UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________

FORM 10-Q

___________________________________________________________

(Mark One)

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

For the quarterly period ended March 31, ~~2019~~2020

o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35669

___________________________________________________________

SHUTTERSTOCK, INC.

(Exact name of registrant as specified in its charter)

~~___________________________________________________________~~

________________________________________________________



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

~~Shutterstock, Inc.~~

350 Fifth Avenue, 21st Floor

New York, NY 10118

(Address of principal executive offices, including zip code)

~~(646)~~ (646) 710-3417

(Registrant’s telephone number, including area code)

~~__________________________________________________________~~Not applicable

(Former name, former address and former fiscal year, if changed since last report)

______________________________________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each 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:~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x☒ Yes o☐ No

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x☒ Yes o☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

~~Large accelerated filer~~ x

~~Accelerated filer~~ o

~~Non-accelerated filer~~ o ~~(Do not check if a smaller reporting company)~~

~~Smaller reporting company~~ o

Emerging growth company o

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

☐

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

☐

Yesx

☒

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

~~Class~~

~~Outstanding at April 19, 2019~~

~~Common Stock, $0.01 par value per share~~

~~35,215,629~~

As of April 24, 2020, 35,631,028 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.

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Shutterstock, Inc.

FORM 10-Q

Table of Contents

For the Quarterly Period Ended March 31, ~~2019~~

2020

Table of Contents

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, or management ~~strategies.~~strategies and the COVID-19 pandemic. You can identify ~~these~~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. ~~These forward-looking~~Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in ~~our~~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 ~~26, 2019,~~13, 2020, under the caption “Risk Factors” in this Quarterly Report on Form 10-Q and in our consolidated financial statements, related notes, and the other information appearing elsewhere in such ~~report,~~Annual Report, this ~~report~~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,” “Offset,” “Bigstock,” “Rex Features,” “PremiumBeat” 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)


	March 31,			December 31,				March 31,		December 31,
	2019			2018				2020		2019

ASSETS							ASSETS
Current assets:							Current assets:
Cash and cash equivalents	$	240,141		$	230,852		Cash and cash equivalents	$	295,711	$	303,261
Accounts receivable, net	45,449			41,028

Accounts receivable, net of allowance of $4,553 and $3,579							Accounts receivable, net of allowance of $4,553 and $3,579	45,216		47,016
Prepaid expenses and other current assets	35,378			34,841			Prepaid expenses and other current assets	28,769		26,703

Total current assets	320,968			306,721			Total current assets	369,696		376,980
Property and equipment, net	72,553			76,188			Property and equipment, net	56,896		58,834
Right-of-use assets	46,313			—			Right-of-use assets	43,430		45,453
Intangible assets, net	29,048			29,540			Intangible assets, net	25,499		26,669
Goodwill	88,889			88,576			Goodwill	88,144		88,974
Deferred tax assets, net	11,636			12,375			Deferred tax assets, net	14,803		14,387
Other assets	18,090			18,088			Other assets	16,497		19,215
Total assets	$	587,497		$	531,488		Total assets	$	614,965	$	630,512
LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:							Current liabilities:
Accounts payable	$	4,941		$	7,212		Accounts payable	$	4,125	$	6,104
Accrued expenses	53,887			51,385			Accrued expenses	53,294		53,864
Contributor royalties payable	25,156			22,971			Contributor royalties payable	25,637		25,193

Deferred revenue	137,368			139,604			Deferred revenue	138,883		141,922

Other current liabilities	10,858			2,131			Other current liabilities	10,367		18,811
Total current liabilities	232,210			223,303			Total current liabilities	232,306		245,894
Deferred tax liability, net	—			77

Lease liabilities	48,591			—			Lease liabilities	45,522		47,313
Other non-current liabilities	11,712			21,441			Other non-current liabilities	9,410		9,160
Total liabilities	292,513			244,821			Total liabilities	287,238		302,367
Commitments and contingencies (Note 14)
Commitments and contingencies (Note 12)							Commitments and contingencies (Note 12)

Stockholders’ equity:							Stockholders’ equity:
Common stock, $0.01 par value; 200,000 shares authorized; 37,759 and 37,618 shares issued and 35,201 and 35,060 shares outstanding as of March 31, 2019 and December 31, 2018, respectively	378			376
Treasury stock, at cost; 2,558 shares as of March 31, 2019 and December 31, 2018	(100,027		)	(100,027		)

Common stock, $0.01 par value; 200,000 shares authorized; 38,119 and 38,055 shares issued and 35,561 and 35,497 shares outstanding as of March 31, 2020 and December 31, 2019, respectively							Common stock, $0.01 par value; 200,000 shares authorized; 38,119 and 38,055 shares issued and 35,561 and 35,497 shares outstanding as of March 31, 2020 and December 31, 2019, respectively	381		381
Treasury stock, at cost; 2,558 shares as of March 31, 2020 and December 31, 2019							Treasury stock, at cost; 2,558 shares as of March 31, 2020 and December 31, 2019	(100,027)		(100,027)
Additional paid-in capital	292,458			291,710			Additional paid-in capital	316,823		312,824
Accumulated comprehensive loss	(6,426		)	(6,471		)	Accumulated comprehensive loss	(8,668)		(6,220)
Retained earnings	108,601			101,079			Retained earnings	119,218		121,187
Total stockholders’ equity	294,984			286,667			Total stockholders’ equity	327,727		328,145
Total liabilities and stockholders’ equity	$	587,497		$	531,488		Total liabilities and stockholders’ equity	$	614,965	$	630,512

See Notes to Unaudited Consolidated Financial Statements.

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Shutterstock, Inc.

Consolidated Statements of Operations

(In thousands, except for per share data)

(unaudited)


	Three Months Ended March 31,					Three Months Ended March 31,
	2019		2018			2020		2019

Revenue	$	163,332	$	153,019	Revenue	$	161,285	$	163,332

Operating expenses:					Operating expenses:
Cost of revenue	69,218		64,490		Cost of revenue	69,123		69,218
Sales and marketing	44,446		40,368		Sales and marketing	42,660		44,446
Product development	14,986		16,448		Product development	13,069		14,986
General and administrative	26,583		27,224		General and administrative	30,652		26,583
Total operating expenses	155,233		148,530		Total operating expenses	155,504		155,233
Income from operations	8,099		4,489		Income from operations	5,781		8,099
Gain on Sale of Webdam	—		38,613

Other income, net	896		802		Other income, net	513		896
Income before taxes	8,995		43,904
Income before income taxes					Income before income taxes	6,294		8,995
Provision for income taxes	1,473		11,323		Provision for income taxes	1,976		1,473
Net income	$	7,522	$	32,581	Net income	$	4,318	$	7,522


Earnings per share:					Earnings per share:
Basic	$	0.21	$	0.94	Basic	$	0.12	$	0.21
Diluted	$	0.21	$	0.92	Diluted	$	0.12	$	0.21

Weighted average shares outstanding:					Weighted average shares outstanding:
Basic	35,114		34,784		Basic	35,521		35,114
Diluted	35,491		35,318		Diluted	35,882		35,491

See Notes to Unaudited Consolidated Financial Statements.

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Shutterstock, Inc.

Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)


	Three Months Ended March 31,
	2020		2019

Net income	$	4,318	$	7,522
Foreign currency translation (loss) / gain	(2,448)		45

Other comprehensive (loss) / gain	(2,448)		45
Comprehensive income	$	1,870	$	7,567

Three Months Ended
March 31,
2019 2018

Net income $ 7,522
$ 32,581
Foreign currency translation gain 45
1,075
Other comprehensive income 45
1,075
Comprehensive income $ 7,567
$ 33,656

See Notes to Unaudited Consolidated Financial Statements.

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Shutterstock, Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

(unaudited)

Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Loss Retained
Earnings
Common Stock Treasury Stock
Shares Amount Shares Amount Total
Balance at December 31, 2018 37,618
$ 376
2,558
$ (100,027 ) $ 291,710
$ (6,471 ) $ 101,079
$ 286,667
Equity-based compensation —
—
—
—
4,624
—
—
4,624
Issuance of common stock in connection with employee stock option exercises and RSU vesting 229
3
—
—
214
—
—
217
Common shares withheld for settlement of taxes in connection with equity-based compensation (88 ) (1 ) —
—
(4,090 ) —
—
(4,091 )
Other comprehensive loss —
—
—
—
—
45
—
45
Net income —
—
—
—
—
—
7,522
7,522
Balance at March 31, 2019 37,759
$ 378
2,558
$ (100,027 ) $ 292,458
$ (6,426 ) $ 108,601
$ 294,984


																																									Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings
																															Common Stock				Treasury Stock
Three Months Ended March 31, 2020																									Three Months Ended March 31, 2020						Shares	Amount		Shares	Amount											Total
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
Cumulative effect of accounting change (Note 1)																									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

Equity-based compensation																									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						109	1		—	—		(1)		—		—		—
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						(45)	(1)		—	—		(1,760)		—		—		(1,761)

Cash dividends paid, $0.17 per common share																									Cash dividends paid, $0.17 per common share						—	—		—	—		—		—		(6,040)		(6,040)
Other comprehensive loss																									Other comprehensive loss						—	—		—	—		—		(2,448)		—		(2,448)
Net income																									Net income						—	—		—	—		—		—		4,318		4,318
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

Three Months Ended March 31, 2019																									Three Months Ended March 31, 2019
Balance at December 31, 2018																									Balance at December 31, 2018						37,618	$	376	2,558	$	(100,027)	$	291,710	$	(6,471)	$	101,079	$	286,667

Equity-based compensation																									Equity-based compensation						—	—		—	—		4,624		—		—		4,624

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						229	3		—	—		214		—		—		217
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						(88)	(1)		—	—		(4,090)		—		—		(4,091)

										Additional Paid-in Capital				Accumulated Other Comprehensive Loss				Retained Earnings
	Common Stock					Treasury Stock
	Shares		Amount			Shares	Amount						Total
Balance at December 31, 2017	37,270		$	373		2,558	$	(100,027	)				$			272,657						$	(3,557	)		$	145,139		$	314,585
Cumulative Effect of Accounting Change (See Note 1)	—		—			—	—						—								—				6,178			6,178
Balance at January 1, 2018	37,270		$	373		2,558	$	(100,027	)	$	272,657				$	(3,557	)		$	151,317			$	320,763
Equity-based compensation	—		—			—	—			5,606				—				—				5,606
Issuance of common stock in connection with employee stock option exercises and RSU vesting	252		3			—	—			1,176				—				—				1,179
Common shares withheld for settlement of taxes in connection with equity-based compensation	(83	)	(1		)	—	—			(4,039		)		—				—				(4,040		)
Other comprehensive loss	—		—			—	—			—				1,075				—				1,075
Other comprehensive income																									Other comprehensive income						—	—		—	—		—		45		—		45
Net income	—		—			—	—			—				—				32,581				32,581			Net income						—	—		—	—		—		—		7,522		7,522
Balance at March 31, 2018	37,439		$	375		2,558	$	(100,027	)	$	275,400			$	(2,482	)		$	183,898			$	357,164
Balance at March 31, 2019																									Balance at March 31, 2019						37,759	$	378	2,558	$	(100,027)	$	292,458	$	(6,426)	$	108,601	$	294,984

See Notes to Unaudited Consolidated Financial Statements.

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Shutterstock, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Three Months Ended March 31,							Three Months Ended March 31,
	2019			2018				2020		2019

CASH FLOWS FROM OPERATING ACTIVITIES							CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	7,522		$	32,581		Net income	$	4,318	$	7,522
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	11,916			10,943			Depreciation and amortization	10,519		11,916

Deferred taxes	699			(1,644		)	Deferred taxes	(386)		699
Non-cash equity-based compensation	4,624			5,606			Non-cash equity-based compensation	5,760		4,624
Gain on Sale of Webdam	—			(38,613		)

Bad debt expense	(632		)	238			Bad debt expense	658		(632)

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

Accounts receivable	(3,812		)	561			Accounts receivable	673		(3,812)
Prepaid expenses and other current and non-current assets	(2,782		)	(7,688		)	Prepaid expenses and other current and non-current assets	(2,207)		(2,782)

Accounts payable and other current and non-current liabilities	1,994			15,247			Accounts payable and other current and non-current liabilities	(2,286)		1,994
Long-term incentives related to acquisitions							Long-term incentives related to acquisitions	(7,759)		—
Contributor royalties payable	2,138			3,027			Contributor royalties payable	551		2,138

Deferred revenue	(1,958		)	836			Deferred revenue	(2,982)		(1,958)
Net cash provided by operating activities	$	19,709		$	21,094		Net cash provided by operating activities	$	6,859	$	19,709

CASH FLOWS FROM INVESTING ACTIVITIES							CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(7,253		)	(14,975		)	Capital expenditures	(7,719)		(7,253)
Acquisition of businesses, net of cash acquired	—			(845		)
Proceeds from Sale of Webdam, net	2,500			42,338
Other investments / advances	—			(15,000		)
Acquisition of digital content	(545		)	(635		)

Proceeds from sale of Webdam, net							Proceeds from sale of Webdam, net	—		2,500

Acquisition of content							Acquisition of content	(723)		(545)

Security deposit release	—			34			Security deposit release	31		—
Net cash used in investing activities	$	(5,298	)	$	10,917		Net cash used in investing activities	$	(8,411)	$	(5,298)

CASH FLOWS FROM FINANCING ACTIVITIES							CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercise of stock options	214			1,185			Proceeds from exercise of stock options	—		214

Cash paid related to settlement of employee taxes related to RSU vesting	(4,090		)	(4,033		)	Cash paid related to settlement of employee taxes related to RSU vesting	(1,761)		(4,090)
Payment of cash dividend							Payment of cash dividend	(6,040)		—

Net cash used in financing activities	$	(3,876	)	$	(2,848	)	Net cash used in financing activities	$	(7,801)	$	(3,876)

Effect of foreign exchange rate changes on cash	(1,246		)	2,291			Effect of foreign exchange rate changes on cash	(810)		(1,246)
Net increase in cash, cash equivalents and restricted cash	9,289			31,454			Net increase in cash, cash equivalents and restricted cash	(10,163)		9,289

Cash, cash equivalents and restricted cash, beginning of period	233,465			256,041			Cash, cash equivalents and restricted cash, beginning of period	305,874		233,465
Cash, cash equivalents and restricted cash, end of period	$	242,754		$	287,495		Cash, cash equivalents and restricted cash, end of period	$	295,711	$	242,754

Supplemental Disclosure of Cash Information:							Supplemental Disclosure of Cash Information:
Cash paid / (received) for income taxes	$	305		$	(1,835	)
Cash paid for income taxes							Cash paid for income taxes	$	494	$	305

See Notes to Unaudited Consolidated Financial Statements.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(1) Summary of Operations and Significant Accounting Policies

Summary of Operations

Shutterstock ~~Inc., together with its subsidiaries (collectively, the~~(the “Company” or “Shutterstock”), is a global technology company offering a creative platform, which provides high-quality ~~digital~~ content, tools and services to creative professionals. The ~~digital~~ content licensed by the Company’s customers includes: ~~(a) imagery,~~

•Images - consisting of ~~licensed~~ photographs, vectors ~~illustrations~~ and ~~video clips, which is~~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 ~~content;~~clips, premium footage filmed by industry experts and ~~(b) music,~~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 isare often used to complement ~~digital imagery.~~ images and footage.

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. The Company also offered digital asset management services through its cloud-based digital asset management platform (“Webdam”). As discussed in Note 3, on February 26, 2018, the Company completed a sale transaction, pursuant to which the buyer in the transaction acquired certain assets and assumed certain contracts and liabilities which constituted the Company’s digital asset management business (the “Sale of Webdam”).

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 March 31, ~~2019,~~2020, and the Consolidated Statements of Operations, Comprehensive Income, Stockholders’ Equity and Cash Flows for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, are unaudited. The Consolidated Balance Sheet as of December 31, ~~2018,~~2019, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP. These unaudited interim financial statements have been prepared on a basis consistent with the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, which include all normal recurring adjustments necessary to fairly state ~~fairly~~ the Company’s financial position as of March 31, ~~2019,~~2020, and its consolidated results of operations, ~~and~~ comprehensive income, ~~for the three months ended March 31, 2019~~stockholders’ equity and ~~2018, and its~~ cash flows for the three months ended March 31, ~~2019~~2020 and ~~2018.~~2019. The financial data and the other financial information disclosed in the notes to the financial statements related to these periods are also unaudited. The results of operations for the three months ended March 31, ~~2019~~2020 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, ~~2019~~2020 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, ~~2018~~2019 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February ~~26, 2019.~~13, 2020. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Certain immaterial changes in presentation have been made to conform the prior period presentation to current period reporting.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements. Actual results could differ from those estimates. Such estimates include, but are not limited to, the determination of the allowance for doubtful accounts, the volume of expected unused licenses for our subscription-based products, the assessment of recoverability of property and equipment, the fair value of acquired goodwill and intangible assets, the grant-date fair value of non-cash equity-based compensation, the assessment of recoverability of deferred tax assets, 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, Cash Equivalents and Restricted Cash

The following represents the Company’s cash and cash equivalents and restricted cash balances as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	As of March 31, 2019		As of December 31, 2018			As of March 31, 2020		As of December 31, 2019
Cash and cash equivalents	$	240,141	$	230,852	Cash and cash equivalents	$	295,711	$	303,261
Restricted cash	2,613		2,613		Restricted cash	—		2,613
Total cash, cash equivalents and restricted cash	$	242,754	$	233,465	Total cash, cash equivalents and restricted cash	$	295,711	$	305,874

The Company’s cash and cash equivalents consist ~~primarily~~ of ~~(i)~~ cash on hand and bank ~~deposits and (ii) money market accounts.~~deposits. These assets are stated at cost, which approximates fair value.

~~The Company’s restricted~~As of March 31, 2020, the Company was no longer required to provide cash ~~relates to security deposits related to the lease~~collateral for its ~~headquarters in~~letter of credit for its New York City ~~which expires in 2029. The carrying value of restricted cash approximates fair value. Restricted cash is included as a component of other assets on the Consolidated Balance Sheets.~~headquarters, and, accordingly, these funds are no longer restricted.

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 the aging of its accounts receivable and on a customer-by-customer basis where appropriate. The Company’s reserve analysis contemplates the Company’s historical loss rate on receivables, specific customer situations and the economic environments in which the Company operates.

Historically, the Company used an incurred loss model to calculate its allowance for doubtful accounts. Upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”) on January 1, 2020, the Company shifted to a current expected credit loss model.

During the three months ended March 31, ~~2019,~~2020, the Company ~~reduced its allowance for doubtful accounts which included a $0.6 million benefit~~ recorded to bad debt expense ~~and $0.1 million related to write-offs and other adjustments.~~of $0.7 million. As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company’s allowance for doubtful accounts was approximately ~~$4.0~~$4.6 million and ~~$4.7~~$3.6 million, respectively, which ~~was~~are included as a reduction of accounts ~~receivable.~~receivable on the Consolidated Balance Sheets.

Chargeback and Sales Refund Allowance

~~The majority of the Company’s customers purchase products by making an electronic payment with a credit card at the time of a transaction.~~ The Company establishes a chargeback allowance and sales refund reserve allowance based on factors surrounding historical credit card chargeback trends, historical sales refund trends and other information. As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company’s combined allowance for chargebacks and sales refunds was $0.3 million, ~~and $0.3 million, respectively,~~ which was included inas a component of other ~~liabilities.~~current liabilities on the Consolidated Balance Sheets.

Revenue Recognition

The majority of the Company’s revenue is earned from the license of ~~digital~~ content. ~~Digital content~~Content licenses are generally purchased on a monthly or annual subscription 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. Prior to the Sale of Webdam, the Company also earned revenue from licensing hosted software services through Webdam’s cloud-based tools for businesses, which were purchased as part of a subscription.

The Company recognizes revenue upon the satisfaction of performance obligations, which generally occurs when ~~(i) digital~~ content is downloaded by a ~~customer or (ii) hosted software services are provisioned and available to a~~ customer. ~~For digital content licenses, the~~The Company recognizes revenue on both its subscription-based and transaction-based sales 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 revenue associated with the unused licenses throughout 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. ~~Revenue associated with hosted software services is recognized ratably over the term of the license.~~ 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 ~~payments~~payment with a credit card at the time of ~~the transaction with~~ a credit card. The Company establishes an allowance for credit card chargebacks and a sales refund reserve based on factors surrounding historical chargeback and sales refund trends and other information.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

~~Shutterstock, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

make payments under standard credit terms. Collectability for 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.

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2014-09, as amended (“ASU 2014-09”), on January 1, 2018 using the modified retrospective approach, and prior period amounts were not restated. The effect of adoption of this new guidance on the Consolidated Balance Sheet as of January 1, 2018 was to reduce (i) prepaid expenses and other current assets by $3.7 million and (ii) deferred revenues by $9.9 million, with an offsetting $6.2 million increase in 2018 opening retained earnings.

~~Leasing~~

~~The Company records rent expense on a straight-line basis over the term of the related lease. Prior to the adoption of FASB ASU 2016-02,~~ ~~Leases (Topic 842)~~, as amended (“ASC 842”), the difference between the rent expense recognized and the actual payments made in accordance with the operating lease agreement was recognized as a deferred rent liability on the Company’s balance sheet. As of December 31, 2018, the Company had deferred rent of $11.3 million, which is included in other non-current liabilities in the Consolidated Balance Sheet.

Effective January 1, 2019, the Company adopted ASC 842. In accordance with ASC 842, the Company first determines if an arrangement contains a lease and the classification of that lease, if applicable, at inception. This standard requires the recognition of right-of-use (“ROU”) assets and lease liabilities for the Company’s operating leases. For contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration, and to account for the lease and non-lease components as a single lease component. The Company has also elected not to recognize a lease liability or ROU asset for leases with a term of 12 months or less, and recognize lease payments for those short-term leases on a straight-line basis over the lease term in the Consolidated Statements of Operations. Operating leases are included in ROU assets, other current liabilities and lease liabilities (net of current portion) in the Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments under the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The implicit rate within the Company’s leases is generally not determinable and therefore the incremental borrowing rate at the lease commencement date is utilized to determine the present value of lease payments. The determination of the incremental borrowing rate requires judgment. Management determines the incremental borrowing rate for each lease using the Company’s estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The ROU asset also includes any lease prepayments, offset by lease incentives. Certain of the Company’s leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when the Company is reasonably certain that the option will be exercised. An option to terminate is considered unless the Company is reasonably certain the option will not be exercised.

Recently Adopted Accounting Standard Updates

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. ASU 2016-02 requires that the rights and obligations created by leases with a duration greater than 12 months be recorded as assets and liabilities on the balance sheet of the lessee. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has adopted this standard as of January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date. The Company has also elected the option, as permitted in ASU 2018-11, ~~Leases (Topic 842): Targeted Improvements~~, whereby initial application of the new lease standard would occur at the adoption date and a cumulative-effect adjustment, if any, would be recognized to the opening balance of retained earnings in the period of adoption. For comparability purposes, the Company will continue to comply with previous disclosure requirements in accordance with existing lease guidance for all periods presented in the year of adoption.

~~Shutterstock, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

The Company has elected the practical expedients permitted under the transition guidance which enabled the Company: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for existing leases. In addition, the Company has made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. Upon adoption of this standard on January 1, 2019, the Company recognized a total lease liability in the amount of $58.0 million, representing the present value of the minimum rental payments remaining as of the adoption date and a right-of-use asset in the amount of $46.7 million.

~~Recently Issued Accounting Standard Updates~~

In June 2016, the FASB issued ASU 2016-13, ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments~~ ~~(“ASU 2016-13”)~~. ~~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 is required, prospectively, for annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Company ~~is evaluating~~adopted ASU 2016-13, as amended, effective January 1, 2020 using the ~~impact~~modified retrospective method and recorded a cumulative-effect adjustment of ~~adopting this new accounting standard on its financial statements.~~$0.2 million, net of tax, in retained earnings as of January 1, 2020.

In 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 is required for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company ~~is evaluating the~~adopted ASU 2018-13, effective January 1, 2020. The impact of ~~adopting~~adoption of this ~~new~~ standard on ~~its~~the consolidated financial ~~statements.~~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 is 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 ~~impact of this new accounting standard~~effect that ASU 2019-12 will have on ~~its financial statements.~~the Company's Consolidated Financial Statements.

(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 March 31, ~~2019~~2020 or December 31, ~~2018.~~2019.

Other Fair Value Measurements

~~Cash,~~The carrying amounts of cash, accounts receivable, restricted cash, accounts payable and accrued expenses ~~carrying amounts~~ approximate fair value because of the short-term nature of these instruments. The Company’s non-financial assets, which include property and equipment, intangible assets and goodwill, are not required to be measured at fair value on a recurring basis. However, if ~~certain triggering events occur, or if an annual impairment test is required and~~ the Company is required to evaluate the 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.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Other Long-term Investments

Investment in ZCool Technologies Limited (“ZCool”)

On January 4, 2018, the Company invested $15.0 million in convertible preferred shares issued by ZCool (the “Preferred Shares”), which is equivalent to a 25% fully diluted equity ownership interest. ZCool’s primary business is the operation of an e-commerce platform in China whereby customers can pay to license content contributed by creative professionals. ZCool ~~has~~and its affiliates have been the exclusive distributor of Shutterstock creative content in China since 2014.

~~Shutterstock, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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 ~~will be~~are accounted for using the measurement alternative for equity investments with no readily determinable fair value. The Preferred Shares ~~will be~~are reported at cost, adjusted for impairments or any observable price changes in ~~ordinary~~orderly transactions ~~with~~for identical or similar investments issued by ZCool.

On a quarterly basis, the Company evaluates the carrying value of the Preferred Shares for impairment, which includes an assessment of ZCool’s revenue growth, earnings performance, working capital and the general regional market conditions. As of March 31, ~~2019~~2020, no adjustments to the carrying value were identified as a result of this assessment. Changes in performance negatively impacting ZCool’s operating results and cash flows could result in the Company recording an impairment charge on the Preferred Shares in future periods.

As of March 31, 2020 and December 31, ~~2018,~~2019, the Company’s total investment in ZCool is ~~approximately~~ $15.0 million, which is reported within ~~Other~~other assets on the Consolidated Balance ~~Sheet.~~Sheets.

(3) ~~Sale of Digital Asset Management Business~~

On February 26, 2018, the Company completed the Sale of Webdam for an aggregate purchase price of $49.1 million. Total cash received, net of $4.6 million transaction costs paid, was $44.3 million, inclusive of $2.5 million received during the three months ended March 31, 2019 from the release of funds from escrow. During the three months ended March 31, 2018, the Company recognized a pre-tax gain on sale of approximately $38.6 million, which represents the excess of the net purchase price over the net assets transferred, less transaction costs.

~~(4)~~ Property and Equipment

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


	As of March 31, 2019			As of December 31, 2018				As of March 31, 2020		As of December 31, 2019
Computer equipment and software	$	155,112		$	148,104		Computer equipment and software	$	172,931	$	165,950
Furniture and fixtures	10,028			10,020			Furniture and fixtures	10,206		10,199
Leasehold improvements	18,780			18,822			Leasehold improvements	19,260		19,203
Property and equipment	183,920			176,946			Property and equipment	202,397		195,352
Less accumulated depreciation	(111,367		)	(100,758		)	Less accumulated depreciation	(145,501)		(136,518)
Property and equipment, net	$	72,553		$	76,188		Property and equipment, net	$	56,896	$	58,834

Depreciation and amortization expense related to property and equipment was ~~$10.6~~$9.3 million and ~~$9.5~~$10.6 million for the three months ended March 31, 2020 and 2019, respectively. Of these amounts, $8.2 million and ~~2018,~~$9.3 million are included in cost of revenue for the three months ended March 31, 2020 and 2019, respectively, and $1.1 million and $1.3 million are included in general and administrative expense for the three months ended March 31, 2020 and 2019, respectively.

Depreciation and 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~~$6.6 million and ~~$9.6~~$6.5 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Capitalized amounts are included as a component of property and equipment under computer equipment and software on the Consolidated Balance Sheets.

The portion of total depreciation expense related to capitalized internal-use software was ~~$7.3~~$7.2 million and ~~$5.4~~$7.3 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~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 March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had capitalized internal-use software of ~~$47.4~~$41.2 million and ~~$48.2~~$41.8 million, respectively, net of accumulated depreciation, which was included in property and equipment, net.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

~~(5)~~(4) Goodwill and Intangible Assets

Goodwill

The Company’s goodwill balance is attributable to its ~~Bigstock, Editorial, Images and Music~~Content reporting ~~units~~unit and is tested for impairment annually on October 1 or upon a triggering event. No triggering events were identified during the three months ended March 31, ~~2019.~~2020.

The following table summarizes the changes in the carrying value of the Company’s goodwill balance during the three months ended March 31, ~~2019~~2020 (in thousands):


	Goodwill
Balance as of December 31, 2019	$	88,974

Foreign currency translation adjustment	(830)

Balance as of March 31, 2020	$	88,144

Goodwill
Balance as of December 31, 2018 $ 88,576
Foreign currency translation adjustment 313
Balance as of March 31, 2019 $ 88,889

Intangible Assets

Intangible assets, all of which are subject to amortization, consisted of the following as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	As of March 31, 2019						As of December 31, 2018						As of March 31, 2020							As of December 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization				Gross Carrying Amount		Accumulated Amortization		Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization
Amortizing intangible assets:												Amortizing intangible assets:
Customer relationships	$	17,649	$	(7,744	)	9	$	17,360	$	(7,135	)	Customer relationships	$	16,960	$	(9,290)	9	$	17,729	$	(9,294)
Trade name	6,455		(3,980		)	7	6,372		(3,719		)	Trade name	6,229		(5,712)		7	6,517		(5,941)
Developed technology	4,838		(3,844		)	4	4,780		(3,633		)	Developed technology	4,673		(4,214)		4	4,841		(4,226)
Contributor content	20,572		(5,150		)	10	19,912		(4,653		)	Contributor content	23,905		(7,207)		10	23,510		(6,626)

Patents	259		(88		)	18	259		(84		)	Patents	259		(104)		18	259		(100)
Domain name	160		(79		)	13	160		(79		)

Total	$	49,933	$	(20,885	)		$	48,843	$	(19,303	)	Total	$	52,026	$	(26,527)		$	52,856	$	(26,187)

Amortization expense was ~~$1.3~~$1.2 million and ~~$1.5~~$1.3 million for the three months ended March 31, 2020 and 2019, respectively. Of these amounts, $0.6 million and ~~2018,~~$0.5 million are included in cost of revenue for the three months ended March 31, 2020 and 2019, respectively, and $0.6 million and $0.8 million are included in general and administrative expense for the three months ended March 31, 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: ~~$4.9~~$4.2 million for the remaining nine months of ~~2019, $5.9 million in~~ 2020, ~~$5.1~~$4.8 million in 2021, ~~$3.4~~$4.5 million in 2022, ~~$2.8~~$3.8 million in 2023, ~~$2.7~~$3.2 million in 2024, $1.9 million in 2025 and ~~$4.2~~$3.1 million thereafter.

~~(6)~~(5) Accrued Expenses

Accrued expenses consisted of the following (in thousands):


	As of March 31, 2020		As of December 31, 2019
Compensation	$	17,300	$	20,776
Non-income taxes	15,728		15,332

Website hosting and marketing fees	11,308		8,657



Other expenses	8,958		9,099
Total accrued expenses	$	53,294	$	53,864

As of March 31, 2019 As of December 31, 2018
Compensation $ 13,176
$ 15,153
Non-income taxes 8,782
7,885
Royalty tax withholdings 5,681
5,618
Other expenses 26,248
22,729
Total accrued expenses $ 53,887
$ 51,385

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

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

Stockholders’ Equity

Common Stock

During the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, the Company issued approximately ~~141,000~~64,000 and ~~169,000~~141,000 shares of common stock, respectively, primarily related to the exercise of stock options and the vesting of Restricted Stock Units (“RSUs”).

Treasury Stock

In October 2015, the Company’s Board of Directors approved a 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 three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, the Company did not repurchase any shares of its common stock under the share repurchase program. As of March 31, ~~2019,~~2020, the Company had $100 million of remaining authorization for purchases under the share repurchase program.

The Company expects to fund future repurchases, if any, through a combination of cash on hand, cash generated by operations and future financing transactions, if appropriate. Accordingly, the share repurchase program is subject to the Company having available cash to fund repurchases. Under the share repurchase program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.

Dividends

The Company declared and paid cash dividends of $0.17 per share of common stock, or $6.0 million during the three months ended March 31, 2020.

On April 20, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share of outstanding common stock payable on June 18, 2020 to stockholders of record at the close of business on June 4, 2020. Future declaration 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 ~~share-based~~equity-based payment awards, including employee stock options and RSUs granted under the Company’s Amended and Restated 2012 Omnibus Equity Incentive Plan (the “2012 Plan”), based on the fair value of each award on the 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 months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three Months Ended March 31,					Three Months Ended March 31,
	2019		2018			2020		2019
Cost of revenue	$	85	$	174	Cost of revenue	$	51	$	85
Sales and marketing	582		427		Sales and marketing	460		582
Product development	1,175		1,477		Product development	1,125		1,175
General and administrative	2,782		3,528		General and administrative	4,124		2,782
Total	$	4,624	$	5,606	Total	$	5,760	$	4,624

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 months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):

Three Months Ended March 31,
2019 2018
Stock options $ 891
$ 1,466
RSUs 3,733
4,140
Total $ 4,624
$ 5,606

~~Shutterstock, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~


	Three Months Ended March 31,
	2020		2019
Stock options	$	1,316	$	891
RSUs	4,444		3,733



Total	$	5,760	$	4,624

Stock Option Awards

During the three months ended March 31, ~~2019,~~2020, the Company ~~did not grant any~~granted 53,022 options to purchase shares of its common ~~stock.~~stock with a weighted average exercise price of $42.96. As of March 31, ~~2019,~~2020, there were approximately ~~429,000~~358,000 options vested and exercisable with a weighted average exercise price of ~~$33.94.~~$34.10. As of March 31, ~~2019,~~2020, the total unrecognized compensation charge related to non-vested options was approximately ~~$5.9~~$2.7 million, which is expected to be recognized through ~~2022.~~2023.

Restricted Stock Unit Awards

During the three months ended March 31, ~~2019,~~2020, the Company had ~~net RSU forfeitures, after considering~~ RSU grants, net of forfeitures, of approximately ~~52,000.~~36,000. As of March 31, ~~2019~~2020, there are approximately ~~788,000~~1,040,000 non-vested RSUs (including performance-based restricted stock units, or PRSUs) outstanding with a weighted average grant-date fair value of ~~$44.67.~~$44.96. As of March 31, ~~2019,~~2020, the total unrecognized non-cash equity-based compensation charge related to the non-vested RSUs was approximately ~~$24.0~~$23.2 million, which is expected to be recognized through ~~2022. On April 1, 2019, the Company granted approximately 365,000 RSUs with a grant date fair value of approximately $17.0 million.~~2023.

During the three months ended March 31, ~~2019,~~2020, shares of common stock with an aggregate value of ~~$4.1~~$1.8 million were withheld upon vesting of RSUs and paid in connection with related remittance of employee withholding taxes to taxing authorities.

~~Grant of Performance Stock Units (“PSUs”)~~

On March 26, 2019, the Compensation Committee of the Board of Directors (the “Compensation Committee”) of the Company approved a new form of performance-based stock unit award agreement (the “Form PSU Award Agreement”) under the Company’s Amended and Restated 2012 Omnibus Equity Incentive Plan (the “2012 Plan”). On April 1, ~~2019,~~2020, the Company ~~awarded~~granted approximately ~~202,000 target PSUs to certain~~412,000 RSUs with a grant date fair value of the Company’s officers. These awards will be measured against performance goals set by the Compensation Committee for each year during a three-year performance period starting on January 1, 2019, and ending on December 31, 2021.$12.2 million.

~~(8)~~(7) Revenue

The Company distributes its ~~digital~~ content offerings through two primary channels:

E-commerce: The majority of the Company’s customers ~~purchase~~license content ~~licenses~~ directly through the Company’s ~~e-commerce platforms.~~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 ~~purchase~~license content ~~licenses~~ 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: ~~Enterprise customers are mainly composed~~ The Company also has a base of ~~creative professionals and large organizations~~customers with unique content, licensing and workflow needs. ~~Customers of this size~~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, ~~invoicing and the~~ ability to pay on

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

credit terms, multi-brand licensing packages, increased indemnification protection ~~multi-brand licensing packages~~ and content licensed for use-cases outside of those available on the e-commerce platform.

~~In addition to the Company’s digital content offerings, the Company has historically generated revenue through other channels:~~

~~Other:~~ The Company’s other sales channel includes revenue from Webdam’s digital asset management offerings which included tools to help organizations manage, search, distribute and collaborate on creative and other brand-building activities. Effective February 26, 2018, the Company completed the Sale of Webdam. See Note 3 for further information on the Sale of Webdam.

~~Shutterstock, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

The Company’s ~~revenue~~revenues by distribution channel for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 are as follows (in thousands):


	Three Months Ended March 31,
	2020		2019
E-commerce	$	99,736	$	98,113
Enterprise	61,549		65,219

Total Revenues	$	161,285	$	163,332

Three Months Ended
March 31,
2019 2018
E-commerce $ 98,113
$ 89,735
Enterprise 65,219
60,573
Other ⁽¹⁾
—
2,711
Total Revenues $ 163,332
$ 153,019


~~(1)~~	~~On February 26, 2018, the Company completed the Sale of Webdam. 2018 amounts include revenue earned during the period from January 1, 2018 through February 26, 2018.~~

The March 31, ~~2019~~2020 deferred revenue balance will be earned as ~~digital~~ content is downloaded or upon the expiration of subscription-based products, and nearly all is expected to be earned within the next twelve months. ~~$67.3~~$59.1 million of total revenue recognized for the three months ended March 31, ~~2019~~2020 was reflected in deferred revenue as of December 31, ~~2018.~~2019.

~~(9)~~(8) Other 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 months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three Months Ended March 31,
	2020		2019
Foreign currency loss	$	(598)	$	(161)



Interest income	1,111		1,057
Total other income	$	513	$	896

Three Months Ended March 31,
2019 2018
Foreign currency (loss) / gain $ (161 ) $ 319
Interest income 1,057
483
Total other income $ 896
$ 802

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

The Company’s effective tax rates yielded a net expense of ~~16.4%~~31.4% and ~~25.8%~~16.4% for the three months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively. InDuring the three months ended March 31, 2020, the effective tax rate increased by 6.9% as a result of a loss jurisdiction with no tax benefit. Discrete items further increased the effective tax rate by 3.0%. During the three months ended March 31, 2019, the impact of discrete items decreased the effective tax rate ~~for the three months ended March 31, 2019~~ by 1.2%. In the three months ended March 31, 2018, the Company incurred a discrete tax expense related primarily to the gain on Sale of Webdam, the net effect of which increased the effective tax rate for the three months ended March 31, 2018 by 9.6%.

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 international provisions enacted as part of the Tax Cuts and Jobs Act of 2017.~~

During the three months ended March 31, 2020and2019,~~and2018,~~ uncertain tax positions recorded by the Company were not 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 material for the three months ended March 31, ~~2019~~2020 and ~~2018.~~2019.

During the three months ended March 31, 2020 and 2019, the Company paid net cash taxes of $0.5 million and $0.3 million, ~~and during the three months ended March 31, 2018, the Company received net cash tax refunds~~respectively.

Table of ~~$1.8 million.~~

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

~~(11)~~(10) Net Income Per Share

Basic net income per share is computed using the weighted average number of shares of common stock outstanding for the period, excluding unvested RSUs and stock options. Diluted net income per share is based upon the weighted average shares of common stock outstanding for the period plus dilutive potential shares of common stock, including unvested RSUs and stock options using the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three Months Ended March 31,
	2020		2019
Net income	$	4,318	$	7,522
Shares used to compute basic net income per share	35,521		35,114
Dilutive potential common shares
Stock options	67		105
Unvested restricted stock awards	294		272

Shares used to compute diluted net income per share	35,882		35,491
Basic net income per share	$	0.12	$	0.21
Diluted net income per share	$	0.12	$	0.21

Dilutive shares included in the calculation	856		979
Anti-dilutive shares excluded from the calculation	1,144		1,135

Three Months Ended March 31,
2019 2018
Net income $ 7,522
$ 32,581
Shares used to compute basic net income per share 35,114
34,784
Dilutive potential common shares
Stock options 105
116
Unvested restricted stock awards 272
418
Shares used to compute diluted net income per share 35,491
35,318
Basic net income per share $ 0.21
$ 0.94
Diluted net income per share $ 0.21
$ 0.92

Dilutive securities included in the calculation 979
1,425
Anti-dilutive securities excluded from the calculation 1,135
938

~~(12)~~(11) Geographic Information

The following table presents the Company’s revenue based on customer location (in thousands):


	Three Months Ended March 31,					Three Months Ended March 31,
	2019		2018			2020		2019
North America	$	57,514	$	56,958	North America	$	57,018	$	57,514
Europe	55,485		51,934		Europe	53,796		55,485
Rest of the world	50,333		44,127		Rest of the world	50,471		50,333
Total revenue	$	163,332	$	153,019	Total revenue	$	161,285	$	163,332

The United States, included in North America in the above table, accounted for 32% and ~~34%~~32% of consolidated revenue for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. 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):


	March 31,		December 31,			As of March 31,		As of December 31,
	2019		2018			2020		2019
North America	$	67,440	$	71,758	North America	$	50,126	$	51,954
Europe	5,050		4,371		Europe	6,438		6,541
Rest of the world	63		59		Rest of the world	332		339
Total long-lived tangible assets	$	72,553	$	76,188	Total long-lived tangible assets	$	56,896	$	58,834

The United States, included in North America in the above table, accounted for ~~86%~~78% and ~~88%~~79% of total long-lived tangible assets as of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, 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)

~~(13) Leases~~

The Company’s leases relate primarily to office facilities that expire on various dates from 2019 through 2029, some of which include one or more options to renew. All of the Company’s leases are classified as operating leases. Operating lease costs, including insignificant costs related to short-term leases, were $2.7 million and $2.4 million for the three months ended March 31, 2019 and 2018, respectively.

~~Additional information related to the Company’s leases as of and for the three months ended March 31, 2019, is as follows:~~

(in thousands, except lease term and discount rate) March 31, 2019
Balance sheet information
ROU assets $ 46,313

Lease liabilities, current $ 9,060
Lease liabilities, non-current 48,591
Total lease liabilities $ 57,651

Supplemental data
Weighted average remaining lease term 9.0 years
Weighted average discount rate 6.2 %

Cash paid for amounts included in lease liabilities $ 2,433
ROU assets obtained in exchange for lease obligations $ 1,160

~~Maturities of lease liabilities as of March 31, 2019 were as follows:~~

(in thousands) March 31, 2019
Year ending December 31,
2019 (remaining) $ 7,386
2020 8,834
2021 7,620
2022 6,957
2023 6,208
Thereafter 39,591
Total undiscounted lease payments 76,596
Less: imputed interest (18,945 )
Total lease liabilities $ 57,651

The Company’s most significant lease is for its headquarters in New York City, which was entered into in March 2013 and was amended in January 2016 (“ESB Lease”). As amended, the ESB Lease will expire in 2029, and the undiscounted remaining future minimum lease payments are approximately $66.1 million. The Company is also party to a $2.6 million letter of credit, as a security deposit for the ESB Lease, which is collateralized by an equivalent amount of cash, and is reported as restricted cash within other assets on the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018.

~~Shutterstock, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

~~Fiscal year 2018 lease commitments in accordance with prior guidance~~

~~Future minimum lease payments under non-cancelable operating leases as of December 31, 2018 were as follows (in thousands):~~

Year Ending December 31, Operating
Leases
2019 $ 9,913
2020 8,762
2021 7,493
2022 6,829
2023 6,082
Thereafter 39,481
Total minimum lease payments $ 78,560

~~(14)~~(12) Commitments and Contingencies

~~Unconditional purchase obligations and other obligations~~

As of March 31, ~~2019,~~2020, the Company had total other non-lease obligations in the amount of approximately ~~$71.5~~$41.3 million, which consisted primarily of minimum royalty guarantees and unconditional purchase obligations related to contracts for infrastructure and other business services. As of March 31, ~~2019,~~2020, the Company’s other non-lease obligations for the remainder of ~~2019~~2020 and for the years ending December 31, ~~2020,~~ 2021 ~~2022~~ and ~~2023~~2022 were approximately $20.5 million, ~~$30.4 million, $16.7~~$16.4 million and ~~$3.9~~$4.4 million, respectively.

Legal Matters

From time to time, the Company may become party to litigation in the ordinary course of business, including direct claims brought by or against the Company with respect to intellectual property, contracts, employment and other matters, as well as claims brought against the Company’s customers for whom the Company has a contractual indemnification obligation. The Company assesses the likelihood of any adverse judgments or outcomes with respect to these matters and determines loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, the Company considers other relevant factors that could impact its ability to reasonably estimate a loss. A determination of the amount of reserves required, if any, for these contingencies is made after analyzing each matter. The Company reviews reserves, if any, at least quarterly and may change the amount of any such reserve in the future due to new developments or changes in strategy in handling these matters. Although the results of litigation and threats of litigation, investigations and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these matters will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company currently has no material active litigation matters and, 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 ~~the~~any modifications made by the customer, or the context in which ~~an image~~content is used. The standard maximum aggregate obligation and liability to any one customer for ~~all claims~~any single claim is generally limited to ~~ten thousand dollars. The Company offers~~10000 dollars but can range to $250,000, with certain ~~of its customers greater levels of~~exceptions for which our indemnification ~~including unlimited indemnification.~~obligation are uncapped. As of March 31, ~~2019,~~2020, the Company had recorded no0 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.

~~Shutterstock, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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 ~~arrangements and indemnification~~ agreements with ~~certain~~its executive officers and ~~with~~ certain employees. ~~The~~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 Form 10-K for the fiscal year ended December 31, ~~2018~~2019 filed with the SEC on February ~~26, 2019.~~13, 2020.

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” ~~disclosure of~~disclosures contained in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 and this Quarterly Report on Form 10-Q 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 global technology company offering a creative platform, which provides high-quality ~~digital~~ content, tools and services to creative professionals. 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 ~~digital~~ content licensed by our customers ~~includes: (a) imagery,~~include:

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

•Music - consisting of high-quality music tracks and sound effects, which isare often used to complement ~~digital imagery. We also offered digital asset management services through Webdam, our cloud-based digital asset management service, which we sold in February 2018 (“Sale of Webdam”).~~images and footage.

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. For customers seeking specialized content that goes beyond our library of stock content, our platform also connects customers with contributors who can produce custom branded content. ~~More than~~Over 1.9 million active, paying customers contributed to our revenue for the twelve-month period ended March 31, ~~2019.~~2020. As of March 31, ~~2019,~~2020, more than ~~750,000~~1.2 million approved contributors made their images, ~~video clips~~footage and music tracks available in our collection, which has grown to ~~over 260~~more than 330 million images and ~~over 14~~more than 18 million ~~video clips as of March 31, 2019.~~footage clips. This makes our collection of content one of the largest of its kind, and we delivered more than 4546 million paid downloads to our customers across all of our brands during the three months ended March 31, ~~2019. We believe that we delivered the highest volume of commercial image downloads of any single brand in our industry during this period.~~2020.

During the three months ended March 31, ~~2019, in addition to the increase in content provided by our contributors,~~2020, the Company had the following significant events:

•In January ~~2019,~~2020, we launched our ninth annual Creative Trends Report, identifying global and local trends that will influence design aesthetics and visual culture in 2020. This data-led report predicts image, video and music styles set to dominate marketing campaigns, advertising creative and video projects throughout the year.

•In January 2020, we announced that ~~our contributor-facing website and mobile applications are now available~~Shutterstock has been renewed as the official photographer of the 2020 EE British Academy Film Awards, which recognizes the best in ~~21 languages, aligning with~~film over the ~~languages already available on the Shutterstock customer-facing site and its new developer portal.~~past year.

•In ~~January 2019,~~February 2020, we launched our ~~first brand marketing campaign~~eighth annual Oscar Pop! poster series, which celebrates the best picture nominees in ~~six years. The ‘It’s not stock, it’s Shutterstock’ message is designed to showcase~~ the ~~quality and depth of our creative asset library.~~92nd Academy Awards.

•In March ~~2019,~~2020, we ~~launched in-app contributor registration~~announced Footage library availability for ~~the mobile-first generation, making it easier than ever for iOS~~mobile users. Mobile application users can now search, save and ~~Android users to sign up as a~~license over 17 million videos on-the-go with Shutterstock ~~contributor.~~mobile apps.

Through our platform, we generate revenue by licensing content to our customers. During the three months ended March 31, ~~2019, 60%~~2020, 62% of our revenue ~~was generated~~and the majority of our content licenses came from ~~e-commerce customers.~~our E-commerce sales channel. E-commerce customers have the flexibility of choosing content subscription plans that provide a large volume of content for their creative ~~process without concern for the~~

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~~incremental cost of each license.~~process. We also offer simple, affordable, smaller subscriptions and those where customers have an option to pay for individual content licenses at the time of delivery. ~~Our enterprise customers~~Customers in our Enterprise sales channel generally ~~include creative professionals and larger organizations or those with~~have unique content,

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licensing and workflow needs. Our dedicated ~~enterprise~~Enterprise sales, service, client success and research teams are able to provide a number of 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 on our ~~e-commerce~~E-commerce platform. Customers in our Enterprise ~~customers~~sales channel may also benefit from editorial content and the creation of ~~our~~ custom branded content. Our ~~enterprise customers~~Enterprise sales channel provided approximately ~~40%~~38% of our revenue during the three months ended in March 31, ~~2019.~~2020.

Each time an image, ~~video~~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. ~~Royalties~~Depending on the content licensed by our customers, royalties are calculated using either a fixed dollar amount or a fixed percentage of revenue and are typically paid to contributors on a monthly basis, subject to ~~withholding taxes and~~ certain payout minimums. Royalties represent the largest component of our operating expenses, are reported within cost of revenue, ~~and~~ tend to ~~increase proportionally~~fluctuate proportionately with ~~revenue.~~

~~Our cost of~~ revenue ~~associated with our e-commerce~~ and enterprise customers is substantially similar as a percentage of revenue. While contributors earn a fixed amount per download for some of our products, we have set the per-download amount paid to our contributors for our products so that contributors earn more per download from products where we collect higher revenue per download. In other words, we strive to deliver a similar percentage of revenue to contributors regardless of the sales channel. We do not believe that shifts inmay be impacted by the mix ~~between e-commerce and enterprise sales channels will materially impact our operating margins.~~of products sold.

An important driver of our growth is customer acquisition, which we achieve primarily through online marketing efforts ~~including~~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. ~~Since~~This spend considers, among other things, the blended average customer lifetime value across our various purchase options so we ~~believe the market for content is multi-faceted and continually expanding, we plan to continue to invest aggressively in~~can manage customer acquisition costs and aim to achieve ~~revenue and market share growth.~~targeted returns.

We believe that another important driver of growth is the quality of the user experience we provide on our websites, especially the efficiency and speed with which our search interfaces and algorithms help customers find and download the 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, ~~video clip,~~footage and music and search patterns, and the ~~degree to which~~security of user information on our ~~websites have been localized for our global user base.~~platform. To this end, we have invested aggressively in product development and cloud-based hosting infrastructure, and we intend to continue to invest in these areas, to the extent that we can improve the customer experience and increase the efficiency with which we deploy new products and features. ~~Finally,~~

COVID-19 Update

In December 2019, a novel coronavirus disease (“COVID-19”) was initially reported and on March 11, 2020, the ~~number~~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 economic uncertainty caused by COVID-19 has had an impact on our customers and their ability to spend marketing budgets on our products, which has resulted in an unfavorable impact, to varying degrees geographically, on our revenue growth for the first quarter of ~~approved and licensable images in the Shutterstock collection exceeded 260 million images and 14 million video clips as of March 31, 2019, making it one~~2020. See Item 1A. Risk Factors for further discussion of the ~~largest libraries~~possible impact of ~~its kind.~~the COVID-19 pandemic on our business.

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Key Operating Metrics

In addition to key financial 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 months ended March 31, ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended March 31,
	2020		2019
	(in millions, except revenue per download)
Paid downloads (during the period)	46.8		47.2
Revenue per download (during the period)	$	3.42	$	3.42
Content in our collection (end of period):
Images	330		260
Footage Clips	18		14

Three Months Ended March 31,
2019 2018
(in millions, except revenue per download)
Paid downloads (during the period) 47.2
43.7
Revenue per download (during the period) $ 3.42
$ 3.40
Content in Our Collection (end of period):
Images 260.5
186.9
Video Clips 14.3
9.9

Paid Downloads

Measuring the number of paid downloads that our customers make in any given period is important because downloads are the primary method of delivering licensed content, which drives a significant portion of our revenue and contributor

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royalties. We define paid downloads as the number of downloads that our customers make in a given period of our photographs, vectors, illustrations, ~~video clips~~footage or music tracks. Paid downloads exclude custom content, re-downloads of content that a customer has downloaded in the past (which do not generate incremental revenue or contributor royalty expense) and downloads of content that is offered to customers for no charge, including our free image of the week.

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 the impact of revenue that is not derived from or associated with content licenses. This metric captures any changes in our pricing, ~~if any,~~including changes resulting from the impact of competitive pressures, as well as the mix of ~~purchase~~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. ~~Revenue~~Changes in revenue per download ~~has increased over the last three years, almost entirely due to~~have primarily been driven by the introduction of new product offerings and ~~the change~~changes in product mix. ~~During this period, pricing has remained relatively constant.~~

Content in our Collection

We define content in our collection as the total number of (a) images (photographs, vectors and illustrations) and (b) ~~video~~footage clips available to customers for commercial license on shutterstock.com at ~~any point in time.~~the end of the period. We exclude content from this collection metric that is not uploaded directly to our site but is available for license by our customers through an application program interface, custom content and certain content that may be licensed for editorial use only. We ~~record this metric as of the end of a period. Offering a~~believe that our large selection of high-quality content ~~allows~~enables us to attract and retain customers and ~~therefore, we believe that continuously broadening~~drives our ~~selection of high-quality content is an important driver of our revenue growth.~~network effect.

Non-GAAP Financial Measures

This Quarterly Report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains a calculation of period-over-period revenue growth (including by distribution channel) on a constant-currency basis, which is a financial measure that has not been calculated in accordance with generally accepted accounting principles in the United States, or GAAP, and should be considered in addition to our results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, our results prepared in accordance with GAAP.

Revenue growth (including by distribution channel) on a constant-currency basis (expressed as a percentage) is calculated by determining the increase in current period revenues over prior period revenues, utilizing fixed exchange rates for translating foreign currency revenues for all periods in the comparison.

Our management uses this non-GAAP financial measure, in conjunction with GAAP financial measures, as an operating measure to help evaluate our business and in making financial and operational decisions. Management believes that providing a measure of period-over-period revenue growth (including by distribution channel) on a constant-currency basis is useful to investors because it enables them to analyze and compare our revenue trends and overall business on the same basis as that which is used by management and because this metric eliminates the effect of foreign currency fluctuations that are not directly attributable to our underlying operating performance and are outside management’s control. Additionally, management believes that providing this non-GAAP financial measure enhances the comparability for investors in assessing our financial reporting.

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However, we caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions, and similarly-titled non-GAAP financial measures vary among companies. Accordingly, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of ~~assets and liabilities, the disclosure or inclusion of contingent~~ assets and liabilities, 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 for our subscription-based products, goodwill, intangibles, equity-based compensation 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.

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We believe that the policies, assumptions and estimates associated with our revenue recognition, allowance for doubtful accounts, equity-based compensation, accounting for income taxes and goodwill and intangible assets have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

A description of our critical accounting policies that involve significant management judgments appears in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 that was filed with the SEC on February ~~26, 2019, or the 2018~~13, 2020 (our “2019 Form ~~10-K,~~10-K”), under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. ASU 2016-02 requires that the rights and obligations created by leases with a duration greater than 12 months be recorded as assets and liabilities on the balance sheet of the lessee. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has adopted this standard as of January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date. The Company has also elected the option, as permitted in ASU 2018-11, ~~Leases (Topic 842): Targeted Improvements~~, whereby initial application of the new leases standard would occur at the adoption date and a cumulative-effect adjustment would be recognized to the opening balance of retained earnings in the period of adoption. For comparability purposes, the Company will continue to comply with existing disclosure requirements in accordance with existing lease guidance for all periods presented in the year of adoption.

~~Effective January 1, 2019, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2016-02,~~ ~~Leases (Topic 842)~~ using a modified retrospective approach and, accordingly, balance sheet and income statement totals for all periods before January 1, 2019 reflect those previously reported under the prior accounting model and have not been restated.

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. ~~Apart from the items described above, there~~There have been no material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in ~~the 2018~~our 2019 Form 10-K.

Key Components of Our Results of Operations

Revenue

We distribute our ~~digital~~ content offerings through two primary channels:

E-commerce: The majority of our customers license content directly through our ~~e-commerce platforms.~~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: ~~Our~~ We also have a base of ~~enterprise~~ customers ~~is mainly composed of creative professionals and large organizations~~ with unique content, licensing and workflow needs. ~~As our enterprise customer base has grown, the number of unique offerings has also grown, as we continue to address individual business needs. Customers of this size~~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 platform.

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~~In addition to these digital content offerings, we have historically generated revenue through other channels:~~

~~Other~~: Our other sales channel includes revenue from Webdam’s digital asset management offerings which included tools to help organizations manage, search, distribute and collaborate on creative and other brand-building activities. On February 26, 2018, we completed the Sale of Webdam for an aggregate purchase price of $49.1 million.

The Company’s revenues by distribution channel for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 are as follows (in thousands):


	Three Months Ended March 31,
	2020		2019
E-Commerce	$	99,736	$	98,113
Enterprise	61,549		65,219

Total Revenues	$	161,285	$	163,332

Three Months Ended
March 31,
2019 2017
E-Commerce $ 98,113
$ 89,735
Enterprise 65,219
60,573
Other⁽¹⁾
—
2,711
Total Revenues $ 163,332
$ 153,019

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~~(1)~~	~~On February 26, 2018, we completed the Sale of Webdam. Consequently, 2018 includes revenues earned during the period January 1, 2018 through February 26, 2018.~~

Costs and Expenses

Cost of Revenue. Cost of revenue ~~includes~~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 ~~infrastructure and hosting costs related to maintaining~~the maintenance of our creative platform and cloud-based software platform. ~~We expect that our cost of revenue will increase in absolute dollars in the foreseeable future to the extent that our revenue grows.~~

Sales and Marketing. Sales and marketing expenses include third-party marketing, advertising, branding, public relations and sales expenses. Sales and marketing expenses also include associated employee compensation, including non-cash equity-based compensation, bonuses and benefits, and commissions as well as allocated facility and other supporting overhead costs. ~~We expect sales and marketing expenses to increase in absolute dollars in the foreseeable future as we continue to invest in new customer acquisition.~~

Product Development. Product development expenses consist of employee compensation, including non-cash equity-based compensation, bonuses and benefits, and expenses related to vendors engaged in product management, design, development and testing of our websites and products. Product development costs also include allocated facility and other supporting overhead costs. We expense product development costs as incurred, except for costs that are capitalized related to internal-use software development projects and subsequently depreciated over the expected useful life of the developed software. We expect product development expenses, of which a portion will be capitalized, to continue in the foreseeable future as we identify opportunities to invest in the development of new products and internal tools and enhancement of our existing products and technologies that we believe will drive the long-term profitability of the business.

General and Administrative. General and administrative expenses include employee compensation, including non-cash equity-based compensation, bonuses and benefits for executive, finance, ~~business development,~~ accounting, legal, human resources, internal information technology, internet security, business intelligence and other administrative personnel. In addition, general and administrative expenses include outside legal, tax and accounting services, bad debt expense, insurance, facilities costs, ~~and~~ other supporting overhead ~~costs. We expect to incur incremental general~~costs and ~~administrative expenses to support our global operational growth~~depreciation and ~~enhancements to support our reporting and planning functions.~~amortization expense.

Other Income, ~~net.~~ Net. Other income, net consists of non-operating costs such as foreign currency transaction gains and losses in addition to interest income and expense, impairments related to a long-term investment asset, and prior to 2017, changes in the fair value of contingent consideration related to acquisitions. As we increase the volume of business transacted in foreign currencies resulting from international expansion and as currency rates fluctuate, we expect foreign currency gains and losses to continue to fluctuate.income.

Income Taxes. We compute income taxes using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted statutory income tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized.

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Results of Operations

The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods.


	Three Months Ended March 31,
	2020		2019
	(in thousands)
Consolidated Statements of Operations:
Revenue	$	161,285	$	163,332
Operating expenses:
Cost of revenue	69,123		69,218
Sales and marketing	42,660		44,446
Product development	13,069		14,986
General and administrative	30,652		26,583
Total operating expenses	155,504		155,233
Income from operations	5,781		8,099

Other income, net	513		896
Income before income taxes	6,294		8,995
Provision for income taxes	1,976		1,473
Net income	$	4,318	$	7,522

The following table presents the components of our results of operations for the periods indicated as a percentage of revenue:


	Three Months Ended March 31,
	2020		2019
Consolidated Statements of Operations:
Revenue	100	%	100	%
Operating expenses:
Cost of revenue	43	%	42	%
Sales and marketing	26	%	27	%
Product development	8	%	9	%
General and administrative	19	%	16	%
Total operating expenses	96	%	95	%
Income from operations	4	%	5	%

Other income, net	—	%	1	%
Income before income taxes	4	%	6	%
Provision for income taxes	1	%	1	%
Net income	3	%	5	%

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

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Comparison of the Three Months Ended March 31, 2020 and 2019

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


	Three Months Ended March 31,
	2020		2019		$ Change		% Change
	(in thousands)
Consolidated Statements of Operations:
Revenue	$	161,285	$	163,332	$	(2,047)	(1)	%
Operating expenses:
Cost of revenue	69,123		69,218		(95)		—
Sales and marketing	42,660		44,446		(1,786)		(4)
Product development	13,069		14,986		(1,917)		(13)
General and administrative	30,652		26,583		4,069		15
Total operating expenses	155,504		155,233		271		—
Income from operations	5,781		8,099		(2,318)		(29)

Other income, net	513		896		(383)		(43)
Income before income taxes	6,294		8,995		(2,701)		(30)
Benefit for income taxes	1,976		1,473		503		34
Net income	$	4,318	$	7,522	$	(3,204)	(43)	%

* Percentage change is not meaningful

Revenue

Revenue decreased by $2.0 million, or 1%, to $161.3 million in the three months ended March 31, 2020 compared to the same period in 2019. On a constant currency basis, revenue decreased approximately 0.5%, in the three months ended March 31, 2020, compared to the same period in 2019.

The Company’s E-commerce revenues increased by 2%, to $99.7 million in the three months ended March 31, 2020, compared to the same period in 2019, and was not significantly impacted by foreign currency fluctuations. During the three months ended March 31, 2020, growth in our E-commerce sales channel was driven by shifting resources to more efficient performance marketing channels as well as expanding free trial offerings, which tend to drive new customers toward recurring subscription products.

The Company’s Enterprise revenues decreased by 6%, to $61.5 million in the three months ended March 31, 2020, compared to the same period in 2019. On a constant currency basis, the Company’s Enterprise revenues decreased by approximately 5% in the three months ended March 31, 2020, compared to the same period in 2019. We continue to face headwinds in our Enterprise sales channel and we are implementing changes, including optimizing the sales organization and making revisions to compensation plans, which we believe will improve our Enterprise sales channel operations.

Revenue growth for the three months ended March 31, 2020 was also unfavorably affected by the global COVID-19 pandemic and its impact on our customers and their ability to spend marketing budgets on our products. We expect COVID-19 to continue to have an unfavorable impact on our 2020 revenues.

In the three months ended March 31, 2020 and 2019, we delivered 46.8 million and 47.2 million paid downloads, respectively, and our revenue per download remained flat at $3.42 for the three months ended March 31, 2020 and 2019. During the three months ended March 31, 2020, the 0.8% decrease in the number of paid downloads compared to the same period in 2019, is correlated with the year over year decline in revenues.

Changes in our revenue by region were as follows: revenue from North America decreased by $0.5 million, or 1%, to $57.0 million, revenue from Europe decreased by $1.7 million, or 3%, to $53.8 million and revenue from outside Europe and North America remained relatively flat at $50.5 million, in the three months ended March 31, 2020 compared to the same period in 2019.

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Costs and Expenses

Cost of Revenue. Cost of revenue decreased by $0.1 million, to $69.1 million in the three months ended March 31, 2020 compared to the same period in 2019. Royalties expense, which is primarily incurred as content is downloaded, decreased $2.2 million, or 5% for the three months ended March 31, 2020, compared to the same period in 2019. The Company’s royalty rate was approximately 25.6% and 26.6% for the three months ended March 31, 2020 and 2019, respectively, and fluctuates based on customer usage and the mix of products sold. These declines were partially offset by $1.1 million in higher employee related costs, substantially consisting of severance charges. We expect that our cost of revenue will fluctuate in line with changes in revenue.

Sales and Marketing. Sales and marketing expenses decreased by $1.8 million, or 4%, to $42.7 million in the three months ended March 31, 2020 compared to the same period in 2019. As a percent of revenue, sales and marketing expenses decreased to 26% for the three months ended March 31, 2020, from 27% for the same period in 2019. This decrease was primarily driven by a $1.4 million decline in marketing spend as we focused resources on more efficient customer acquisition and improved marketing return on investment. 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 $1.9 million, or 13%, to $13.1 million in the three months ended March 31, 2020 compared to the same period in 2019. This decrease was primarily driven by a reduction in software and other technology costs for the three months ended March 31, 2020, as compared to the same period in the prior year. Employee and third-party contractor related costs, net of capitalized labor, remained relatively flat for the three months ended March 31, 2020 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 increased by $4.1 million, or 15%, to $30.7 million in the three months ended March 31, 2020 compared to the same period in 2019. This increase was primarily driven by: (i) higher employee-related costs of $3.1 million for the three months ended March 31, 2020 as compared to the same period in 2019, primarily associated with increased headcount related to ensuring the stability and security of the Company’s technology infrastructure; (ii) severance charges of approximately $1.2 million incurred during the three months ended March 31, 2020; and (iii) a year over year increase of $1.3 million in bad debt expense, driven by $0.7 million of bad debt expense recorded for the three months ended March 31, 2020 and a benefit of $0.6 million recorded in the same quarter in 2019. The increase in general and administrative expenses was partially offset by 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”). 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. In the three months ended March 31, 2020, approximately $1.1 million of other income consisted of interest income which was partially offset by $0.6 million of unfavorable foreign currency fluctuations.

During the three months ended March 31, 2019, approximately $1.1 million of other income consisted of interest income which was partially offset by $0.2 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 $0.5 million for the three months ended March 31, 2020 as compared to the same period in 2019. Our effective tax rates yielded an expense of 31.4% and 16.4% for the three months ended March 31, 2020 and 2019, respectively.

For the three months ended March 31, 2020, the effective tax rate increased by 6.9% as a result of a loss jurisdiction with no tax benefit. Discrete items further increased the effective tax rate by 3.0%. Excluding these items, our effective tax rate would have ~~not recorded any such valuation allowances.~~

~~Table~~been 21.5% for the three months ended March 31, 2020. For the three months ended March 31, 2019, the net effect of ~~Contents~~

discrete items decreased the effective tax rate by 1.2%.

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.

~~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 March 31,
2019 2018
(in thousands)
Consolidated Statements of Operations:

Revenue $ 163,332
$ 153,019
Operating expenses:
Cost of revenue 69,218
64,490
Sales and marketing 44,446
40,368
Product development 14,986
16,448
General and administrative 26,583
27,224
Total operating expenses 155,233
148,530
Income from operations 8,099
4,489
Gain on Sale of Webdam —
38,613
Other income, net 896
802
Income before taxes 8,995
43,904
Provision for income taxes 1,473
11,323
Net income $ 7,522
$ 32,581

~~The following table presents the components of our results of operations for the periods indicated as a percentage of revenue:~~

Three Months Ended March 31,
2019 2018
Consolidated Statements of Operations:

Revenue 100 % 100 %
Operating expenses:
Cost of revenue 42 % 42 %
Sales and marketing 27 % 26 %
Product development 9 % 11 %
General and administrative 16 % 18 %
Total operating expenses 95 % 97 %
Income from operations 5 % 3 %
Gain on Sale of Webdam — % 25 %
Other income, net 1 % 1 %
Income before taxes 6 % 29 %
Provision for income taxes 1 % 7 %
Net income 5 % 21 %

~~Note: Percent totals may not sum exactly, due to rounding~~

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~~Comparison of the Three Months Ended March 31, 2019 and 2018~~

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

Three Months Ended March 31,
2019 2018 $ Change % Change
(in thousands)
Consolidated Statements of Operations:

Revenue $ 163,332
$ 153,019
$ 10,313
6.7 %
Operating expenses:

Cost of revenue 69,218
64,490
4,728
7.3
Sales and marketing 44,446
40,368
4,078
10.1
Product development 14,986
16,448
(1,462 ) (8.9 )
General and administrative 26,583
27,224
(641 ) (2.4 )
Total operating expenses 155,233
148,530
6,703
4.5
Income from operations 8,099
4,489
3,610
80.4
Gain on Sale of Webdam —
38,613
(38,613 ) *
Other income, net 896
802
94
*
Income before income taxes 8,995
43,904
(34,909 ) (79.5 )
Provision for income taxes 1,473
11,323
(9,850 ) *
Net income $ 7,522
$ 32,581
$ (25,059 ) (76.9 )%

* Percentage change is not meaningful

~~Revenue~~

Revenue increased by $10.3 million, or 6.7%, to $163.3 million in the three months ended March 31, 2019 compared to the same period in 2018. Excluding the impact of foreign currency fluctuations, revenue increased 9.1% in the three months ended March 31, 2019, compared to the same period in 2018. In addition, the Company’s e-commerce and enterprise revenues increased by 9.3% and 7.7%, respectively, in the three months ended March 31, 2019, compared to the same period in 2018. On a constant currency basis, the Company’s e-commerce and enterprise revenues increased by 11.6% and 10.4%, respectively, in the three months ended March 31, 2019, compared to the same period in 2018.

During the three months ended March 31, 2019, we continued to grow our customer base and continued with initiatives focused on broadening our product offerings and adding functionality to our creative platform and increased sales and marketing efforts to attract more users and promote increased customer engagement across our platform. We believe these actions and initiatives will lead to increased and sustained customer engagement in the future. The increased revenue was partially offset by the absence of revenue from Webdam during the quarter, as a result of the Sale of Webdam in February 2018. We did not recognize revenue from Webdam in the three months ended March 31, 2019, compared to $2.7 million for the three months ended March 31, 2018.

In the three months ended March 31, 2019 and 2018, we delivered 47.2 million and 43.7 million paid downloads, respectively, and our revenue per download increased to $3.42 for the three months ended March 31, 2019 from $3.40 for the three months ended March 31, 2018.

Our revenue growth by region was as follows: revenue from outside Europe and North America increased by $6.2 million, or 14.1%, to $50.3 million, revenue from Europe increased by $3.6 million, or 6.8%, to $55.5 million and revenue from North America increased by $0.6 million, or 1.0%, to $57.5 million in the three months ended March 31, 2019 compared to the same period in 2018.

~~Costs and Expenses~~

~~Cost of Revenue~~. Cost of revenue increased by $4.7 million, or 7.3%, to $69.2 million in the three months ended March 31, 2019 compared to the same period in 2018. Royalties expense, which is driven in large part by the number of downloads and the revenue earned on each download, increased $2.6 million, or 6.3%, which is in line with the increase in revenues for the three months ended March 31, 2019. We anticipate royalties will continue growing in absolute dollars as long as revenue grows, although royalties as a percentage of revenue may vary somewhat from period to period as a result of further

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shifts in customer usage and product mix. Costs associated with website hosting, hardware and software licenses, and depreciation and amortization expense increased by $1.9 million to $14.7 million for the three months ended March 31, 2019 compared to the same period in 2018, driven primarily by the depreciation and amortization of infrastructure, hardware and software assets acquired, developed and purchased in recent periods.

~~Sales and Marketing.~~ Sales and marketing expenses increased by $4.1 million, or 10.1%, to $44.4 million in the three months ended March 31, 2019 compared to the same period in 2018. Expenses related to performance and brand advertising, the largest component of our sales and marketing expenses, increased by $3.7 million, as compared to the prior year, as a result of increased spending on affiliate, search advertising and other new channels and are in line with the increase in revenues for the three months ended March 31, 2019. We anticipate that our total sales and marketing spend will continue to increase in absolute dollars for the foreseeable future as we continue to pursue growth through new customers, products, markets and geographies.

~~Product Development~~. Product development expenses decreased by $1.5 million, or 8.9%, from $16.4 million for the three months ended March 31, 2018 to $15.0 million for the three months ended March 31, 2019. This decrease was driven by an approximately $4.0 million reduction in employee related costs, net of capitalized labor. The decline was partially offset by an increase of $2.5 million in software and other technology used to support our product development initiatives for the three months ended March 31, 2019, as compared to the prior year. We anticipate this level of product development expenses, of which a portion will continue to be capitalized, to continue for the foreseeable future as we continue to invest in developing new products and internal tools and enhancing the functionality of our existing products and technology.

~~General and Administrative~~. General and administrative expenses decreased by $0.6 million, or 2.4%, to $26.6 million in the three months ended March 31, 2019 compared to the same period in 2018. The change was driven by a reduction in bad debt expense for the three months ended March 31, 2019.

~~Gain on Sale of Webdam.~~ On February 26, 2018, the Company completed the Sale of Webdam, for an aggregate purchase price of $49.1 million. Total cash received, net of $4.6 million in transaction costs paid, was $44.3 million, inclusive of $2.5 million received from the release of funds from escrow during the three months ended March 31, 2019. During the three months ended March 31, 2018, management recognized a pre-tax gain on the sale of approximately $38.6 million, which represents the excess of the net purchase price over the net assets transferred, less transaction costs.

~~Other Income, net~~. In the three months ended March 31, 2019, approximately $1.1 million of other income consisted of interest income which was partially offset by $0.2 million of unfavorable foreign exchange fluctuations. During the three months ended March 31, 2018, approximately $0.5 million of other income consisted of interest income and approximately $0.3 million consisted of favorable foreign exchange fluctuations.

~~Income Taxes~~. Income tax expense decreased by $9.9 million for the three months ended March 31, 2019 as compared to the same period in 2018. Our effective tax rates yielded an expense of 16.4% and 25.8% for the three months ended March 31, 2019 and 2018, respectively.

For the three months ended March 31, 2018, we incurred a net discrete tax expense related primarily to the gain on Sale of Webdam, the effect of which increased the effective tax rate by 9.6%. Excluding the discrete items, our effective tax rate would have been 16.2% for the three months ended March 31, 2018.

Quarterly Trends

Our operating results may fluctuate from quarter to quarter as a result of a variety of factors, including the effects of some seasonal trends in customer behavior. For example, we expect certain customers’ usage may decrease during the ~~fourth~~third quarter of each calendar year due to the ~~year-end holiday~~summer vacation season and may increase in the ~~first~~fourth quarter of each calendar year as ~~many customers return~~demand is generally higher to ~~work.~~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 tend to be smoother and less volatile than if we had no subscription-based customers.

In addition, ~~expenditures~~customers’ expenditure on ~~digital~~ content ~~by customers tend~~tends to be discretionary in nature ~~reflecting overall economic conditions, the economic prospects of specific industries, budgeting constraints, buying patterns~~ and has been impacted by COVID-19. We cannot estimate when a ~~variety of other factors, many of which are outside our control. As a result of these~~recovery will occur and ~~other factors,~~therefore, the results of any prior quarterly or annual ~~periods~~period should not be relied upon as indicators of our future operating performance. See Part II, “Item 1A.—Risk Factors—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.”

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Liquidity and Capital Resources

As of March 31, ~~2019,~~2020, we had cash and cash equivalents totaling ~~$240.1~~$295.7 million which primarily consisted of bank ~~balances and money market mutual funds.~~balances. Since inception, we have financed our operations primarily through cash flows generated from operations.

Historically, our principal uses of cash have ~~been~~included funding our operations, capital expenditures, content ~~acquisition,~~acquisitions, business combinations that enhance our strategic position, cash dividend payments and share purchases under our share repurchase program. We plan to finance our operations and capital expenses largely through cash generated by our operations. Since our results of operations are sensitive to the level of competition we face, increased competition could adversely affect our liquidity and capital resources.

~~Sale~~Dividends

We declared and paid cash dividends of ~~Webdam~~

~~On February 26, 2018, we completed the Sale~~$0.17 per share of ~~Webdam for an aggregate purchase price of $49.1 million. Total cash received, net of $4.6~~common stock, or $6.0 million ~~in transaction costs paid, was $44.3 million, inclusive of $2.5 million received from the release of funds from escrow~~ during the three months ended March 31, ~~2019. We recognized~~2020.

On April 20, 2020, our Board of Directors declared a ~~pre-tax gain~~quarterly cash dividend of $0.17 per share of outstanding common stock payable on ~~sale~~June 18, 2020 to stockholders of ~~approximately $38.6 million, which represents~~record at the ~~excess~~close of business on June 4, 2020. Future declaration of dividends are subject to the ~~net purchase price over the net assets transferred, less transaction costs.~~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 ~~this~~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 March 31, ~~2019,~~2020, we have repurchased approximately 2,558,000 shares of our common stock under the share repurchase program at an average per-share cost of $39.09. During the three months ended March 31, ~~2019,~~2020, we did not repurchase any shares of our common stock under the share repurchase program. As of March 31, ~~2019,~~2020, we had $100 million of remaining authorization for share repurchases under ~~this~~the share repurchase program.

~~Share-Based~~Equity-Based Compensation

~~Effective October 1, 2016, we implemented a practice of net share settlement upon~~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 ~~our previous approach of~~ 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 ~~share-based~~equity-based compensation programs on stockholders.

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During the three months ended March 31, ~~2019,~~2020, shares with an aggregate value of ~~$4.1~~$1.8 million were withheld upon vesting of RSUs and paid in connection with related remittance to taxing authorities.

Sources and Uses of Funds

We believe, based on our current operating plan, that our cash and cash equivalents, and cash from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. ~~Consistent with previous periods, we expect that future~~Future capital expenditures ~~will primarily~~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, ~~digital~~ content and general corporate infrastructure. See Note 1412 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 March 31, ~~2019.~~2020.

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Cash Flows

The following table summarizes our cash flow data for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands).


	Three Months Ended March 31,							Three Months Ended March 31,
	2019			2018				2020		2019
Net cash provided by operating activities	$	19,709		$	21,094		Net cash provided by operating activities	$	6,859	$	19,709
Net cash (used in) / provided by investing activities	$	(5,298	)	$	10,917
Net cash used in investing activities							Net cash used in investing activities	$	(8,411)	$	(5,298)
Net cash used in financing activities	$	(3,876	)	$	(2,848	)	Net cash used in financing activities	$	(7,801)	$	(3,876)

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 $6.9 million for the three months ended March 31, 2020, compared to $19.7 million for the three months ended March 31, ~~2019, compared to $21.1 million for the three months ended March 31, 2018.~~2019. In the three months ended March 31, ~~2019,~~2020, operating cash flows were unfavorably impacted by $7.8 million of one-time payments associated with long-term incentives related to our 2017 acquisition of Flashstock. Operating cash flows were also unfavorably impacted by the reduction in revenues and other changes in the timing of payments pertaining to operating expenses, which can cause operating cash flow to fluctuate from period to period.

In addition, ~~as it relates to cash taxes,~~ the Company paid net cash taxes of $0.5 million and $0.3 million, for the three months ended March 31, 2020 and 2019, ~~and during the three months ended March 31, 2018, the Company received net cash tax refunds of $1.8 million.~~respectively.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2020 was $8.4 million, consisting primarily of capital expenditures of $7.7 million for internal-use software and website development costs and purchases of software and equipment and $0.7 million paid to acquire the rights to distribute certain digital content in perpetuity.

Cash used in investing activities in the three months ended March 31, 2019 was $5.3 million, consisting primarily of capital expenditures of $7.3 million for internal-use software and website development costs and purchases of software and equipment, partially offset by $2.5 million of cash received during the three months ended March 31, 2019 from escrowed funds related to the ~~Sale~~sale of ~~Webdam.~~Webdam, our former digital asset management business, which was sold in February 2018.

Financing Activities

Cash ~~provided by investing~~used in financing activities in the three months ended March 31, ~~2018~~2020 was ~~$10.9~~$7.8 million, consisting primarily of ~~cash received~~$6.0 million related to the ~~Sale~~payment of ~~Webdam, of approximately $42.3~~the quarterly cash dividend and $1.8 million, which was partially offset by capital expenditures of $15.0 million to purchase software and equipment related to our data centers, capitalization of leasehold improvements and website development costs, $15.0 million related to our investment in Zcool, $0.8 million paid in settlement of ~~final working capital~~tax withholding obligations related to ~~the 2017 acquisition of Flashstock and $0.6 million paid to acquire the rights to distribute certain digital content in perpetuity.~~

~~Financing Activities~~employee stock-based compensation awards.

Cash used in financing activities in the three months ended March 31, 2019 was $3.9 million, consisting primarily of $4.1 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.

~~Cash used in financing activities in the three months ended March 31, 2018 was $2.8 million, consisting primarily~~

Table of $4.0 million which was paid in settlement of tax withholding obligations related to employee stock-based compensation awards. and was partially offset by approximately $1.2 million of proceeds from the issuance of common stock in connection with the exercise of stock options.Contents

Contractual Obligations and Commitments

We lease real estate under operating lease agreements that expire on various dates during the period from ~~2019~~2020 through 2029. We do not have any material finance lease obligations and our property, equipment and software have been purchased primarily with cash. ~~We anticipate expanding our office and co-location facilities as our revenue and customer base continue to grow and diversify.~~ We do not anticipate any difficulties in renewing those leases and co-location agreements that expire within the next several years and that we currently plan to renew, or in leasing other space or hosting facilities, if required.

On March 21, 2013, we entered into an operating lease agreement to lease our headquarters in New York City, which was amended in 2016. The aggregate undiscounted future minimum lease payments under the lease, as amended, are approximately ~~$66.1~~$60.6 million. We are also party to a letter of credit as a security deposit for this leased facility, which was ~~increased to~~reduced from $2.6 million to $1.7 million in ~~January 2016 in connection with an amendment of the lease.~~February 2020. As of March 31, ~~2019,~~2020, the Company is no longer required to provide cash collateral for its letter of credit, is

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~~collateralized by $2.6 million of cash, which is reported as restricted cash~~ and, ~~is included in other assets on our Consolidated Balance Sheet as of March 31, 2019.~~accordingly, these funds are no longer restricted.

Additionally, as of March 31, ~~2019,~~2020, aggregate undiscounted future minimum lease payments under other operating leases are approximately ~~$17.0~~$9.9 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 March 31, ~~2019,~~2020, our guaranteed royalty payments and unconditional purchase obligations for the remainder of ~~2019~~2020 and for the fiscal years ending December 31, ~~2020,~~ 2021 and 2022 were approximately $20.5 million, ~~$30.4 million, $16.7~~$16.4 million and ~~$3.9~~$4.4 million, respectively.

Off-Balance Sheet Arrangements

As of March 31, ~~2019,~~2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business, including risks related to 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% and ~~37%~~35% for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. 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. ~~All amounts~~Royalties earned by and paid to ~~our foreign~~ 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 three months ended March 31, ~~2019,~~2020, we estimate that a 10% change in the exchange rate of the U.S. dollar against all foreign currency denominated revenues would result in an approximately 3% impact on our revenue.

We have established foreign subsidiaries in various countries and have concluded 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 ~~income (loss)~~loss in stockholders’ equity. We do not currently enter into derivatives or other financial instruments in order to hedge our foreign currency exchange risk, but we may do so in the future.

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


	Three Months Ended March 31,
	2020						2019
	U.S. Dollars		Originating Currency		U.S. Dollars		Originating Currency
Euro	$	33,692	€	30,378	$	33,075	€	28,671
British pounds	12,203		£	9,470	12,114		£	9,256
All other non-U.S. currencies⁽¹⁾	11,795				11,761
Total foreign currency	57,690				56,950

U.S. dollar	103,595				106,382
Total revenue	$	161,285			$	163,332

Three Months Ended March 31,
2019 2018
U.S. Dollars Originating Currency U.S. Dollars Originating Currency
Euro $ 33,075
€ 28,671
$ 31,383
€ 25,545
British pounds 12,114
£ 9,256
13,775
£ 9,906
All other non-U.S. currencies⁽¹⁾
11,761
10,792

Total foreign currency 56,950
55,950

U.S. dollar 106,382
97,069

Total revenue $ 163,332
$ 153,019


~~(1)~~	(1)Includes no single currency which exceeded 5% ~~of total revenue for any of the periods presented.~~

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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 March 31, ~~2019.~~2020.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, ~~2019.~~2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. 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 March 31, ~~2019,~~2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were ~~not~~ effective at the reasonable assurance level due to a material weakness in our internal control over financial reporting. We concluded that we did not design and maintain effective controls related to the accuracy, cut-off and completeness of sales transactions related to certain enterprise license arrangements. Specifically, as our business strategy related to enterprise license arrangements changed during 2018, we did not design and maintain effective controls to assess the risks of misstatement, and therefore the appropriateness of revenue recognition, associated with product offerings outside of our standard product catalog. The deficiencies resulted in immaterial errors in recorded revenue, accounts receivable, deferred revenue and related disclosures for the years ended December 31, 2018 and 2017 and the interim periods ended June 30, 2018 and September 30, 2018 and did not result in a material misstatement of our interim or annual consolidated financial statements or disclosures for any historical periods. Additionally, these control deficiencies could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that these control deficiencies constitute a material weakness.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.

~~Remediation Plan~~

The Board of Directors and management are fully committed to maintaining a strong internal control environment. In response to the identified material weakness, management, with the oversight of the Audit Committee of the Board of Directors, has taken comprehensive actions to remediate the material weakness in internal control over financial reporting. These actions include the: (1) creation of a project team to identify the population of enterprise product offerings outside of our standard product catalog; and (2) development and implementation of an enhanced process, focused on the accuracy, cut-off and completeness of transactions related to these enterprise product offerings.

We believe the remediation steps outlined above will improve the effectiveness of our internal control over financial reporting. However, the material weakness will not be considered remediated until a sustained period of time has passed to allow management to test the design and operational effectiveness of the corrective actions.

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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.

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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 ~~2018~~2019 Form 10-K, which could materially affect our business, financial condition or future results. During the three months ended March 31, ~~2019,~~2020, there were no material changes to these risk factors as described in our ~~2018~~2019 Form ~~10-K.~~10-K except as noted below.

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 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. COVID-19 has had a widespread and detrimental effect on the global economy as a result of the continued increase in the number of cases and affected countries and actions by public health and governmental authorities, businesses, other organizations and individuals to address the outbreak, including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations and shutdowns. The duration and severity of COVID-19 and the degree of its impact on our business is uncertain and difficult to predict. The continued spread of the outbreak could result in one or more of the following conditions that could have a material adverse impact on our business operations and financial condition: decreased business spending by our customers and prospective customers, reduced demand for our products, lower renewal rates by our customers; increased customer losses/churn; increased challenges in or cost of acquiring new customers; reduction in the amount of content uploaded by our contributors and/or reduction in the number of contributors on our site because of reduced royalties earned by our contributors; inability of our Custom contributors to complete assignments because of travel restrictions; increased competition; increased risk in collectability of accounts receivable; reduced productivity due to remote work arrangements; lost productivity due to illness and/or illness of family members; inability to hire key roles; adverse effects on our strategic partners’ businesses; impairment charges; extreme currency exchange-rate fluctuations; inability to recover costs from insurance carriers; business continuity concerns for us and our third-party vendors; increased risk of privacy and cybersecurity breaches from increased remote working; and challenges with Internet infrastructure due to high loads. If we are not able to respond to and manage the potential impact of such events effectively, our business could be harmed.

As we generally recognize revenue from our customers as content is downloaded, the impact to our reported revenue resulting from recent and near-term changes in our sales activity due to COVID-19 may not be fully apparent until future periods. Our efforts to help mitigate the negative impact of the outbreak on our business may not be effective, and we may be affected by a protracted economic downturn. Furthermore, while many governmental authorities around the world have and continue to enact legislation to address the impact of COVID-19, including measures intended to mitigate some of the more severe anticipated economic effects of the virus, we may not benefit from such legislation or such legislation may prove to be ineffective in addressing COVID-19’s impact on our and our customer’s businesses and operations. Even after the COVID-19 outbreak has subsided, we may continue to experience impacts to our business as a result of the coronavirus’ global economic impact and any recession that has occurred or may occur in the future. Further, as the COVID-19 situation is unprecedented and continuously evolving, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or in a manner that we currently do not consider to present significant risks to our operations.

In addition, the overall uncertainty regarding the economic impact of the COVID-19 pandemic and the impact on our revenue growth, could impact our cash flows from operations and liquidity. Material changes to our cash flows, liquidity and the volatility of the stock market and our stock price could impact our capital allocation strategy, including our recently introduced quarterly dividend program and our outstanding authorization under our stock repurchase program.

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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#~~10.1						~~Employment~~Mutual Separation Agreement and General Release, dated ~~March 13, 2019~~February 25, 2020, between the Company and ~~Stan Pavlovsky~~Lisa Nadler
~~10.2#~~10.2						~~Form of Performance Stock Unit Award~~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 ~~March 27, 2019~~on April 15, 2020 (File No. ~~001-35669)~~001-35699))
~~31.1#~~

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 Interim 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 Interim 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: April 28, 2020			By:	/s/ Jarrod Yahes
				Jarrod Yahes
				Chief Financial Officer
				(Principal Financial Officer)

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

	~~SHUTTERSTOCK, INC.~~

~~Dated: April 25, 2019~~	~~By:~~	~~/s/ Steven Berns~~
		~~Steven Berns~~
		~~Co-Chief Operating Officer and Chief Financial Officer~~
		~~(Principal Financial Officer)~~

~~Dated: April 25, 2019~~	~~By:~~	~~/s/ Steven Ciardiello~~
		~~Steven Ciardiello~~
		~~Chief Accounting Officer~~
		~~(Principal Accounting Officer)~~



			Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2119
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3129
Item 4.	Controls and Procedures	3231

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3432
Item 1A.	Risk Factors	3432

Item 6.	Exhibits	3433

Signatures			3635



	Goodwill
Balance as of December 31, 2018	$	88,576
Foreign currency translation adjustment	313
Balance as of March 31, 2019	$	88,889



(in thousands, except lease term and discount rate)	March 31, 2019
Balance sheet information
ROU assets	$	46,313

Lease liabilities, current	$	9,060
Lease liabilities, non-current	48,591
Total lease liabilities	$	57,651

Supplemental data
Weighted average remaining lease term	9.0 years
Weighted average discount rate	6.2		%

Cash paid for amounts included in lease liabilities	$	2,433
ROU assets obtained in exchange for lease obligations	$	1,160



(in thousands)	March 31, 2019
Year ending December 31,
2019 (remaining)	$	7,386
2020	8,834
2021	7,620
2022	6,957
2023	6,208
Thereafter	39,591
Total undiscounted lease payments	76,596
Less: imputed interest	(18,945		)
Total lease liabilities	$	57,651



Year Ending December 31,	Operating Leases
2019	$	9,913
2020	8,762
2021	7,493
2022	6,829
2023	6,082
Thereafter	39,481
Total minimum lease payments	$	78,560



	Three Months Ended March 31,
	2019		2017
E-Commerce	$	98,113	$	89,735
Enterprise	65,219		60,573
Other⁽¹⁾	—		2,711
Total Revenues	$	163,332	$	153,019