cost, which approximates fair value.~~

~~As of March 31, 2020, the Company was no longer required to provide cash collateral for its letter of credit for its New York City headquarters, and, accordingly, these funds are no longer restricted.~~commercial paper.

Allowance for Doubtful Accounts

The Company’s accounts receivable consists 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 (i) the aging of its accounts receivable ~~and~~considering historical receivables loss rates, (ii) 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~~appropriate, and (iii) the economic environments in which the Company operates.

~~Historically,~~During the three months ended March 31, 2021, the Company ~~used an incurred loss model to calculate its~~recorded bad debt expense of $0.5 million. As of March 31, 2021 and December 31, 2020, the Company’s allowance for doubtful ~~accounts. Upon~~accounts was approximately $5.5 million and $4.9 million, respectively. The allowance for doubtful accounts is included as a reduction of accounts receivable on the ~~adoption of~~Consolidated Balance Sheets.

The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”) on January 1, 2020, using the ~~Company shifted to~~modified retrospective method and recorded a ~~current expected credit loss model.~~

~~During the six months ended June 30, 2020, the Company recorded bad debt expense~~cumulative-effect adjustment of ~~$1.1 million. As~~$0.2 million, net of ~~June 30, 2020 and December 31, 2019, the Company’s allowance for doubtful accounts was approximately $3.6 million. The allowance for doubtful accounts is included~~tax, in retained earnings as ~~a reduction~~ of ~~accounts receivable on the Consolidated Balance Sheets.~~January 1, 2020.

Chargeback and Sales Refund Allowance

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company’s combined allowance for chargebacks and sales refunds was ~~$0.4~~$0.5 million, which was included as a component of other current liabilities on the Consolidated Balance Sheets.

Revenue Recognition

The majority of the Company’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 a predetermined quantity of content 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 time of download.

The Company recognizes revenue upon the satisfaction of performance obligations, which generally occurs when content is downloaded by a customer. The Company recognizes revenue on both its subscription-based and transaction-based products when content is downloaded, at which time the license is provided. In addition, management estimates expected unused licenses for subscription-based products and recognizes the estimated revenue associated with the unused licenses as digital content is downloaded and licenses are obtained for such content by the customer during the subscription period. The estimate of unused licenses is based on historical download activity and future changes in the estimate could impact the timing of revenue recognition of the Company’s subscription 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 the Company’s customers purchase products by making an electronic payment with a credit 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

~~Table of Contents~~

~~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.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

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 was required, prospectively, for annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Company adopted ASU 2016-13, as amended, effective January 1, 2020 using the modified retrospective method and recorded a cumulative-effect adjustment of $0.2 million, net of tax, in retained earnings as of January 1, 2020.

~~In August 2018, the FASB issued ASU 2018-13,~~ ~~Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements~~ (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. Adoption of this guidance was required for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-13, effective January 1, 2020. The impact of adoption of this standard on the consolidated financial statements, including accounting policies, processes and systems, was not material.

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~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 the requirements for capitalizing implementation costs incurred for an internal-use software license. Adoption of this guidance was required for 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, 2020 and interim periods within those fiscal years. ~~We are currently in the process of evaluating the effect that~~The Company adopted ASU 2019-12, ~~will have~~effective January 1, 2021. The impact of adoption of this standard on the ~~Company's Consolidated Financial Statements.~~consolidated financial statements, including accounting policies, processes and systems, was not material.

(2) Fair Value Measurements and ~~Other~~ Long-term Investments

Fair Value Measurements

The Company had no assets or liabilities requiring fair value hierarchy disclosures as of ~~June 30, 2020~~March 31, 2021 or December 31, ~~2019.~~2020, except as noted below.

Cash Equivalents

~~Table~~Cash equivalents include money market accounts and short-term commercial paper and are classified as a level 1 measurement based on quoted prices in active markets for identical assets that the reporting entity can access at the measurement date. As of ~~Contents~~

~~Shutterstock, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

March 31, 2021 and December 31, 2020, the Company had cash equivalent balances of $255.0 million and $250.0 million, respectively.

Other Fair Value Measurements

The carrying amounts of cash and cash equivalents, accounts receivable, ~~restricted cash,~~ accounts payable and accrued expenses 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 the Company is required to evaluate a 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 asset be recorded at fair value.

~~Other~~ Long-term Investments

~~Investment~~As of March 31, 2021 and December 31, 2020, the Company’s long-term investments are 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 investmentssecurities with no readily determinable fair ~~value.~~value, totaled $20.0 million, and is reported within other assets on the Consolidated Balance Sheets. The ~~Preferred Shares are~~Company uses the measurement alternative for these equity investments and their carrying value is reported at cost, adjusted for impairments or any observable price changes in ~~orderly~~ordinary transactions ~~for~~with identical or similar ~~investments issued by ZCool.~~investments.

On a quarterly basis, the Company evaluates the carrying value of ~~the Preferred Shares~~its long-term investments 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,~~March 31, 2021, no adjustments to the carrying ~~value~~values of the Company’s long-term investments were identified as a result of this assessment. Changes in performance negatively impacting ~~ZCool’s~~ operating results and cash flows of these investments could result in the Company recording an impairment charge ~~on the Preferred Shares~~ in future periods.

Table of ~~June 30, 2020~~Contents

Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(3) Acquisition

TurboSquid, Inc.

On February 1, 2021, the Company completed its acquisition of all of the outstanding shares of TurboSquid, Inc. (“TurboSquid”), for approximately $77.3 million, subject to customary working capital adjustments. The transaction was accounted for using the acquisition method and, ~~December 31, 2019,~~accordingly, the results of the acquired business have been included in the Company’s results of operations from the acquisition date. In connection with the acquisition, the Company incurred approximately $1.6 million of transaction costs.

TurboSquid is a Louisiana-based company that operates a marketplace offering more than one million 3D models, a marketplace for 2D images derived from 3D objects and a digital asset management solution. The Company believes this acquisition establishes Shutterstock as the premium destination for 3D models as well as 3D models in an easy-to-use 2D format.

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 ~~investment~~purchase price was paid with existing cash on hand in ~~ZCool~~the three months ended March 31, 2021, subject to working capital adjustments which are expected to be settled during the second quarter of 2021. The Company is ~~$15.0 million,~~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 follows (in thousands):


Assets acquired and liabilities assumed:	Fair Value at Acquisition Date
Cash and cash equivalents	$	5,165

Other assets	1,553
Property and equipment	472





Intangible assets	21,500
Goodwill	59,491
Total assets acquired	$	88,181

Accounts payable, accrued expenses and other liabilities	(4,685)
Contributor royalties payable	(2,243)


Deferred tax liability	(3,923)
Total liabilities assumed	(10,851)
Net assets acquired	$	77,330

The identifiable intangible assets, which include customer relationships, developed technology, trade names and contributor content, have a weighted average life of approximately 8.2 years and are being amortized on a straight-line basis. The fair value of 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 trade names and developed technology were determined using the relief-from-royalty method and the fair value of the contributor content was determined using the cost-to-recreate method.

The goodwill arising from the transaction is ~~reported within other assets~~primarily attributable to expected operational synergies and is not deductible for income tax purposes.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

The following unaudited pro forma consolidated financial information (in thousands) reflects the results of operations of the Company for the three months ended March 31, 2021 and 2020, as if the TurboSquid acquisition had been completed on January 1, 2020, after giving effect to certain purchase accounting adjustments, primarily related to intangible assets. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of what the ~~Consolidated Balance Sheets.~~Company’s operating results would have been, had the acquisitions actually taken place at the beginning of the previous annual period:


	Three Months Ended March 31,
	2021		2020
Revenue
As Reported	$	183,281	$	161,285
Pro Forma	185,344		166,723
Income before income taxes
As Reported	$	35,656	$	6,294
Pro Forma	36,957		4,841

~~(3)~~(4) Property and Equipment

Property and equipment is summarized as follows (in thousands):


		As of June 30, 2020		As of December 31, 2019			As of March 31, 2021		As of December 31, 2020
Computer equipment and software	Computer equipment and software	$	179,580	$	165,950	Computer equipment and software	$	200,493	$	193,141
Furniture and fixtures	Furniture and fixtures	10,211		10,199		Furniture and fixtures	10,245		10,235
Leasehold improvements	Leasehold improvements	19,260		19,203		Leasehold improvements	19,368		19,382
Property and equipment	Property and equipment	209,051		195,352		Property and equipment	230,106		222,758
Less accumulated depreciation	Less accumulated depreciation	(154,811)		(136,518)		Less accumulated depreciation	(179,740)		(171,852)
Property and equipment, net	Property and equipment, net	$	54,240	$	58,834	Property and equipment, net	$	50,366	$	50,906

Depreciation and amortization expense related to property and equipment was $9.6 million and $10.5 million for the three months ended June 30, 2020 and 2019, respectively, and $18.9 million and $21.1 million for the six months ended June 30, 2020 and 2019, respectively. Cost of revenues includes depreciation expense of $8.6$8.0 million and $9.3 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $16.8~~respectively. Of these amounts, $7.1 million and ~~$18.6~~$8.2 million ~~for the six months ended June 30, 2020 and 2019, respectively. General and administrative expense includes depreciation expense~~are included in cost of ~~$1.0 million and $1.2 million~~revenue for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, and ~~$2.1~~$0.9 million and ~~$2.5~~$1.1 million are included in general and administrative expense for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, respectively.

Depreciation and ~~2019, respectively.~~amortization expense is included in cost of revenue and general and administrative expense in the Consolidated Statements of Operations based on the nature of the asset being depreciated.

Capitalized Internal-Use Software

The Company capitalized costs related to the development of internal-use software of ~~$6.5~~$7.0 million and ~~$5.8~~$6.6 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $13.1 million and $12.3 million for the six months ended June 30, 2020 and 2019,~~ respectively. Capitalized amounts are included as a component of property and equipment under computer equipment and software on the Consolidated Balance Sheets.

~~Table of Contents~~

The portion of total depreciation expense related to capitalized internal-use software was ~~$7.8~~$6.7 million and ~~$7.5~~$7.2 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $14.9 million and $14.8 million for the six months ended June 30, 2020 and 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.~~Operations based on the nature of the asset.

As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had capitalized internal-use software of ~~$39.9~~$38.3 million and ~~$41.8~~$38.0 million, respectively, net of accumulated depreciation, which was included in property and equipment, net.

~~(4)~~

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(5) Goodwill and Intangible Assets

Goodwill

The Company’s goodwill balance is attributable to its Content reporting unit and is tested for impairment annually on October 1 or upon a triggering event. No triggering events were identified during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

The following table summarizes the changes in the carrying value of the Company’s goodwill balance during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 (in thousands):

Goodwill

Balance as of December 31, ~~2019~~2020

~~88,974~~89,413

Goodwill related to acquisitions

59,491

Foreign currency translation adjustment

~~(807)~~136

Balance as of ~~June 30, 2020~~March 31, 2021

~~88,167~~149,040

Intangible Assets

Intangible assets, all of which are subject to amortization, consisted of the following as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in thousands):


		As of June 30, 2020							As of December 31, 2019							As of March 31, 2021							As of December 31, 2020
		Gross Carrying Amount		Accumulated Amortization		Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:	Amortizing intangible assets:										Amortizing intangible assets:
Customer relationships	Customer relationships	$	16,982	$	(9,648)	9	$	17,729	$	(9,294)	Customer relationships	$	27,258	$	(11,601)	$	15,657	9	$	18,132	$	(11,032)	$	7,100
Trade name	Trade name	6,237		(5,778)		7	6,517		(5,941)		Trade name	8,917		(6,469)		2,448		8	6,669		(6,328)		341
Developed technology	Developed technology	4,677		(4,368)		4	4,841		(4,226)		Developed technology	14,757		(5,519)		9,238		4	6,930		(5,039)		1,891
Contributor content	Contributor content	24,812		(7,883)		9	23,510		(6,626)		Contributor content	29,706		(11,426)		18,280		8	26,669		(10,378)		16,291

Patents	Patents	259		(108)		18	259		(100)		Patents	259		(120)		139		18	259		(117)		142

Total	Total	$	52,967	$	(27,785)		$	52,856	$	(26,187)	Total	$	80,897	$	(35,135)	$	45,762		$	58,659	$	(32,894)	$	25,765

Amortization expense was ~~$1.2~~$2.1 million and ~~$2.9~~$1.2 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $2.5~~respectively. Of these amounts, $1.2 million and ~~$4.2~~$0.6 million ~~for the six months ended June 30, 2020 and 2019, respectively. Cost~~are included in cost of revenue ~~includes amortization expense of $0.7 million and $0.5 million~~ for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, ~~and $1.3 million~~ and $0.9 million ~~for the six months ended June 30, 2020~~ and ~~2019, respectively. General~~$0.6 million are included in general and administrative expense ~~includes amortization expense of $0.5 million and $2.4 million~~ for the three months ended ~~June 30,~~March 31, 2021 and 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 is: ~~$2.9~~$6.6 million for the remaining ~~six~~nine months of ~~2020, $5.1 million in~~ 2021, ~~$4.8~~$8.6 million in 2022, ~~$4.1~~$8.2 million in 2023, ~~$3.2~~$7.3 million in 2024, ~~$1.9~~$3.9 million in 2025, $2.8 million in 2026 and ~~$3.2~~$8.4 million thereafter.

(6) Accrued Expenses

Accrued expenses consisted of the following (in thousands):


	As of March 31, 2021		As of December 31, 2020
Compensation	$	21,311	$	31,499
Non-income taxes	20,630		17,164

Website hosting and marketing fees	12,484		9,991



Other expenses	11,028		9,255
Total accrued expenses	$	65,453	$	67,909

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

~~(5) Accrued Expenses~~

~~Accrued expenses consisted of the following (in thousands):~~

As of June 30, 2020 As of December 31, 2019
Compensation $ 18,902 $ 20,776
Non-income taxes 16,316 15,332
Website hosting and marketing fees 8,343 8,657
Other expenses 7,993 9,099
Total accrued expenses $ 51,554 $ 53,864

~~(6)~~(7) Stockholders’ Equity and Equity-Based Compensation

Stockholders’ Equity

Common Stock

The Company issued approximately ~~126,000~~207,000 and ~~57,000~~64,000 shares of common stock during the three months ended ~~June 30,~~March 31, 2021 and 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”).~~Units.

Treasury Stock

In October 2015, the Company’s Board of Directors approved a share repurchase program, authorizing the Company 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, authorizing the Company to repurchase up to an additional $100 million of its outstanding common stock. During the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company did ~~not~~0t repurchase any shares of its common stock under the share repurchase program. As of ~~June 30, 2020,~~March 31, 2021, 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~~$0.21 per share of common stock, or ~~$6.1 million and $12.1~~$7.6 million, during the three ~~and six~~ months ended ~~June 30, 2020.~~March 31, 2021.

On ~~July 20, 2020,~~April 19, 2021, the Company’s Board of Directors declared a quarterly cash dividend of ~~$0.17~~$0.21 per share of outstanding common stock payable on ~~September~~June 17, ~~2020~~2021 to stockholders of record at the close of business on ~~September~~June 3, ~~2020.~~2021. Future ~~declaration~~declarations of dividends are subject to the final determination of the Board of Directors, and will depend on, 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 Restricted Stock Units and Performance-based Restricted Stock Units (“PRSUs” and, collectively with Restricted Stock Units, “RSUs”) and 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 grant date.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

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 six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands):


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Cost of revenue	Cost of revenue	$	99	$	105	$	150	$	190	Cost of revenue	$	164	$	51
Sales and marketing	Sales and marketing	374		675		834		1,257		Sales and marketing	467		460
Product development	Product development	1,068		1,252		2,193		2,427		Product development	1,229		1,125
General and administrative	General and administrative	2,095		5,719		6,219		8,501		General and administrative	6,350		4,124
Total	Total	$	3,636	$	7,751	$	9,396	$	12,375	Total	$	8,210	$	5,760

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 six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands):


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Stock options	Stock options	$	414	$	2,176	$	1,730	$	3,067	Stock options	$	175	$	1,316
RSUs	RSUs	3,222		5,575		7,666		9,308		RSUs	8,035		4,444

Total	Total	$	3,636	$	7,751	$	9,396	$	12,375	Total	$	8,210	$	5,760

Stock Option Awards

During the ~~six~~three months ended ~~June 30, 2020, the Company granted 53,000~~March 31, 2021, no options to purchase shares of its common stock ~~with a weighted average exercise price of $42.96.~~were granted. As of ~~June 30, 2020,~~March 31, 2021, there were approximately ~~338,000~~325,000 options vested and exercisable with a weighted average exercise price of ~~$34.59.~~$33.29. As of ~~June 30, 2020,~~March 31, 2021, the total unrecognized compensation charge related to non-vested options was approximately ~~$2.0~~$1.4 million, which is expected to be recognized through 2023.

Restricted Stock Unit Awards

During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, the Company had RSU grants, net of forfeitures, of approximately ~~292,000.~~92,000. As of ~~June 30, 2020,~~March 31, 2021, there are approximately ~~1,139,000~~1,169,000 non-vested RSUs ~~(including performance-based restricted stock units, or PRSUs)~~ outstanding with a weighted average grant-date fair value of ~~$39.83.~~$42.70. As of ~~June 30, 2020,~~March 31, 2021, the total unrecognized non-cash equity-based compensation charge related to the non-vested RSUs was approximately ~~$26.6~~$30.4 million, which is expected to be recognized through ~~2023.~~2024.

During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, shares of common stock with an aggregate value of ~~$3.4~~$13.0 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,~~April 1, 2021, the Company granted approximately ~~332,000 PRSUs~~350,000 RSUs with a grant date fair value of ~~$12.7~~$31.4 million.

~~(7)~~(8) Revenue

The Company distributes its content offerings through two primary channels:

E-commerce: The majority of the Company’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 monthly or annual basis or to license content on a transactional basis. These customers generally license content under the Company’s standard or enhanced licenses, with additional licensing options available to meet customers’ individual needs. E-commerce customers typically pay the full amount of the purchase price in advance or at the time of license, generally with a credit card.

Enterprise: The Company also has a base of customers with unique content, licensing and workflow needs. These customers benefit from communication with dedicated sales professionals, service and research teams which provide a number of tailored enhancements to their 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 those available on the E-commerce platform.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

The Company’s revenues by distribution channel for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ are as follows (in thousands):


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
E-commerce	E-commerce	$	98,164	$	96,993	$	197,900	$	195,106	E-commerce	$	118,400	$	99,736
Enterprise	Enterprise	61,066		64,748		122,615		129,967		Enterprise	64,881		61,549

Total Revenues	Total Revenues	$	159,230	$	161,741	$	320,515	$	325,073	Total Revenues	$	183,281	$	161,285

The ~~June 30, 2020~~March 31, 2021 deferred revenue balance will be earned as content is downloaded or upon the expiration of subscription-based products, and nearly all is expected to be earned within the next twelve months. ~~$91.0~~$64.4 million of total revenue recognized for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was reflected in deferred revenue as of December 31, ~~2019.~~2020.

~~(8)~~(9) Other (Loss) / Income, 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 six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands):

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Foreign currency gain / (loss) $ 132 $ (569) $ (466) $ (730)
Interest income 17 1,153 1,128 2,210
Total other income $ 149 $ 584 $ 662 $ 1,480


	Three Months Ended March 31,
	2021		2020
Foreign currency loss	$	(2,510)	$	(598)



Interest income, net	48		1,111
Total other (loss) / income	$	(2,462)	$	513

~~(9)~~(10) Income Taxes

The Company’s effective tax rates yielded a net expense of ~~16.3%~~17.2% and ~~9.7%~~31.4% for the three months ended ~~June 30,~~March 31, 2021 and 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~~ For the three months ended ~~June 30, 2020, the~~March 31, 2021, net effect of discrete items decreased the effective tax rate by ~~0.3%~~1.8%. Excluding these items, the Company’s effective tax rate would have been 19.0% for the three months ended March 31, 2021.

For the ~~six~~three months ended ~~June 30,~~March 31, 2020, the effective tax rate increased by ~~1.6%~~9.9%, primarily as a result of a loss jurisdiction with no tax benefit. ~~Discrete~~Excluding these items, ~~further increased~~ the ~~effective tax rate by 1.4%. Excluding the discrete items, our~~Company’s effective tax rate would have been ~~16.6%~~21.5% for the three ~~and six~~ months ended ~~June 30,~~March 31, 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, in 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 the 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,~~March 31, 2021and2020, 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.~~material. To the extent the remaining uncertain tax positions 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 ~~significant~~material for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

During the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company paid net cash taxes of ~~$0.9~~$3.4 million and ~~$1.5~~$0.5 million, respectively.

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Notes to Consolidated Financial Statements

(unaudited)

~~(10)~~(11) 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,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands):


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Net income	Net income	$	18,987	$	3,299	$	23,305	$	10,821	Net income	$	29,514	$	4,318
Shares used to compute basic net income per share	Shares used to compute basic net income per share	35,652		35,232		35,587		35,174		Shares used to compute basic net income per share	36,336		35,521
Dilutive potential common shares	Dilutive potential common shares									Dilutive potential common shares
Stock options	Stock options	39		102		53		104		Stock options	224		67
Unvested restricted stock awards	Unvested restricted stock awards	215		170		254		221		Unvested restricted stock awards	689		294

Shares used to compute diluted net income per share	Shares used to compute diluted net income per share	35,906		35,504		35,894		35,499		Shares used to compute diluted net income per share	37,249		35,882
Basic net income per share	Basic net income per share	$	0.53	$	0.09	$	0.65	$	0.31	Basic net income per share	$	0.81	$	0.12
Diluted net income per share	Diluted net income per share	$	0.53	$	0.09	$	0.65	$	0.30	Diluted net income per share	$	0.79	$	0.12

Dilutive shares included in the calculation	Dilutive shares included in the calculation	1,304		1,005		1,080		992		Dilutive shares included in the calculation	1,436		856
Anti-dilutive shares excluded from the calculation	Anti-dilutive shares excluded from the calculation	1,152		1,206		1,148		1,171		Anti-dilutive shares excluded from the calculation	18		1,144

~~(11)~~(12) 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,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
North America	North America	$	56,211	$	57,657	$	113,229	$	115,171	North America	$	64,309	$	57,018
Europe	Europe	52,207		53,647		106,003		109,132		Europe	62,277		53,796
Rest of the world	Rest of the world	50,812		50,437		101,283		100,770		Rest of the world	56,695		50,471
Total revenue	Total revenue	$	159,230	$	161,741	$	320,515	$	325,073	Total revenue	$	183,281	$	161,285

The United States, included in North America in the above table, accounted for 32% of consolidated revenue for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. No other country accounts for more than 10% of the Company’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,			As of March 31,		As of December 31,
		2020		2019			2021		2020
North America	North America	$	47,361	$	51,954	North America	$	43,010	$	43,451
Europe	Europe	6,557		6,541		Europe	7,132		7,192
Rest of the world	Rest of the world	322		339		Rest of the world	224		263
Total long-lived tangible assets	Total long-lived tangible assets	$	54,240	$	58,834	Total long-lived tangible assets	$	50,366	$	50,906

The United States, included in North America in the above table, accounted for ~~77%~~76% and ~~79%~~75% of total long-lived tangible assets as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. No other country accounts for more than 10% of the Company’s long-lived tangible assets in any period presented.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

~~(12)~~(13) Commitments and Contingencies

As of ~~June 30, 2020,~~March 31, 2021, the Company had total non-lease obligations in the amount of approximately ~~$39.2~~$48.8 million, which consisted primarily of minimum royalty guarantees and unconditional purchase obligations related to contracts for infrastructure and other business services. As of ~~June 30, 2020,~~March 31, 2021, the Company’s non-lease obligations for the remainder of ~~2020~~2021 and for the years ending December 31, ~~2021~~2022, 2023, 2024 and ~~2022~~2025 were approximately ~~$18.2~~$24.3 million, ~~$16.5~~$12.5 million, $8.0 million, $3.2 million and ~~$4.4~~$0.8 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, accordingly, no material reserves related to litigation.

Indemnification and Employment Agreements

In the ordinary course of business, the Company enters into contractual arrangements 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 content is used. The standard maximum aggregate obligation and liability to any one customer for any single claim is generally limited to 10000 dollars but can range to $250,000, with certain exceptions for which our indemnification obligation are uncapped. As of ~~June 30, 2020,~~March 31, 2021, the Company had recorded 0no material liabilities related to indemnification obligations 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’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 in the event of a change in control or otherwise, with or without cause.

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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~~2020 Form ~~10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 13, 2020.~~10-K.

In addition to historical consolidated financial information, this discussion contains forward-looking statements including statements about our plans, estimates and beliefs. These statements involve risks and uncertainties and our actual results could differ materially from those expressed or implied in forward-looking statements. See “Forward Looking Statements” above. See also the “Risk Factors” disclosures contained in our ~~Annual Report on~~2020 Form 10-K for the fiscal year ended December 31, 2019, 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 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~~offering full-service solutions, high-quality content, and tools for brands, businesses and ~~services to creative professionals.~~media companies. Our platform brings together users and contributors of content by providing readily-searchable content that our customers pay to license and by compensating contributors as their content is licensed.

The content licensed by our customers ~~include:~~includes:

•Music - consisting of high-quality music tracks and sound effects, which are often used to complement images and footage.

~~Our platform brings together users~~•3D Models - following our acquisition of TurboSquid, Inc. (“TurboSquid”) on February 1, 2021, we now offer 3D models, used in industries such as advertising, media & video production, gaming, retail, education, design and ~~contributors of content by providing readily-searchable content that our customers pay to license and by compensating contributors as their content is licensed.~~ architecture.

For customers seeking specialized solutions, we also create custom, on-brand content by matching our global contributor network to the unique needs of our customers. This solution allows us to offer customers a fast and scalable way to produce cost-effective content that ~~goes beyond our library~~is in line with the visual footprint of ~~stock~~their brand. We typically offer a royalty-free non-exclusive license and the processes we maintain to properly license content ~~our platform also connects customers with contributors who can produce custom branded content.~~and the indemnification protections we provide, allow individuals and businesses of all sizes, including media agencies, publishers, production companies and creative service providers, to confidently utilize such content for their unique commercial or editorial needs.

Over ~~1.9~~2.0 million active, paying customers contributed to our revenue for the twelve-month period ended ~~June 30, 2020.~~March 31, 2021. As of ~~June 30, 2020,~~March 31, 2021, more than ~~1.4~~1.7 million approved contributors made their images, footage and music tracks available in our collection, which has grown to more than ~~340~~370 million images and more than 1921 million footage ~~clips.~~clips as of March 31, 2021. This makes our collection of content one of the largest of its kind, and we delivered ~~approximately 90.8~~45.8 million paid downloads to our customers across all of our brands during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

Through our platform, we generate revenue by licensing content to our customers. During the ~~six~~three months ended ~~June 30, 2020, 62%~~March 31, 2021, 65% of our revenue and the majority of our content licenses came from our E-commerce sales channel.

The majority of our customers license content directly through our self-service web properties, including our Shutterstock.com, bigstock.com, premiumbeat.com and turbosquid.com websites. E-commerce customers have the ~~flexibility of choosing content~~ability to purchase plans that ~~provide~~are paid on either a ~~large volume of~~monthly or annual basis or to license content ~~for their creative process. We also offer simple, affordable, smaller plans and other products where~~on a transactional basis. E-commerce customers ~~have an option~~generally license content under our standard or enhanced licenses, with additional licensing options available to ~~pay for~~meet customers’ individual ~~content licenses at the time of delivery.~~ needs.

Customers in our Enterprise sales channel generally have unique content, licensing and workflow needs. ~~Our~~These customers benefit from communication with our dedicated ~~Enterprise~~ sales, service ~~client success~~ and research teams ~~are able to~~which provide a number of personalized enhancements to their creative workflows including non-standard licensing rights, multi-seat access, ~~multi-brand licensing packages and content licensed for use-cases outside of those available for license~~ability to pay on ~~our E-commerce platform. Our Enterprise sales channel provided approximately 38% of our revenue during the six months ended June 30, 2020.~~

Each time an image, footage clip or music track is delivered to a customer for use, we record a royalty expense for the amount due to the associated contributor. Depending on the content licensed by our customers, royalties are calculated using either a fixed dollar amount or a fixed percentage of the price per asset downloaded and are typically paid to contributors on a monthly basis, subject to certain payout minimums. Royalties represent the largest component of our operating expenses, arecredit

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terms, multi-brand licensing packages, increased indemnification protection and content licensed for use-cases outside of those available on our e-commerce platform. Customers in our enterprise sales channel may also benefit from our API platform as well as access to Shutterstock Editorial, which includes our library of editorial images and videos and Shutterstock Studios, our offering which provides custom, high-quality content matched with production tools and services. Our Enterprise sales channel provided approximately 35% of our revenue for the three months ended March 31, 2021.

As the use cases for our creative solutions expand, we believe our customers are seeking alternative means to consume our offerings. As a result, we have seen strong growth in customers purchasing monthly subscription products. Our monthly subscriptions provide for a fixed number of content licenses that may be downloaded during the period. Our subscription-based pricing model makes the creative process easier because customers can download content in our collection for use in their creative process without incremental costs, which provides greater creative freedom and helps improve work product. In addition, customers may also purchase licenses through other contractual plans where the customer commits to buy a predetermined quantity of content licenses that may be downloaded over a period of time, generally between one month to one year. For users who need less content, individual content licenses may also be purchased on a transactional basis, paid for at the time of download.

Contributors of content typically earn a royalty each time their work is licensed. Contributors earn royalties based on our published earnings schedule that is based on annual licensing volume, which determines the contributor’s earnings tier and the purchase option under which the content was licensed. Royalties represent the largest component of our operating expenses, are reported within cost of revenue, tend to fluctuate proportionately with revenue and paid downloads and may be impacted by the mix of products sold.

An important driver of our growth is customer acquisition, which we achieve primarily through online marketing efforts and 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 represented a significant percentage of revenue. This spend considers, among other things, the blended average customer lifetime value across our various purchase options so we can manage customer acquisition costs and aim to achieve 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 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 image, footage and music and search patterns, and the security of user information on our 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.

COVID-19 Update

In December 2019, a novel coronavirus disease (“COVID-19”) was initially reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. Our operations have been impacted by office closures globally and restrictions on employee travel and in-person meetings, however, we have generally been able to deliver our services remotely. ~~The~~We believe 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 we believe has resulted in an unfavorable impact, to varying degrees geographically, on our revenue growth and number of paid downloads for the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021. See Item 1A. Risk Factors in our ~~Quarterly Report on~~2020 Form ~~10-Q for the quarter ended March 31, 2020, which was filed with the SEC on April 28, 2020,~~10-K for further discussion of the possible impact of the COVID-19 pandemic on our business.

Key Operating Metrics

We 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 six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020

Subscribers (end of period)	Subscribers (end of period)	223,000		173,000		223,000		173,000		Subscribers (end of period)	306,000		209,000
Subscriber revenue (in millions)	Subscriber revenue (in millions)	$	62.7	$	57.9	$	126.6	$	115.8	Subscriber revenue (in millions)	$	76.5	$	63.9

Average revenue per customer (trailing twelve months)		$	326	$	325	$	326	$	325
Average revenue per customer (last twelve months)										Average revenue per customer (last twelve months)	$	342	$	329
Paid downloads (in millions)	Paid downloads (in millions)	44.0		46.6		90.8		93.8		Paid downloads (in millions)	45.8		46.8
Revenue per download	Revenue per download	$	3.61	$	3.44	$	3.51	$	3.43	Revenue per download	$	3.96	$	3.42
Content in our collection (end of period, in millions):	Content in our collection (end of period, in millions):									Content in our collection (end of period, in millions):
Images	Images	340		280		340		280		Images	370		330
Footage clips	Footage clips	19		15		19		15		Footage clips	21		18

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Subscribers

We 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 subscribers is an important metric that provides insight into our monthly recurring business and its growth. We believe that an increase in our number of subscribers is an indicator of engagement in our platform and potential for future growth.

Subscriber Revenue

We define subscriber revenue as the revenue generated from subscribers during the period. We believe subscriber revenue, together with our number of subscribers, provide insight into the portion of our business and growth driven by our monthly recurring products.

Average Revenue Per Customer

Average revenue per customer is calculated by dividing total revenue for the ~~trailing~~last twelve month period by customers. We define customers as total active, paying customers that contributed to total revenue over the ~~trailing~~last twelve month period. Changes in our average revenue per customer will be driven by changes in the mix of our subscription-based products and the 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 content. Paid downloads exclude custom content and downloads of content that are offered to customers for no charge, including our free image of the week. 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 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 revenue from custom content and revenue that is not derived from or associated with 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 licensing 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. Changes in revenue per download are primarily driven by the introduction of new product offerings, changes in product mix and ~~the~~ customer utilization of our products.

Content in our Collection

We define content in our collection as the total number of approved images (photographs, vectors and illustrations) and footage (in number of clips) in our library on shutterstock.com at the end of the period. We exclude content from this collection metric that is not uploaded directly to our site but is available for license by our customers through an application program interface, custom content and certain content that may be licensed for editorial use only. We believe that our large selection of high-quality content enables us to attract and retain customers and drives our network effect.

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, the volume of expected unused licenses used in revenue recognition for our subscription-based products, ~~equity-based compensation~~the fair value of acquired goodwill and intangible assets and income tax 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, ~~equity-based compensation~~goodwill and intangible assets and accounting for income taxes 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~~2020 Form 10-K, ~~for the fiscal year ended December 31, 2019 that was filed with the SEC on February 13, 2020 (our “2019 Form 10-K”),~~ under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

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 new accounting standards on our financial statements. There have been no material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in our ~~2019~~2020 Form 10-K.

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Key Components of Our Results of Operations

Revenue

We distribute our content offerings through two primary channels:

E-commerce: The majority of our customers license content directly through our self-service web properties. E-commerce customers have the flexibility to purchase a subscription-based plan that is paid on a monthly or annual basis or to license content on a transactional basis. These customers generally license content under our standard or enhanced licenses, with additional licensing options available to meet customers’ individual needs. E-commerce customers typically pay the full amount of the purchase price in advance or at the time of license, 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 number of tailored enhancements to their 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 those available on the ~~E-commerce~~e-commerce platform.

The Company’s revenues by distribution channel for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ are as follows (in thousands):


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
E-commerce	E-commerce	$	98,164	$	96,993	$	197,900	$	195,106	E-commerce	$	118,400	$	99,736
Enterprise	Enterprise	61,066		64,748		122,615		129,967		Enterprise	64,881		61,549

Total Revenues	Total Revenues	$	159,230	$	161,741	$	320,515	$	325,073	Total Revenues	$	183,281	$	161,285

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, infrastructure and hosting costs related to maintaining our creative platform and cloud-based software platform, depreciation and amortization of capitalized internal-use software, content and technology intangible assets, allocated facility costs and other supporting overhead costs. Cost of revenue also includes employee compensation, including non-cash equity-based compensation, bonuses and benefits associated with the maintenance of our 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.

Product Development. Product development expenses consist of employee compensation, including non-cash equity-based compensation, bonuses and benefits, and expenses related to vendors engaged in product management, design, development and testing of our websites and products. Product development costs also ~~include~~includes software and other IT equipment costs, allocated facility expenses and other supporting overhead costs.

General and Administrative. General and administrative expenses include employee compensation, including non-cash equity-based compensation, bonuses and benefits for executive, finance, 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, other supporting overhead costs and depreciation and amortization expense.

Other (Expense) / Income, Net. Other (expense) / income, net consists of non-operating costs such as foreign currency transaction gains and losses in addition to interest 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,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
		(in thousands)														(in thousands)
Consolidated Statements of Operations:	Consolidated Statements of Operations:									Consolidated Statements of Operations:
Revenue	Revenue	$	159,230	$	161,741	$	320,515	$	325,073	Revenue	$	183,281	$	161,285
Operating expenses:	Operating expenses:									Operating expenses:
Cost of revenue	Cost of revenue	63,811		68,526		132,934		137,744		Cost of revenue	61,832		69,123
Sales and marketing	Sales and marketing	35,557		44,488		78,217		88,934		Sales and marketing	41,921		42,660
Product development	Product development	12,485		13,594		25,554		28,580		Product development	10,731		13,069
General and administrative	General and administrative	24,832		32,063		55,484		58,646		General and administrative	30,679		30,652
Total operating expenses	Total operating expenses	136,685		158,671		292,189		313,904		Total operating expenses	145,163		155,504
Income from operations	Income from operations	22,545		3,070		28,326		11,169		Income from operations	38,118		5,781

Other income, net		149		584		662		1,480
Other (expense) / income, net										Other (expense) / income, net	(2,462)		513
Income before income taxes	Income before income taxes	22,694		3,654		28,988		12,649		Income before income taxes	35,656		6,294
Provision for income taxes	Provision for income taxes	3,707		355		5,683		1,828		Provision for income taxes	6,142		1,976
Net income	Net income	$	18,987	$	3,299	$	23,305	$	10,821	Net income	$	29,514	$	4,318

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,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Consolidated Statements of Operations:	Consolidated Statements of Operations:									Consolidated Statements of Operations:
Revenue	Revenue	100	%	100	%	100	%	100	%	Revenue	100	%	100	%
Operating expenses:	Operating expenses:									Operating expenses:
Cost of revenue	Cost of revenue	40	%	42	%	41	%	42	%	Cost of revenue	34	%	43	%
Sales and marketing	Sales and marketing	22	%	28	%	24	%	27	%	Sales and marketing	23	%	26	%
Product development	Product development	8	%	8	%	8	%	9	%	Product development	6	%	8	%
General and administrative	General and administrative	16	%	20	%	17	%	18	%	General and administrative	17	%	19	%
Total operating expenses	Total operating expenses	86	%	98	%	91	%	97	%	Total operating expenses	79	%	96	%
Income from operations	Income from operations	14	%	2	%	9	%	3	%	Income from operations	21	%	4	%

Other income, net		—	%	—	%	—	%	—	%
Other (expense) / income, net										Other (expense) / income, net	(1)	%	—	%
Income before income taxes	Income before income taxes	14	%	2	%	9	%	4	%	Income before income taxes	19	%	4	%
Provision for income taxes	Provision for income taxes	2	%	—	%	2	%	1	%	Provision for income taxes	3	%	1	%
Net income	Net income	12	%	2	%	7	%	3	%	Net income	16	%	3	%

Note: Due to rounding, percentages may not sum to totals.

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Comparison of the Three Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~

The following table presents our results of operations for the periods indicated:


		Three Months Ended June 30,															Three Months Ended March 31,
		2020		2019		$ Change		% Change			2021		2020		$ Change		% Change
		(in thousands)													(in thousands)
Consolidated Statements of Operations:	Consolidated Statements of Operations:									Consolidated Statements of Operations:
Revenue	Revenue	$	159,230	$	161,741	$	(2,511)	(2)	%	Revenue	$	183,281	$	161,285	$	21,996	14	%
Operating expenses:	Operating expenses:									Operating expenses:
Cost of revenue	Cost of revenue	63,811		68,526		(4,715)		(7)		Cost of revenue	61,832		69,123		(7,291)		(11)
Sales and marketing	Sales and marketing	35,557		44,488		(8,931)		(20)		Sales and marketing	41,921		42,660		(739)		(2)
Product development	Product development	12,485		13,594		(1,109)		(8)		Product development	10,731		13,069		(2,338)		(18)
General and administrative	General and administrative	24,832		32,063		(7,231)		(23)		General and administrative	30,679		30,652		27		—
Total operating expenses	Total operating expenses	136,685		158,671		(21,986)		(14)		Total operating expenses	145,163		155,504		(10,341)		(7)
Income from operations	Income from operations	22,545		3,070		19,475		634		Income from operations	38,118		5,781		32,337		559

Other income, net		149		584		(435)		(74)
Other (expense) / income, net										Other (expense) / income, net	(2,462)		513		(2,975)		*
Income before income taxes	Income before income taxes	22,694		3,654		19,040		521		Income before income taxes	35,656		6,294		29,362		467
Provision for income taxes	Provision for income taxes	3,707		355		3,352		*		Provision for income taxes	6,142		1,976		4,166		211
Net income	Net income	$	18,987	$	3,299	$	15,688	476	%	Net income	$	29,514	$	4,318	$	25,196	584	%

* Percentage change is not meaningful

Revenue

Revenue ~~decreased~~increased by ~~$2.5~~$22.0 million, or 2%14%, to ~~$159.2~~$183.3 million in the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in ~~2019.~~2020. On a constant currency basis, revenue ~~decreased~~increased approximately 1%11%, in the three months ended ~~June 30, 2020,~~March 31, 2021, compared to the same period in ~~2019.~~2020.

The Company’s E-commerce revenues increased by 1%19%, to ~~$98.2~~$118.4 million in the three months ended ~~June 30, 2020,~~March 31, 2021, compared to the same period in ~~2019.~~2020. On a constant currency basis, the Company’s E-commerce revenues increased by 2%16% in the three months ended ~~June 30, 2020,~~March 31, 2021, compared to the same period in ~~2019.~~2020. During the three months ended ~~June 30, 2020,~~March 31, 2021, growth in our E-commerce sales channel was primarily driven by ~~shifting resources to more efficient performance marketing channels.~~increased subscriber revenue. E-commerce revenues also benefited from our acquisition of TurboSquid on February 1, 2021.

The Company’s Enterprise revenues ~~decreased~~increased by 6%5%, to ~~$61.1~~$64.9 million in the three months ended ~~June 30, 2020,~~March 31, 2021, compared to the same period in ~~2019.~~2020. On a constant currency basis, the Company’s Enterprise revenues ~~decreased~~increased by 5%3% in the three months ended ~~June 30, 2020,~~March 31, 2021, compared to the same period in ~~2019.~~2020. During the quarter, the Company has continued to identify and implement changes to respond to market trends including making updates to product offerings and continuously improving our platform. We ~~continue to face headwinds in~~believe these enhancements impacted our Enterprise sales ~~channel,~~operations during the period and ~~are in~~is one of the ~~midst~~drivers of ~~implementing changes to improve performance, including optimizing~~ the ~~sales organization, updating product offerings and making further platform investments, which~~increased deferred revenue balance as of March 31, 2021.

In addition, we believe ~~will improve~~ our ~~Enterprise sales channel operations.~~

~~Revenue~~revenue growth for the three months ended ~~June 30, 2020~~March 31, 2021 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,~~March 31, 2021 and 2020, ~~and 2019,~~ we delivered ~~44.0~~45.8 million and ~~46.6~~46.8 million paid downloads, respectively, and our revenue per download was ~~$3.61~~$3.96 and ~~$3.44~~$3.42 for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. During the three months ended ~~June 30, 2020,~~March 31, 2021, the 6%2% decrease in the number of paid downloads compared to the same period in ~~2019,~~2020, 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.~~quarter is partially attributable to COVID-19.

Changes in our revenue by region were as follows: revenue from North America ~~decreased~~increased by ~~$1.4~~$7.3 million, or 3%13%, to ~~$56.2~~$64.3 million, revenue from Europe ~~decreased~~increased by ~~$1.4~~$8.5 million, or 3%16%, to ~~$52.2~~$62.3 million and revenue from outside Europe and North America increased by ~~$0.4~~$6.2 million, or 1%12%, to ~~$50.8~~$56.7 million, in the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in ~~2019.~~2020.

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Costs and Expenses

Cost of Revenue. Cost of revenue decreased by ~~$4.7~~$7.3 million, or 7%11% to ~~$63.8~~$61.8 million in the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in ~~2019,~~2020, 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. In addition, for the three months ended March 31, 2020, cost of revenue includes severance charges of $1.1 million. The reduction in royalty ~~expenses~~expense was driven by the 6%2% decline in paid downloads ~~due to the impact of COVID-19~~ as well as a ~~change~~modification in the way we ~~remunerate~~compensate 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~~$0.7 million, or ~~20%~~2%, to ~~$35.6~~$41.9 million in the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in ~~2019.~~2020. As a percent of revenue, sales and marketing expenses decreased to ~~22%~~23% for the three months ended ~~June 30, 2020,~~March 31, 2021, from ~~28%~~26% for the same period in ~~2019.~~2020. This decrease was primarily driven by a ~~$9.7~~$1.7 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~~$0.5 million due to travel restrictions resulting from COVID-19. These declines were partially offset by ~~severance charges of approximately $1.5~~$1.3 million ~~incurred during the three months ended June 30, 2020.~~in higher employee-related costs. 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~~$2.3 million, or 8%18%, to ~~$12.5~~$10.7 million in the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in ~~2019.~~2020. This decrease was ~~primarily~~ driven by (i) lower employee and third-party contractor related costs, net of capitalized labor, and (ii) a reduction in software and other IT-related costs, for the three months ended ~~June 30, 2020,~~March 31, 2021, 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~~remained flat at $30.7 million in the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in ~~2019. This decrease was primarily driven by: (i) lower~~2020. During the three months ended March 31, 2021, general and administrative expenses included higher non-cash compensation expense of ~~$3.6~~$2.1 million, attributable to certain performance-based awards, partially offset by a $1.4 million reduction in employee-related costs and other reductions resulting from ~~the Company recognizing non-cash compensation expense for the acceleration of equity awards associated with the departure of an executive officer in~~our ongoing vendor management initiatives. For the three months ended ~~June 30, 2019, three months~~March 31, 2020, general and administrative expenses includes severance charges 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$0.7 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 (Expense) / Income, Net. In the three months ended ~~June 30, 2020,~~March 31, 2021, other (expense) / income, net substantially consisted of ~~$0.1~~$2.5 million of unfavorable foreign currency fluctuations.

During the three months ended ~~June 30, 2019,~~March 31, 2020, approximately ~~$1.2~~$1.1 million of other (expense) / income, net 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~~$4.2 million for the three months ended ~~June 30, 2020~~March 31, 2021 as compared to the same period in ~~2019.~~2020. Our effective tax rates yielded a net expense of ~~16.3%~~17.2% and ~~9.7%~~31.4% for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

For the three months ended ~~June 30, 2020,~~March 31, 2021, the net effect of discrete items decreased the effective tax rate by ~~0.3%~~1.8%. Excluding these items, our effective tax rate would have been ~~16.6%~~19.0% for the three months ended ~~June 30, 2020.~~ March 31, 2021.

For the three months ended ~~June 30, 2019, the net effect of discrete items decreased~~March 31, 2020, the effective tax rate increased by ~~3.4%.~~9.9%, primarily as a result of a loss jurisdiction with no tax benefit. Excluding these items, our effective tax rate would have been 21.5% for the three months ended March 31, 2020.

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.

~~Table of Contents~~

~~Comparison of the Six Months Ended June 30, 2020 and 2019~~

~~The following table presents our results of operations for the periods indicated:~~

Six Months Ended June 30,
2020 2019 $ Change % Change
(in thousands)
Consolidated Statements of Operations Data:
Revenue $ 320,515 $ 325,073 $ (4,558) (1) %
Operating expenses:
Cost of revenue 132,934 137,744 (4,810) (3) %
Sales and marketing 78,217 88,934 (10,717) (12) %
Product development 25,554 28,580 (3,026) (11) %
General and administrative 55,484 58,646 (3,162) (5) %
Total operating expenses 292,189 313,904 (21,715) (7) %
Income from operations 28,326 11,169 17,157 154 %
Other income, net 662 1,480 (818) *
Income before income taxes 28,988 12,649 16,339 129 %
Provision for income taxes 5,683 1,828 3,855 *
Net income $ 23,305 $ 10,821 $ 12,484 115 %

* Not meaningful

~~Revenue~~

Revenue decreased by $4.6 million, or 1%, to $320.5 million in the six months ended June 30, 2020 compared to the same period in 2019. On a constant currency basis, revenue decreased approximately 1% in the six months ended June 30, 2020, compared to the same period in 2019.

The Company’s E-Commerce revenues increased by 1%, to $197.9 million in the six months ended June 30, 2020, compared to the same 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 the same period in 2019. During the six 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 $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 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 six 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 six months ended June 30, 2020 and 2019, we delivered 90.8 million and 93.8 million paid downloads, respectively, and our revenue per download increased to $3.51 for the six months ended June 30, 2020, from $3.43 for the six months ended June 30, 2019. During the six months ended June 30, 2020, the 3% 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 $1.9 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 $0.5 million, or 1%, to $101.3 million, in the six months ended June 30, 2020 compared to the same period in 2019.

~~Table of Contents~~

~~Costs and Expenses~~

~~Cost of Revenue.~~ Cost of revenue decreased by $4.8 million, or 3%, to $132.9 million in the six 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. In addition, severance charges of $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 will fluctuate in line with changes in revenue and paid downloads.

~~Sales and Marketing.~~ Sales and marketing expenses decreased by $10.7 million, or 12%, to $78.2 million in the six months ended June 30, 2020 compared to the same period in 2019. As a percent of revenue, sales and marketing expenses decreased to 24% for the three months ended June 30, 2020, 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 the prior year, partially offset by $1.4 million of higher employee-related costs, including severance charges. 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 $3.2 million, or 5%, to $55.5 million in the six months ended June 30, 2020 compared to the same period in 2019. This decrease was primarily driven by: (i) lower depreciation and amortization expense of $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 costs of $3.9 million, primarily associated with increased headcount related to ensuring 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 six months ended June 30, 2020 and a benefit of $0.6 million recorded in the same period in 2019. We expect to continue to incur general and administrative expenses to support our global operational growth and enhancements to support our reporting and planning functions.

~~Other Income, Net.~~ During the six months ended June 30, 2020, approximately $1.1 million of other income consisted of interest income which was partially offset by $0.5 million of unfavorable foreign currency fluctuations.

During the six months ended June 30, 2019, approximately $2.2 million of other income consisted of interest income which was partially offset by $0.7 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 $3.9 million for the six months ended June 30, 2020 as compared to the same period in 2019. Our effective tax rates for the six months ended June 30, 2020 and 2019 were 19.6% and 14.5%, respectively.

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 six months ended June 30, 2020. For the six months ended June 30, 2019, the impact of discrete tax items decreased the effective tax rate by 1.8%.

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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 that certain customers’ usage may decrease at times during the third quarter of each calendar year due to the summer vacation season and may increase inat times during the fourth quarter of each calendar year as demand is generally higher to support marketing campaigns in advance of the fourth quarter holiday season. While we believe seasonal trends have affected and will continue to affect our quarterly results, our growth trajectory 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 have historically been less volatile than if we had no subscription-based customers.

In addition, ~~customers’ expenditure~~expenditures on content ~~tends~~by customers tend to be discretionary in nature, reflecting overall economic conditions, the economic prospects of specific industries, budgeting constraints, buying patterns and ~~has been impacted by~~a variety of other factors, many of which are outside our control, including any impacts from COVID-19. ~~We cannot estimate when~~As a ~~recovery will occur~~result of these and ~~therefore,~~other factors, the results of any prior quarterly or annual ~~period~~periods should not be relied upon as indicators of our future operating performance.

See “Risks Related to the Coronavirus (COVID-19) Pandemic, The effect of the COVID-19 pandemic on our operations, and the operations of our customers, partners and suppliers, could have a material adverse effect on our business, financial condition, cash flows and results of operations” in Part ~~II,~~I, Item 1A, ~~Risk Factors~~“Risk Factors” in our ~~Quarterly Report on~~2020 Form ~~10-Q for the quarter ended March 31, 2020, which was filed with the SEC on April 28, 2020,~~10-K for further discussion of the possible impact of the COVID-19 pandemic on our business.

Liquidity and Capital Resources

As of ~~June 30, 2020,~~March 31, 2021, we had cash and cash equivalents totaling ~~$311.2~~$363.9 million which primarily consisted of bank ~~balances.~~balances, money market funds and commercial paper. Since inception, we have financed our operations primarily through cash flows generated from operations.

Historically, our principal uses of cash have included funding our operations, capital expenditures, content 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.

Dividends

We declared and paid cash dividends of ~~$0.34~~$0.21 per share of common stock, or ~~$12.1~~$7.6 million during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

On ~~July 20, 2020,~~April 19, 2021, our Board of Directors declared a quarterly cash dividend of ~~$0.17~~$0.21 per share of outstanding common stock payable on ~~September~~June 17, ~~2020~~2021 to stockholders of record at the close of business on ~~September~~June 3, ~~2020.~~2021. Future ~~declaration~~declarations 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 needs, business prospects, provisions of applicable law and other factors our Board of Directors may deem relevant.

Share Repurchase Program

In October 2015, our Board of Directors approved a share repurchase program, authorizing us to repurchase up to $100 million of our common stock, and in February 2017, our Board of Directors approved an increase to the share repurchase program, authorizing 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 the 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 ~~June 30, 2020,~~March 31, 2021, 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~~three months ended ~~June 30, 2020,~~March 31, 2021, we did not repurchase any shares of our common stock under the share repurchase program. As of ~~June 30, 2020,~~March 31, 2021, we had $100 million of repurchase capacity remaining ~~authorization for share repurchases~~ under the share repurchase program.

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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~~three months ended ~~June 30, 2020,~~March 31, 2021, shares with an aggregate value of ~~$3.4~~$13.0 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. Future capital expenditures could relate to 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, content and general corporate infrastructure. See Note 1213 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 ~~June 30, 2020.~~March 31, 2021.

Cash Flows

The following table summarizes our cash flow data for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (in thousands).


		Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019			2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	36,343	$	46,743	Net cash provided by operating activities	$	35,828	$	6,859
Net cash used in investing activities	Net cash used in investing activities	$	(15,438)	$	(12,478)	Net cash used in investing activities	$	(81,213)	$	(8,411)
Net cash used in financing activities	Net cash used in financing activities	$	(14,905)	$	(4,963)	Net cash used in financing activities	$	(19,371)	$	(7,801)

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 ~~$36.3~~$35.8 million for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, compared to ~~$46.7~~$6.9 million for the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. In the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, operating cash flows were ~~unfavorably~~favorably impacted ~~by $7.8 million of one-time payments associated with long-term incentives related to~~from our ~~2017 acquisition of Flashstock. Operating cash flows were also unfavorably impacted by the reduction in revenues~~increased operating income and ~~other~~ changes in the timing of payments pertaining to operating expenses, which can cause operating cash flow to fluctuate from period to period.

In addition, the ~~Company paid net cash taxes of $0.9 million and $1.5 million, for the six~~three months ended ~~June 30,~~March 31, 2020 ~~and 2019, respectively.~~were impacted by $7.8 million in one-time payments associated with long-term incentives related to our 2017 acquisition of Flashstock.

Investing Activities

Cash used in investing activities for the ~~six~~three months ended ~~June 30,~~March 31, 2021 was $81.2 million, consisting primarily of cash used in the acquisition of TurboSquid of $72.2 million, net of cash acquired and capital expenditures of $8.5 million for internal-use software and website development costs and purchases of software and equipment.

Cash used in investing activities in the three months ended March 31, 2020 was ~~$15.4~~$8.4 million, consisting primarily of capital expenditures of ~~$14.0~~$7.7 million for internal-use software and website development costs and purchases of software and equipment, and ~~$1.6 million paid to acquire the rights to distribute certain digital content in perpetuity.~~

Cash used in investing activities in the six months ended June 30, 2019 was $12.5 million, consisting primarily of capital expenditures of $13.7 million for internal-use software and website development costs and purchases of software and equipment, and $1.3$0.7 million paid to acquire the rights to distribute certain digital content into 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 former digital asset management business, which was sold in February 2018.perpetuity.

Financing Activities

Cash used in financing activities in the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was ~~$14.9~~$19.4 million, consisting primarily of ~~$12.1~~$13.0 million, paid in settlement of tax withholding obligations related to employee stock-based compensation awards and $7.6 million, related to the payment of the quarterly cash dividend. These amounts were partially offset by approximately $1.3 million received from the issuance of common stock in connection with the exercise of stock options.

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Cash used in financing activities in the three months ended March 31, 2020 was $7.8 million, consisting primarily of $6.0 million related to the payment of the quarterly cash dividend and ~~$3.4~~$1.8 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 $0.6 million from the issuance of common stock in connection with the exercise of stock options.~~

Cash used in financing activities in the six months ended June 30, 2019 was $5.0 million, consisting primarily of $5.2 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 $0.2 million from the issuance of common stock in connection with the exercise of stock options.

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Contractual Obligations and Commitments

We lease real estate under operating lease agreements that expire on various dates during the period from ~~2020~~2021 through 2029. We do not have any material finance lease obligations and our property, equipment and software have been purchased primarily with cash. 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 ~~$59.2~~$54.9 million. We are also party to a letter of credit as a security deposit for this leased facility ~~which was reduced from $2.6 million to~~in the amount of $1.7 ~~million in February 2020.~~million. As of March 31, 2020, the Company is no longer required to provide cash collateral for its letter of credit, and, accordingly, these funds are no longer restricted.

Additionally, as of ~~June 30, 2020,~~March 31, 2021, aggregate undiscounted future minimum lease payments under other operating leases are approximately ~~$9.2~~$6.9 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 ~~June 30, 2020,~~March 31, 2021, our guaranteed royalty payments and unconditional purchase obligations for the remainder of ~~2020~~2021 and for the fiscal years ending December 31, ~~2021~~2022, 2023, 2024 and ~~2022~~2025 were approximately ~~$18.2~~$24.3 million, ~~$16.5~~$12.5 million, $8.0 million, $3.2 million and ~~$4.4~~$0.8 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,										Three Months Ended March 31,
		2020			2019			2020			2019				2021			2020
Non-GAAP Financial Measures:	Non-GAAP Financial Measures:	(in thousands)																				Non-GAAP Financial Measures:	(in thousands)
Adjusted EBITDA	Adjusted EBITDA	$	37,032		$	25,106		$	59,092		$	50,648		Adjusted EBITDA	$	56,419		$	22,060
Adjusted net income	Adjusted net income	22,162			11,785			31,321			24,189			Adjusted net income	36,636			9,159
Free cash flow	Free cash flow	$	22,383		$	19,829		$	28,559		$	31,740		Free cash flow	$	26,791		$	6,176
Revenue growth on a constant currency basis	Revenue growth on a constant currency basis	(1)		%	5		%	(1)		%	7		%	Revenue growth on a constant currency basis	11		%	(1)		%

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 (expressed as a percentage) 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,

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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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Management 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 constant currency basis (expressed as a percentage) and free cash flow 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.~~operating performance. 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 important perspective on the cash 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. Additionally, our methods for measuring non-GAAP financial measures may differ from other companies’ similarly titled measures. 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 differences between adjusted EBITDA, adjusted net income, revenue growth (including by distribution channel) on a constant currency basis and free cash flow, and the most comparable financial measures calculated and presented in accordance with GAAP, are presented below.

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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 adjusted EBITDA to revenue.

The following is a reconciliation of net income to adjusted EBITDA for each of the periods indicated:


		Three Months Ended June 30,									Six Months Ended June 30,										Three Months Ended March 31,
		2020			2019			2020			2019				2021			2020
		(in thousands)																				(in thousands)

Net income	Net income	$	18,987		$	3,299		$	23,305		$	10,821		Net income	$	29,514		$	4,318
Add / (less) Non-GAAP adjustments:	Add / (less) Non-GAAP adjustments:													Add / (less) Non-GAAP adjustments:
Depreciation and amortization	Depreciation and amortization	10,851			13,403			21,370			25,319			Depreciation and amortization	10,091			10,519

Non-cash equity-based compensation	Non-cash equity-based compensation	3,636			7,751			9,396			12,375			Non-cash equity-based compensation	8,210			5,760
Other adjustments, net⁽¹⁾	Other adjustments, net⁽¹⁾	(149)			298			(662)			305			Other adjustments, net(1)	2,462			(513)
Provision for income taxes	Provision for income taxes	3,707			355			5,683			1,828			Provision for income taxes	6,142			1,976

Adjusted EBITDA	Adjusted EBITDA	$	37,032		$	25,106		$	59,092		$	50,648		Adjusted EBITDA	$	56,419		$	22,060
Adjusted EBITDA margin	Adjusted EBITDA margin	23.3		%	15.5		%	18.4		%	15.6		%	Adjusted EBITDA margin	30.8		%	13.7		%

(1)Included in other adjustments, net is foreign currency transaction gains and losses ~~expenses related to long-term incentives and contingent 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 impact of non-cash equity-based compensation, the amortization 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 periods indicated:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
		(in thousands)														(in thousands)

Net income	Net income	$	18,987	$	3,299	$	23,305	$	10,821	Net income	$	29,514	$	4,318
Add / (less) Non-GAAP adjustments:	Add / (less) Non-GAAP adjustments:									Add / (less) Non-GAAP adjustments:
Non-cash equity-based compensation	Non-cash equity-based compensation	3,636		7,751		9,396		12,375		Non-cash equity-based compensation	8,210		5,760
Tax effect of non-cash equity-based compensation(1)	Tax effect of non-cash equity-based compensation(1)	(854)		(1,822)		(2,208)		(2,909)		Tax effect of non-cash equity-based compensation(1)	(1,929)		(1,354)
Acquisition-related amortization expense	Acquisition-related amortization expense	514		2,407		1,082		3,297		Acquisition-related amortization expense	1,099		568
Tax effect of acquisition-related amortization expense(1)	Tax effect of acquisition-related amortization expense(1)	(121)		(498)		(254)		(707)		Tax effect of acquisition-related amortization expense(1)	(258)		(133)
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	Adjusted net income	$	22,162	$	11,785	$	31,321	$	24,189	Adjusted net income	$	36,636	$	9,159

Adjusted net income per diluted common share	Adjusted net income per diluted common share	$	0.62	$	0.33	$	0.87	$	0.68	Adjusted net income per diluted common share	$	0.98	$	0.26

(1)~~Represents expenses related to long-term incentives and contingent consideration related to our 2017 acquisition~~Tax effect reflects the estimated impact of ~~Flashstock.~~the adjustment on the provision for income taxes.

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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,										Three Months Ended March 31,
		2020			2019			2020			2019				2021			2020
		(in thousands)																				(in thousands)

Reported revenue (in thousands)	Reported revenue (in thousands)	$	159,230		$	161,741		$	320,515		$	325,073		Reported revenue (in thousands)	$	183,281		$	161,285
Revenue growth	Revenue growth	(2)		%	3		%	(1)		%	5		%	Revenue growth	14		%	(1)		%
Revenue growth on a constant currency basis	Revenue growth on a constant currency basis	(1)		%	5		%	(1)		%	7		%	Revenue growth on a constant currency basis	11		%	(1)		%

E-commerce reported revenue (in thousands)	E-commerce reported revenue (in thousands)	$	98,164		$	96,993		$	197,900		$	195,106		E-commerce reported revenue (in thousands)	$	118,400		$	99,736
E-commerce revenue growth	E-commerce revenue growth	1		%	6		%	1		%	8		%	E-commerce revenue growth	19		%	2		%
E-commerce revenue growth on a constant currency basis	E-commerce revenue growth on a constant currency basis	2		%	7		%	2		%	10		%	E-commerce revenue growth on a constant currency basis	16		%	2		%

Enterprise reported revenue (in thousands)	Enterprise reported revenue (in thousands)	$	61,066		$	64,748		$	122,615		$	129,967		Enterprise reported revenue (in thousands)	$	64,881		$	61,549
Enterprise revenue growth	Enterprise revenue growth	(6)		%	—		%	(6)		%	4		%	Enterprise revenue growth	5		%	(6)		%
Enterprise revenue growth on a constant currency basis	Enterprise revenue growth on a constant currency basis	(5)		%	2		%	(5)		%	6		%	Enterprise revenue growth on a constant currency basis	3		%	(5)		%

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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 three 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 periods indicated:


		Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019			2021		2020
		(in thousands)							(in thousands)

Net cash provided by operating activities	Net cash provided by operating activities	$	36,343	$	46,743	Net cash provided by operating activities	$	35,828	$	6,859
Capital expenditures	Capital expenditures	(13,966)		(13,726)		Capital expenditures	(8,548)		(7,719)
Content acquisitions	Content acquisitions	(1,577)		(1,277)		Content acquisitions	(489)		(723)
Payments related to long-term incentives related to acquisitions	Payments related to long-term incentives related to acquisitions	7,759		—		Payments related to long-term incentives related to acquisitions	—		7,759
Free Cash Flow	Free Cash Flow	$	28,559	$	31,740	Free Cash Flow	$	26,791	$	6,176

Off-Balance Sheet Arrangements

As of ~~June 30, 2020,~~March 31, 2021, 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 foreign currency exchange rate fluctuation, interest rate fluctuation and inflation.

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 ~~35%~~36% for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. 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 ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, 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 that 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 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.

Our historical revenue by currency is as follows (in thousands):


		Three Months Ended June 30,														Six Months Ended June 30,													Three Months Ended March 31,
		2020						2019						2020							2019							2021	2020
		U.S. Dollars		Originating Currency		U.S. Dollars		Originating Currency		U.S. Dollars		Originating Currency		U.S. Dollars		Originating Currency			U.S. Dollars			Originating Currency		U.S. Dollars		Originating Currency
Euro	Euro	$	32,756	€	29,717	$	33,460	€	29,467	$	66,448	€	60,095	$	66,535	€	58,138	Euro	$	37,890		€	31,955	$	33,692	€	30,378
British pounds	British pounds	11,274		£	9,039	11,918		£	9,191	23,477		£	18,509	24,032		£	18,447	British pounds	13,994			£	10,315	12,203		£	9,470
All other non-U.S. currencies⁽¹⁾	All other non-U.S. currencies⁽¹⁾	11,408				11,752				23,203				23,514				All other non-U.S. currencies(1)	13,946					11,795
Total foreign currency	Total foreign currency	55,438				57,130				113,128				114,081				Total foreign currency	65,830					57,690

U.S. dollar	U.S. dollar	103,792				104,611				207,387				210,992				U.S. dollar	117,451					103,595
Total revenue	Total revenue	$	159,230			$	161,741			$	320,515			$	325,073			Total revenue	$	183,281				$	161,285

(1)Includes no single currency which exceeded 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.~~March 31, 2021.

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 ~~June 30, 2020.~~March 31, 2021. 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. However, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objective.

Based on the evaluation of our disclosure controls and procedures as of ~~June 30, 2020,~~March 31, 2021, 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

There 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. We acquired TurboSquid, Inc. during the first quarter of 2021 and are in the process of integrating the acquired business into our overall internal control over financial reporting process.

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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 ~~2019~~2020 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 ~~June 30, 2020,~~March 31, 2021, there were no material changes to these risk factors as described in our ~~2019 Form 10-K and first quarter~~ 2020 Form ~~10-Q.~~10-K.

Item 6. Exhibits.

See the Exhibit Index, which immediately precedes the signature page of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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EXHIBIT INDEX


Exhibit
Number						Exhibit Description
10.1#						~~Offer Letter, dated February 11, 2020, between the Company~~Shutterstock, Inc. 2012 Amended and ~~Abraham Muchnick~~Restated Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement, for grants subsequent to April 2020.
~~10.2#~~						~~Employment Agreement, dated November 4, 2019, between the Company and Pietro~~ ~~Silvio~~
~~10.3~~						Mutual Separation Agreement and General Release, dated March 23, 2020, between the Company and Lou Weiss (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 15, 2020 (File No. 001-35699))

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.INS						XBRL 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.SCH						XBRL Taxonomy Extension Schema Document
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						XBRL Taxonomy Extension Label Linkbase Document
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover 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, 2020~~April 27, 2021	By:	/s/ Jarrod Yahes
		Jarrod Yahes
		Chief Financial Officer
		(Principal Financial Officer)

Dated: ~~July 28, 2020~~April 27, 2021	By:	/s/ Steven Ciardiello
		Steven Ciardiello
		Chief Accounting Officer
		(Principal Accounting Officer)

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