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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________

FORM 10-Q

___________________________________________________________

(Mark One)

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

For the quarterly period ended June 30, 2019

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

For the transition period from to

Commission File Number: 001-35669

___________________________________________________________

SHUTTERSTOCK, INC.

(Exact name of registrant as specified in its charter)

________________________________________________________



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

350 Fifth Avenue, 21st Floor

New York, NY 10118

(Address of principal executive offices, including zip code)

(646) 710-3417

(Registrant’s telephone number, including area code)

Not applicable

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

______________________________________________________________________________________________________________

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



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

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

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

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



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.						☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).			☐	Yes	☒	No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of August 2, 2019, 35,294,729 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 June 30, 2019



		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	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 6.	Exhibits	36

Signatures		38

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, particularly in the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, are forward-looking. Examples of forward-looking statements include, but are not limited to, statements regarding future business, future results of operations or financial condition, new or planned features, products or services, or management strategies. You can identify many forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. However, not all forward-looking statements contain these words. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. Such risks and uncertainties include, among others, those discussed under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or the SEC, on February 26, 2019, and in our consolidated financial statements, related notes, and the other information appearing elsewhere in such report, this 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)



	June 30,			December 31,
	2019			2018

ASSETS
Current assets:
Cash and cash equivalents	$	259,069		$	230,852
Accounts receivable, net	44,295			41,028
Prepaid expenses and other current assets	29,747			34,841
Total current assets	333,111			306,721
Property and equipment, net	68,350			76,188
Right-of-use assets	44,808			—
Intangible assets, net	26,532			29,540
Goodwill	88,427			88,576
Deferred tax assets, net	13,642			12,375
Other assets	18,083			18,088
Total assets	$	592,953		$	531,488
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,888		$	7,212
Accrued expenses	53,278			51,385
Contributor royalties payable	24,010			22,971
Deferred revenue	137,131			139,604
Other current liabilities	10,511			2,131
Total current liabilities	228,818			223,303
Deferred tax liability, net	—			77
Lease liabilities	47,007			—
Other non-current liabilities	13,207			21,441
Total liabilities	289,032			244,821
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.01 par value; 200,000 shares authorized; 37,816 and 37,618 shares issued and 35,258 and 35,060 shares outstanding as of June 30, 2019 and December 31, 2018, respectively	379			376
Treasury stock, at cost; 2,558 shares as of June 30, 2019 and December 31, 2018	(100,027		)	(100,027		)
Additional paid-in capital	299,122			291,710
Accumulated comprehensive loss	(7,453		)	(6,471		)
Retained earnings	111,900			101,079
Total stockholders’ equity	303,921			286,667
Total liabilities and stockholders’ equity	$	592,953		$	531,488

See Notes to Unaudited Consolidated Financial Statements.

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Shutterstock, Inc.

Consolidated Statements of Operations

(In thousands, except for per share data)

(unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018

Revenue	$	161,741	$	156,584		$	325,073	$	309,603

Operating expenses:
Cost of revenue	68,526		67,891			137,744		132,381
Sales and marketing	44,488		42,018			88,934		82,386
Product development	13,594		16,728			28,580		33,176
General and administrative	32,063		24,322			58,646		51,546
Total operating expenses	158,671		150,959			313,904		299,489
Income from operations	3,070		5,625			11,169		10,114
Gain on Sale of Webdam	—		—			—		38,613
Other income / (expense), net	584		(7,019		)	1,480		(6,217		)
Income / (Loss) before taxes	3,654		(1,394		)	12,649		42,510
Provision / (Benefit) for income taxes	355		(1,140		)	1,828		10,183
Net income / (loss)	$	3,299	$	(254	)	$	10,821	$	32,327

Earnings / (Loss) per share:
Basic	$	0.09	$	(0.01	)	$	0.31	$	0.93
Diluted	$	0.09	$	(0.01	)	$	0.30	$	0.91

Weighted average shares outstanding:
Basic	35,232		34,913			35,174		34,849
Diluted	35,504		34,913			35,499		35,343

See Notes to Unaudited Consolidated Financial Statements.

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Shutterstock, Inc.

Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018

Net income / (loss)	$	3,299		$	(254	)	$	10,821		$	32,327
Foreign currency translation loss	(1,027		)	(4,181		)	(982		)	(3,106		)
Other comprehensive loss	(1,027		)	(4,181		)	(982		)	(3,106		)
Comprehensive income / (loss)	$	2,272		$	(4,435	)	$	9,839		$	29,221

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
Three Months Ended June 30, 2019	Common Stock				Treasury Stock
	Shares		Amount		Shares	Amount											Total
Balance at March 31, 2019	37,759		$	378	2,558	$	(100,027	)	$	292,458		$	(6,426	)	$	108,601	$	294,984
Equity-based compensation	—		—		—	—			7,751			—			—		7,751
Issuance of common stock in connection with employee stock option exercises and RSU vesting	83		1		—	—			4			—			—		5
Common shares withheld for settlement of taxes in connection with equity-based compensation	(26	)	—		—	—			(1,091		)	—			—		(1,091		)
Other comprehensive loss	—		—		—	—			—			(1,027		)	—		(1,027		)
Net income	—		—		—	—			—			—			3,299		3,299
Balance at June 30, 2019	37,816		$	379	2,558	$	(100,027	)	$	299,122		$	(7,453	)	$	111,900	$	303,921



										Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings
Six Months Ended June 30, 2019	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	—		—			—	—			12,375			—			—		12,375
Issuance of common stock in connection with employee stock option exercises and RSU vesting	312		4			—	—			218			—			—		222
Common shares withheld for settlement of taxes in connection with equity-based compensation	(114	)	(1		)	—	—			(5,181		)	—			—		(5,182		)
Other comprehensive income	—		—			—	—			—			(982		)	—		(982		)
Net income	—		—			—	—			—			—			10,821		10,821
Balance at June 30, 2019	37,816		$	379		2,558	$	(100,027	)	$	299,122		$	(7,453	)	$	111,900	$	303,921



									Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings
Three Months Ended June 30, 2018	Common Stock				Treasury Stock
	Shares		Amount		Shares	Amount												Total
Balance at March 31, 2018	37,439		$	375	2,558	$	(100,027	)	$	275,400		$	(2,482	)	$	183,898		$	357,164
Equity-based compensation	—		—		—	—			6,429			—			—			6,429
Issuance of common stock in connection with employee stock option exercises and RSU vesting	91		—		—	—			687			—			—			687
Common shares withheld for settlement of taxes in connection with equity-based compensation	(20	)	—		—	—			(932		)	—			—			(932		)
Other comprehensive loss	—		—		—	—			—			(4,181		)	—			(4,181		)
Net loss	—		—		—	—			—			—			(254		)	(254		)
Balance at June 30, 2018	37,510		$	375	2,558	$	(100,027	)	$	281,584		$	(6,663	)	$	183,644		$	358,913



										Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings
Six Months Ended June 30, 2018	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	—		—			—	—			12,035			—			—		12,035
Issuance of common stock in connection with employee stock option exercises and RSU vesting	343		3			—	—			1,863			—			—		1,866
Common shares withheld for settlement of taxes in connection with equity-based compensation	(103	)	(1		)	—	—			(4,971		)	—			—		(4,972		)
Other comprehensive income	—		—			—	—			—			(3,106		)	—		(3,106		)
Net income	—		—			—	—			—			—			32,327		32,327
Balance at June 30, 2018	37,510		$	375		2,558	$	(100,027	)	$	281,584		$	(6,663	)	$	183,644	$	358,913

See Notes to Unaudited Consolidated Financial Statements.

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Shutterstock, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



	Six Months Ended June 30,
	2019			2018

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	10,821		$	32,327
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	25,319			22,227
Deferred taxes	(1,312		)	(4,321		)
Non-cash equity-based compensation	12,375			12,035
Gain on Sale of Webdam	—			(38,613		)
Loss on impairment of long-term investment	—			5,881
Bad debt expense	(635		)	472
Changes in operating assets and liabilities:
Accounts receivable	(2,746		)	(171		)
Prepaid expenses and other current and non-current assets	1,944			7,886
Accounts payable and other current and non-current liabilities	1,899			(6,019		)
Contributor royalties payable	1,059			3,063
Deferred revenue	(1,981		)	3,256
Net cash provided by operating activities	$	46,743		$	38,023

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(13,726		)	(23,051		)
Acquisition of businesses, net of cash acquired	—			(845		)
Proceeds from Sale of Webdam, net	2,500			42,392
Other investments / advances	—			(15,000		)
Acquisition of digital content	(1,277		)	(1,242		)
Security deposit release	25			(14		)
Net cash (used in) / provided by investing activities	$	(12,478	)	$	2,240

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options	218			1,879
Cash paid related to settlement of employee taxes related to RSU vesting	(5,181		)	(4,972		)
Net cash used in financing activities	$	(4,963	)	$	(3,093	)

Effect of foreign exchange rate changes on cash	(1,085		)	(757		)
Net increase in cash, cash equivalents and restricted cash	28,217			36,413

Cash, cash equivalents and restricted cash, beginning of period	233,465			256,041
Cash, cash equivalents and restricted cash, end of period	$	261,682		$	292,454

Supplemental Disclosure of Cash Information:
Cash paid / (received) for income taxes	$	1,480		$	(124	)

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 “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, consisting of licensed photographs, vectors, illustrations and video clips, which is used in visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and video content; and (b) music, consisting of high-quality music tracks and sound effects, which is often used to complement digital imagery. 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 June 30, 2019, Consolidated Statements of Operations, Comprehensive Income and Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018, and Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, are unaudited. The Consolidated Balance Sheet as of December 31, 2018, 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 state fairly the Company’s financial position as of June 30, 2019, its consolidated results of operations, comprehensive income and stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and its cash flows for the six months ended June 30, 2019 and 2018. The financial data and the other financial information disclosed in the notes to the financial statements related to these periods are also unaudited. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2019 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 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February 26, 2019. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

During the second quarter of 2019, the Company recorded an adjustment related to the correction of an error to increase stock-based compensation expense by $0.5 million, related to the understatement of stock-based compensation expense in the first quarter of 2019. The Company has concluded that the impact of this adjustment is not material to the results of operations or financial position for the current or prior quarter financial statements. 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 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 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 June 30, 2019 and December 31, 2018 (in thousands):



	As of June 30, 2019		As of December 31, 2018
Cash and cash equivalents	$	259,069	$	230,852
Restricted cash	2,613		2,613
Total cash, cash equivalents and restricted cash	$	261,682	$	233,465

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

The Company’s restricted cash relates to security deposits related to the lease for its headquarters in 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.

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. During the six months ended June 30, 2019, 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. As of June 30, 2019 and December 31, 2018, the Company’s allowance for doubtful accounts was approximately $4.0 million and $4.7 million, respectively, which was included as a reduction of accounts receivable on the Consolidated Balance Sheets.

Chargeback and Sales Refund Allowance

The Company establishes a chargeback allowance and sales refund reserve allowance based on factors surrounding historical credit card chargeback trends, historical sales refund trends and other information. As of June 30, 2019 and December 31, 2018, the Company’s combined allowance for chargebacks and sales refunds was $0.3 million, which was included as a component of other current liabilities on the Consolidated Balance Sheets.

Revenue Recognition

The majority of the Company’s revenue is earned from the license of digital content. Digital 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 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 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 payment with a credit card at the time of a transaction. Customer payments received in advance of revenue recognition are contract liabilities and are recorded as deferred revenue. Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms. Collectability for 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 Consolidated Balance Sheets. As of December 31, 2018, the Company had deferred rent of $11.3 million, which is included in other non-current liabilities on 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) on 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.

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

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

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, 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 the impact of adopting this new accounting standard on its financial statements.

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 impact of adopting this new standard on its financial statements.

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 is evaluating the impact of this new accounting standard on its 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 June 30, 2019 or December 31, 2018.

Other Fair Value Measurements

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 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.

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 been the exclusive distributor of Shutterstock creative content in China since 2014.

ZCool is a variable interest entity that is not consolidated because the Company is not the primary beneficiary. The Preferred Shares are not deemed to be in-substance common stock and will be accounted for using the measurement alternative for equity investments with no readily determinable fair value. The Preferred Shares will be reported at cost, adjusted for impairments or any observable price changes in ordinary transactions with identical or similar investments issued by ZCool. As of June 30, 2019 and December 31, 2018, the Company’s total investment in ZCool is approximately $15.0 million, which is reported within other assets on the Consolidated Balance Sheet.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(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 six months ended June 30, 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 June 30, 2019			As of December 31, 2018
Computer equipment and software	$	161,294		$	148,104
Furniture and fixtures	10,089			10,020
Leasehold improvements	18,820			18,822
Property and equipment	190,203			176,946
Less accumulated depreciation	(121,853		)	(100,758		)
Property and equipment, net	$	68,350		$	76,188

Depreciation expense related to property and equipment was $10.5 million and $9.9 million for the three months ended June 30, 2019 and 2018, respectively, and $21.1 million and $19.4 million for the six months ended June 30, 2019 and 2018, respectively. Depreciation expense is included in cost of revenue and general and administrative expense in the Consolidated Statement 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 $5.8 million and $6.2 million for the three months ended June 30, 2019 and 2018, respectively, and $12.3 million and $15.8 million for the six months ended June 30, 2019 and 2018, 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 $7.5 million and $6.0 million for the three months ended June 30, 2019 and 2018, respectively, and $14.8 million and $11.4 million for the six months ended June 30, 2019 and 2018, respectively. Depreciation expense related to capitalized internal-use software is included in cost of revenue in the Consolidated Statements of Operations.

As of June 30, 2019 and December 31, 2018, the Company had capitalized internal-use software of $45.9 million and $48.5 million, respectively, net of accumulated depreciation, which was included in property and equipment, net.

(5) Goodwill and Intangible Assets

Goodwill

In 2018, the Company’s goodwill balance was allocated to four reporting units: Bigstock, Editorial, Images and Music. During the second quarter of 2019, due to changes in the Company’s reporting structure, which resulted in a change in the way management monitors the business, as well as key milestones achieved in the continued integration of the Company’s operations and technology platform, management concluded that the Company now operates with a single reporting unit. The Company evaluated its goodwill immediately prior and subsequent to the change in reporting units and concluded that no adjustment to the carrying value of goodwill was necessary. The aggregate goodwill for the legacy reporting units was assigned to the single content business reporting unit. The Company’s goodwill balance will continue to be tested for impairment annually on October 1 or upon a triggering event.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

The following table summarizes the changes in the Company’s goodwill balance during the six months ended June 30, 2019 (in thousands):



	Goodwill
Balance as of December 31, 2018	$	88,576
Foreign currency translation adjustment	(149		)
Balance as of June 30, 2019	$	88,427

Intangible Assets

Intangible assets consisted of the following as of June 30, 2019 and December 31, 2018 (in thousands):



	As of June 30, 2019						As of December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization
Amortizing intangible assets:
Customer relationships	$	17,224	$	(8,054	)	9	$	17,360	$	(7,135	)
Trade name	6,321		(5,633		)	7	6,372		(3,719		)
Developed technology	4,732		(3,809		)	4	4,940		(3,712		)
Contributor content	21,161		(5,577		)	10	19,912		(4,653		)
Patents	259		(92		)	18	259		(84		)
Total	$	49,697	$	(23,165	)		$	48,843	$	(19,303	)

Amortization expense was $2.9 million and $1.3 million for the three months ended June 30, 2019 and 2018, respectively, and $4.2 million and $2.8 million for the six months ended June 30, 2019 and 2018, respectively. The Company determined that there was no indication of impairment of the intangible assets for any period presented. Estimated amortization expense is: $3.0 million for the remaining six months of 2019, $5.5 million in 2020, $4.7 million in 2021, $3.7 million in 2022, $2.8 million in 2023, $2.7 million in 2024 and $4.1 million thereafter.

(6) Accrued Expenses

Accrued expenses consisted of the following (in thousands):



	As of June 30, 2019		As of December 31, 2018
Compensation	$	12,018	$	15,153
Non-income taxes	9,376		7,885
Royalty tax withholdings	5,703		5,618
Other expenses	26,181		22,729
Total accrued expenses	$	53,278	$	51,385

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(7) Stockholders’ Equity and Equity-Based Compensation

Stockholders’ Equity

Common Stock

During the six months ended June 30, 2019 and 2018, the Company issued approximately 198,000 and 240,000 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 six months ended June 30, 2019 and 2018, the Company did not repurchase any shares of its common stock under the share repurchase program. As of June 30, 2019, 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 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.

Equity-Based Compensation

The Company recognizes stock-based compensation expense for all share-based payment awards, including employee stock options and RSUs granted under the 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.

The following table summarizes non-cash equity-based compensation expense, net of forfeitures, by financial statement line item included in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of revenue	$	105	$	140	$	190	$	314
Sales and marketing	675		715		1,257		1,142
Product development	1,252		1,738		2,427		3,215
General and administrative	5,719		3,836		8,501		7,364
Total	$	7,751	$	6,429	$	12,375	$	12,035

The following table summarizes non-cash equity-based compensation expense, net of forfeitures, by award type included in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Stock options	$	2,176	$	1,500	$	3,067	$	2,966
RSUs	5,575		4,929		9,308		9,069
Total	$	7,751	$	6,429	$	12,375	$	12,035

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Stock Option Awards

During the six months ended June 30, 2019, the Company did not grant any options to purchase shares of its common stock. As of June 30, 2019, there were approximately 459,000 options vested and exercisable with a weighted average exercise price of $33.16. As of June 30, 2019, the total unrecognized compensation charge related to non-vested options was approximately $4.3 million, which is expected to be recognized through 2022.

Restricted Stock Unit Awards

On March 26, 2019, the Compensation Committee of the Board of Directors (the “Compensation Committee”) of the Company approved a performance-based restricted stock unit award (“PRSU”) under the 2012 Plan. On April 1, 2019, the Company awarded approximately 202,000 PRSUs, each with a grant date fair value of $46.69 and corresponding to one target share, to certain of the Company’s officers. The number of shares that may eventually vest will be between 0% and 150% of a recipient’s target shares, depending on both the recipient’s continued service with the Company and the extent to which performance goals will have been achieved.

The value of the PRSUs is based on the Company’s stock price on the date of grant. Based upon the expected levels of achievement, stock-based compensation related to PRSUs is recognized on a straight-line basis over the requisite service period. The expected levels of achievement are reassessed over the requisite service period and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted and recorded in the Consolidated Statements of Operations and the remaining unrecognized stock-based compensation is recognized over the remaining requisite service period.

During the six months ended June 30, 2019, the Company had RSU grants (including PRSUs), net of forfeitures, of approximately 465,000. As of June 30, 2019, there are approximately 1,184,000 non-vested RSUs (including PRSUs) outstanding with a weighted average grant-date fair value of $45.60. As of June 30, 2019, the total unrecognized non-cash equity-based compensation charge related to the non-vested RSUs was approximately $35.4 million, which is expected to be recognized through 2022.

During the six months ended June 30, 2019, shares of common stock with an aggregate value of $5.2 million were withheld upon vesting of RSUs and in connection with related remittance of employee withholding taxes to taxing authorities.

(8) Revenue

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

E-commerce: The majority of customers purchase content licenses directly through the Company’s e-commerce platforms. E-commerce customers have the flexibility to purchase a subscription plan that is paid on a monthly or annual basis or to purchase 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 of creative professionals and large organizations with unique content, licensing and workflow needs. Customers of this size benefit from dedicated sales, service and research teams which provide a number of enhancements to their creative workflows including non-standard licensing rights, multi-seat access, invoicing and the ability to pay on credit terms, 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.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

The Company’s revenues by distribution channel for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
E-commerce	$	96,993	$	91,718	$	195,106	$	181,453
Enterprise	64,748		64,866		129,967		125,439
Other ⁽¹⁾	—		—		—		2,711
Total Revenues	$	161,741	$	156,584	$	325,073	$	309,603


(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 June 30, 2019 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. $96.1 million of total revenue recognized for the six months ended June 30, 2019 was reflected in deferred revenue as of December 31, 2018.

(9) Other Income / (Expense), net

The following table presents a summary of the Company’s other income and expense activity included in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Foreign currency loss	$	(569	)	$	(1,782	)	$	(730	)	$	(1,463	)
Impairment of long-term investments	—			(5,881		)	—			(5,881		)
Interest income	1,153			644			2,210			1,127
Total other income / (expense)	$	584		$	(7,019	)	$	1,480		$	(6,217	)

(10) Income Taxes

The Company’s effective tax rates yielded a net expense of 9.7% and 81.8% for the three months ended June 30, 2019 and 2018, respectively, and a net expense of 14.5% and 24.0% for the six months ended June 30, 2019 and 2018, respectively.

In the three and six months ended June 30, 2019, the impact of discrete tax items decreased the effective tax rate by 3.4% and 1.8%, respectively.

In the three months ended June 30, 2018, the Company incurred a discrete tax benefit relating primarily to the impairment of a long-term investment asset. In the six months ended June 30, 2018, the Company incurred a net discrete tax expense relating primarily to the gain on the Sale of Webdam, partially offset by a discrete tax benefit related to the impairment of a long-term investment asset. The net effect of these discrete items increased the effective tax rate for the three and six months ended June 30, 2018 by 66.5% and 8.7%, respectively.

The Company has computed the provision for income taxes based on the estimated annual effective tax rate and the application of discrete items, if any, in the applicable period. The estimated annual effective tax rate differs from the statutory tax rate due primarily to the international provisions enacted as part of the Tax Cuts and Jobs Act (“TCJA”) and the U.S. Research and Development tax credit.

During the three months ended June 30, 2019 and during the three and six months ended June 30, 2018, uncertain tax positions recorded by the Company were not significant. During the six months ended June 30, 2019, uncertain tax positions recorded by the Company were $1.0 million. To the extent the remaining uncertain tax positions are ultimately recognized, the Company’s effective tax rate may be impacted in future periods.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

The Company recognizes interest expense and tax penalties related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Operations. The Company’s accrual for interest and penalties related to unrecognized tax benefits was not significant for the three and six months ended June 30, 2019 and 2018.

During the six months ended June 30, 2019, the Company paid net cash taxes of $1.5 million and during the six months ended June 30, 2018, the Company received net tax refunds of $0.1 million.

(11) Net Income / (Loss) Per Share

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

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Net income / (loss)	$	3,299	$	(254	)	$	10,821	$	32,327
Shares used to compute basic net income / (loss) per share	35,232		34,913			35,174		34,849
Dilutive potential common shares
Stock options	102		—			104		113
Unvested restricted stock awards	170		—			221		381
Shares used to compute diluted net income / (loss) per share	35,504		34,913			35,499		35,343
Basic net income / (loss) per share	$	0.09	$	(0.01	)	$	0.31	$	0.93
Diluted net income / (loss) per share	$	0.09	$	(0.01	)	$	0.30	$	0.91

Dilutive securities included in the calculation	1,005		—			992		1,366
Anti-dilutive securities excluded from the calculation	1,206		2,370			1,171		1,000

(12) Geographic Information

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
North America	$	57,657	$	56,056	$	115,171	$	113,014
Europe	53,647		53,291		109,132		105,225
Rest of the world	50,437		47,237		100,770		91,364
Total revenue	$	161,741	$	156,584	$	325,073	$	309,603

The United States, included in North America in the above table, accounted for 32% and 33% of consolidated revenue for the three months ended June 30, 2019 and 2018, respectively, and 32% and 33% of consolidated revenue for the six months ended June 30, 2019 and 2018, respectively. No other country accounts for more than 10% of the Company’s revenue in any period presented.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

The Company’s long-lived tangible assets were located as follows (in thousands):



	June 30,		December 31,
	2019		2018
North America	$	62,841	$	71,758
Europe	5,446		4,371
Rest of the world	63		59
Total long-lived tangible assets	$	68,350	$	76,188

The United States, included in North America in the above table, accounted for 84% and 88% of total long-lived tangible assets as of June 30, 2019 and December 31, 2018, respectively. No other country accounts for more than 10% of the Company’s long-lived tangible assets in any period presented.

(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 June 30, 2019 and 2018, respectively and $5.4 million and $4.8 million for the six months ended June 30, 2019 and 2018, respectively.

Additional information related to the Company’s leases as of and for the six months ended June 30, 2019, is as follows:



(in thousands, except lease term and discount rate)	June 30, 2019
Balance sheet information
ROU assets	$	44,808

Lease liabilities, current	$	9,203
Lease liabilities, non-current	47,007
Total lease liabilities	$	56,210

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

Cash paid for amounts included in lease liabilities	$	4,857
ROU assets obtained in exchange for lease obligations	$	1,324

Maturities of lease liabilities as of June 30, 2019 were as follows:



(in thousands)	June 30, 2019
Year ending December 31,
2019 (remaining)	$	5,182
2020	9,433
2021	8,131
2022	7,078
2023	6,210
Thereafter	39,594
Total undiscounted lease payments	75,628
Less: imputed interest	(19,418		)
Total lease liabilities	$	56,210

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

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 $64.8 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 June 30, 2019 and December 31, 2018.

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) Commitments and Contingencies

As of June 30, 2019, the Company had total other non-lease obligations in the amount of approximately $60.9 million, which consisted primarily of minimum royalty guarantees and unconditional purchase obligations related to contracts for infrastructure and other business services. As of June 30, 2019, the Company’s other non-lease obligations for the remainder of 2019 and for the years ending December 31, 2020, 2021 and 2022 were approximately $15.5 million, $29.1 million, $12.5 million and $3.8 million, respectively.

Legal Matters

From time to time, the Company may become party to litigation in the ordinary course of business, including direct claims brought by or against the Company with respect to intellectual property, contracts, employment and other matters, as well as claims brought against the Company’s customers for whom the Company has a contractual indemnification obligation. The Company assesses the likelihood of any adverse judgments or outcomes with respect to these matters and determines loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, the Company considers other relevant factors that could impact its ability to reasonably estimate a loss. A determination of the amount of reserves required, if any, for these contingencies is made after analyzing each matter. The Company reviews reserves, if any, at least quarterly and may change the amount of any such reserve in the future due to new developments or changes in strategy in handling these matters. Although the results of litigation and threats of litigation, investigations and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these matters will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company currently has no material active litigation matters and, accordingly, no material reserves related to litigation.

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Shutterstock, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Indemnification and Employment Agreements

In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to customers with respect to certain matters, including, but not limited to, losses arising out of the breach of the Company’s intellectual property warranties for damages to the customer directly attributable to the Company’s breach. The Company is not responsible for any damages, costs, or losses to the extent such damages, costs or losses arise as a result of any modifications made by the customer, or the context in which content is used. The standard maximum aggregate obligation and liability to any one customer for any single claim is generally limited to ten thousand dollars but can range to $250,000, with certain exceptions for which our indemnification obligation are uncapped. As of June 30, 2019, the Company had recorded no material liabilities related to indemnification obligations in accordance with the authoritative guidance for loss contingencies. Additionally, the Company believes that it has the appropriate insurance coverage in place to adequately cover such indemnification obligations, if necessary.

Pursuant to the Company’s charter documents and separate written indemnification agreements, the Company has certain indemnification obligations to its executive officers, certain employees and directors, as well as certain former officers and directors.

The Company has also entered into employment agreements with its executive officers and certain employees. These agreements specify various employment-related matters, including annual compensation, performance incentive bonuses, and severance benefits in the event of termination in the event of a change in control or otherwise, with or without cause.

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 filed with the SEC on February 26, 2019.

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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 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.

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. The digital content licensed by our customers includes: (a) imagery, consisting of licensed photographs, vectors, illustrations and video clips which is used in visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and video content; and (b) music, consisting of high-quality music tracks and sound effects, which is 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”).

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 1.9 million active, paying customers contributed to our revenue for the twelve-month period ended June 30, 2019. As of June 30, 2019, more than 900,000 approved contributors made their images, video clips and music tracks available in our collection, which has grown to approximately 280 million images and approximately 15 million video clips as of June 30, 2019. This makes our collection of content one of the largest of its kind, and we delivered more than 90 million paid downloads across all of our brands during the six months ended June 30, 2019.

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During the three months ended June 30, 2019, in addition to the increase in content provided by our contributors, the Company also launched new and improved product features, including enhanced product offerings as follows:


•	In April 2019, we launched “View in Room,” our first Augmented Reality (AR) feature, allowing iOS app users to visualize how an image from Shutterstock’s collection would look in real life.


•	In April 2019, we announced the renewal of our agreement with the Associated Press (AP) to distribute AP’s daily global photo output for license to Shutterstock customers based in the U.S., the U.K. and Ireland. This distribution deal gives Shutterstock customers access to approximately 3,000 images daily as well as access to iconic news images from the vast AP archive.


•	In May 2019, we launched our new self-serve application program interface (API) subscription plans which enable developers and businesses to resell more than 1 million images within their products and applications.

In addition, in July 2019, we introduced Shutterstock Elements, a collection consisting of thousands of cinema-grade video effects for filmmakers, including 4K lens flares, transitions and video kits with smoke, fire and explosions.

Through our platform, we generate revenue by licensing content to our customers. During the six months ended June 30, 2019, 60% of our revenue was generated from e-commerce customers. E-commerce customers have the flexibility of choosing content subscription plans that provide a large volume of content for their creative process without concern for the incremental cost of each license. 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 generally include creative professionals and larger organizations or those with unique content, licensing and workflow needs. Our dedicated enterprise sales, service 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 platform. Enterprise customers may also benefit from the creation of our custom branded content. Our enterprise customers provided approximately 40% of our revenue during the six months ended June 30, 2019.

Each time an image, video 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 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 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 in the mix between e-commerce and enterprise sales channels will materially impact our operating margins.

An important driver of our growth is customer acquisition, which we achieve primarily through online marketing efforts, including paid search, organic search, online display advertising, brand marketing, email marketing, affiliate marketing, social media and strategic partnerships. At the beginning of 2019, we launched our award-winning “It’s not stock, it’s Shutterstock” campaign, designed to create top-of-funnel awareness and website traffic by showing the creative marketing results that can be achieved with Shutterstock assets. Over the past several years, our investments in marketing have represented a significant percentage of revenue. Since we believe the market for content is multi-faceted and continually expanding, we plan to continue to invest aggressively in customer acquisition to achieve revenue and market share growth.

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, music and search patterns and the security of user information on our platform. To this end, we have invested aggressively in product development and cloud-based hosting infrastructure, and we intend to continue to invest in these areas, to the extent that we can improve the customer experience and increase the efficiency with which we deploy new products and features.

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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 and six months ended June 30, 2019 and 2018:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions, except revenue per download)
Paid downloads (during the period)	46.6		45.2		93.8		89.0
Revenue per download (during the period)	$	3.44	$	3.41	$	3.43	$	3.41
Content in Our Collection (end of period):
Images	280		204		280		204
Video Clips	15		11		15		11

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 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 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 changes in our pricing, if any, as well as the mix of purchase 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 per download has increased over the last three years, almost entirely due to the introduction of new product offerings and the change 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 clips available to customers for commercial license on shutterstock.com at the end of the period. We exclude content from this collection metric that is not uploaded directly to our site but is available for license by our customers through an application program interface, custom content and certain content that may be licensed for editorial use only. We record this metric as of the end of a period. Offering a large selection of content allows us to attract and retain customers and, therefore, we believe that our library of high-quality content is an important contributor of our revenue growth.

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

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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. 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.

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 that was filed with the SEC on February 26, 2019, or the 2018 Form 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 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 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 customers license content directly through our e-commerce platforms. 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

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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 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 benefit from communication with our dedicated sales, 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.

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 and six months ended June 30, 2019 and 2018 are as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
E-Commerce	$	96,993	$	91,718	$	195,106	$	181,453
Enterprise	64,748		64,866		129,967		125,439
Other⁽¹⁾	—		—		—		2,711
Total Revenues	$	161,741	$	156,584	$	325,073	$	309,603


(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 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, amortization of 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 our creative platform and cloud-based software platform.

Sales and Marketing. Sales and marketing expenses include third-party marketing, advertising, branding, public relations and sales expenses. Sales and marketing expenses also include associated employee compensation, including non-cash equity-based compensation, bonuses and benefits, and commissions as well as allocated facility and other supporting overhead costs.

Product Development. Product development expenses consist of employee compensation, including non-cash equity-based compensation, bonuses and benefits, and expenses related to vendors engaged in product management, design, development and testing of our websites and products. Product development costs also include 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.

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.

Other Income / (Expense), Net. Other income / (expense), net consists of non-operating costs such as foreign currency transaction gains and losses, interest income and expense and impairments related to a long-term investment asset.

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.

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Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. As of June 30, 2019, we have not recorded any such valuation allowances.

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 June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
	(in thousands)
Consolidated Statements of Operations:
Revenue	$	161,741	$	156,584		$	325,073	$	309,603
Operating expenses:
Cost of revenue	68,526		67,891			137,744		132,381
Sales and marketing	44,488		42,018			88,934		82,386
Product development	13,594		16,728			28,580		33,176
General and administrative	32,063		24,322			58,646		51,546
Total operating expenses	158,671		150,959			313,904		299,489
Income from operations	3,070		5,625			11,169		10,114
Gain on Sale of Webdam	—		—			—		38,613
Other income / (expense), net	584		(7,019		)	1,480		(6,217		)
Income / (Loss) before taxes	3,654		(1,394		)	12,649		42,510
Provision / (Benefit) for income taxes	355		(1,140		)	1,828		10,183
Net income / (loss)	$	3,299	$	(254	)	$	10,821	$	32,327

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Consolidated Statements of Operations:
Revenue	100	%	100	%	100	%	100	%
Operating expenses:
Cost of revenue	42	%	43	%	42	%	43	%
Sales and marketing	28	%	27	%	27	%	27	%
Product development	8	%	11	%	9	%	11	%
General and administrative	20	%	16	%	18	%	17	%
Total operating expenses	98	%	96	%	97	%	97	%
Income from operations	2	%	4	%	3	%	3	%
Gain on Sale of Webdam	—	%	—	%	—	%	12	%
Other income / (expense), net	—	%	(4	)%	—	%	(2	)%
Income / (Loss) before taxes	2	%	(1	)%	4	%	14	%
Provision / (Benefit) for income taxes	—	%	(1	)%	1	%	3	%
Net income / (loss)	2	%	—	%	3	%	10	%

__________________________________

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

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Comparison of the Three Months Ended June 30, 2019 and 2018

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



	Three Months Ended June 30,
	2019		2018			$ Change			% Change
	(in thousands)
Consolidated Statements of Operations:
Revenue	$	161,741	$	156,584		$	5,157		3	%
Operating expenses:
Cost of revenue	68,526		67,891			635			1
Sales and marketing	44,488		42,018			2,470			6
Product development	13,594		16,728			(3,134		)	(19	)
General and administrative	32,063		24,322			7,741			32
Total operating expenses	158,671		150,959			7,712			5
Income from operations	3,070		5,625			(2,555		)	(45	)
Other income / (expense), net	584		(7,019		)	7,603			*
Income / (Loss) before income taxes	3,654		(1,394		)	5,048			*
Provision / (Benefit) for income taxes	355		(1,140		)	1,495			*
Net income / (loss)	$	3,299	$	(254	)	$	3,553		*

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* Percentage change is not meaningful

Revenue

Revenue increased by $5.2 million, or 3%, to $161.7 million in the three months ended June 30, 2019 compared to the same period in 2018. Excluding the impact of foreign currency fluctuations, revenue increased approximately 5% in the three months ended June 30, 2019, compared to the same period in 2018. In addition, the Company’s e-commerce revenues increased by 6% and the Company’s enterprise revenues were relatively flat, decreasing 0.2% in the three months ended June 30, 2019, compared to the same period in 2018. On a constant currency basis, the Company’s e-commerce and enterprise revenues increased by approximately 7% and 2%, respectively, in the three months ended June 30, 2019, compared to the same period in 2018.

During the three months ended June 30, 2019, we increased sales and marketing efforts to attract more users and promote increased customer engagement across our platform. We continue to focus on product offerings, platform improvements and other initiatives to increase customer engagement.

In the three months ended June 30, 2019 and 2018, we delivered 46.6 million and 45.2 million paid downloads, respectively, and our revenue per download increased to $3.44 for the three months ended June 30, 2019 from $3.41 for the three months ended June 30, 2018.

Our revenue growth by region was as follows: revenue from outside Europe and North America increased by $3.2 million, or 7%, to $50.4 million, revenue from North America increased by $1.6 million, or 3%, to $57.7 million and revenue from Europe increased by $0.4 million, or 1%, to $53.6 million in the three months ended June 30, 2019 compared to the same period in 2018.

Costs and Expenses

Cost of Revenue. Cost of revenue increased by $0.6 million, or 1%, to $68.5 million in the three months ended June 30, 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, was flat in the three months ended June 30, 2019, compared to the same period in 2018. 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 shifts in customer usage and product mix. Costs associated with website hosting, hardware and software licenses, and depreciation and amortization increased by $0.9 million to $14.0 million for the three months ended June 30, 2019 compared to the same period in 2018, driven primarily by depreciation and amortization of infrastructure hardware and software assets acquired, developed and purchased in recent periods.

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Sales and Marketing. Sales and marketing expenses increased by $2.5 million, or 6%, to $44.5 million in the three months ended June 30, 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 $3.5 million, as compared to the prior year, as a result of increased spending on affiliate, search advertising and other new channels. This was partially offset by a $0.7 million reduction in employee sales commissions. As a percent of revenue, for the three months ended June 30, 2019, sales and marketing expenses remained consistent with the same period in 2018. As we continue to invest in new customer acquisition, products and geographies, we expect sales and marketing expenses to increase in absolute dollars and remain consistent as a percentage of revenue in the foreseeable future.

Product Development. Product development expenses decreased by $3.1 million, or 19%, from $16.7 million for the three months ended June 30, 2018 to $13.6 million for the three months ended June 30, 2019. This decrease was driven by an approximately $2.8 million reduction in employee and third-party contractor related costs, net of capitalized labor. 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 developing new products and internal tools and enhancing the functionality of our existing products and technologies.

General and Administrative. General and administrative expenses increased by $7.7 million, or 32%, to $32.1 million in the three months ended June 30, 2019 compared to the same period in 2018. This increase was primarily driven by (i) higher employee-related costs of $2.6 million for the three months ended June 30, 2019 as compared to the same period in 2018; (ii) one-time severance charges of approximately $2.2 million incurred during the second quarter; and (iii) accelerated amortization expense of $1.5 million recognized during the second quarter in conjunction with the Company’s re-branding of its Editorial product. The remaining change in general and administrative expenses is attributable to higher IT-related costs for the three months ended June 30, 2019, as compared to the same period in 2018, related primarily to required enhancements to our corporate and technology infrastructure, intended to better support our growth initiatives and help sustain long-term profitability. 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 / (Expense), Net. In the three months ended June 30, 2019, approximately $1.2 million of other income consisted of interest income which was partially offset by $0.6 million of unfavorable foreign exchange fluctuations. During the three months ended June 30, 2018, we recorded a charge of $5.9 million as a result of the impairment of a long-term investment asset and incurred unfavorable foreign exchange losses of approximately $1.8 million, which was partially offset by interest income of approximately $0.6 million. 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 $1.5 million for the three months ended June 30, 2019 as compared to the same period in 2018. Our effective tax rates yielded an expense of 9.7% and 81.8% for the three months ended June 30, 2019 and 2018, respectively.

For the three months ended June 30, 2019, the impact of discrete items decreased the effective tax rate by 3.4%. For the three months ended June 30, 2018, we incurred a net discrete tax benefit related primarily to the impairment of a long-term investment asset, the effect of which increased the effective tax rate for the three months ended June 30, 2018 by 66.5%. Excluding the discrete item, our effective tax rate would have been 15.3% for the three months ended June 30, 2018.

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Comparison of the Six Months Ended June 30, 2019 and 2018

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



	Six Months Ended June 30,
	2019		2018			$ Change			% Change
	(in thousands)
Consolidated Statements of Operations Data:
Revenue	$	325,073	$	309,603		$	15,470		5	%
Operating expenses:
Cost of revenue	137,744		132,381			5,363			4	%
Sales and marketing	88,934		82,386			6,548			8	%
Product development	28,580		33,176			(4,596		)	(14	)%
General and administrative	58,646		51,546			7,100			14	%
Total operating expenses	313,904		299,489			14,415			5	%
Income from operations	11,169		10,114			1,055			10	%
Gain on Sale of Webdam	—		38,613			(38,613		)	*
Other income / (expense), net	1,480		(6,217		)	7,697			*
Income before income taxes	12,649		42,510			(29,861		)	(70	)%
Provision for income taxes	1,828		10,183			(8,355		)	*
Net income	$	10,821	$	32,327		$	(21,506	)	(67	)%

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* Not meaningful

Revenue

Revenue increased by $15.5 million, or 5%, to $325.1 million in the six months ended June 30, 2019 compared to the same period in 2018. Excluding the impact of foreign currency fluctuations, revenue increased approximately 7% in the six months ended June 30, 2019, compared to the same period in 2018. In addition, the Company’s e-commerce revenues and enterprise revenues increased by 8% and 4%, respectively, in the six months ended June 30, 2019, compared to the same period in 2018. On a constant currency basis, the Company’s e-commerce and enterprise revenues increased by approximately 10% and 6%, respectively, in the six months ended June 30, 2019, compared to the same period in 2018.

During the six months ended June 30, 2019, we increased sales and marketing efforts to attract more users and promote increased customer engagement across our platform. We continue to focus on product offerings, platform improvements and other initiatives to increase customer engagement.

The increased revenue from our content licensing business was partially offset by the absence of revenue from Webdam, as a result of the Sale of Webdam on February 26, 2018. We did not recognize revenue from Webdam during the six months ended June 30, 2019, compared to $2.7 million for the period from January 1, 2018 through February 26, 2018.

In the six months ended June 30, 2019 and 2018, we delivered 93.8 million and 89.0 million paid downloads, respectively, and our average revenue per download increased to $3.43 for the six months ended June 30, 2019, from $3.41 for the six months ended June 30, 2018.

Our revenue growth by region was as follows: revenue from outside Europe and North America increased by $9.4 million, or 10%, to $100.8 million, revenue from Europe increased by $3.9 million, or 4%, to $109.1 million and revenue from North America increased by $2.2 million, or 2%, to $115.2 million in the six months ended June 30, 2019 compared to the same period in 2018.

Costs and Expenses

Cost of Revenue. Cost of revenue increased by $5.4 million, or 4%, to $137.7 million in the six months ended June 30, 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 $2.5 million, or 3%, which is in line with the increase in revenues for the six months ended June 30, 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 shifts in customer usage and product mix. Costs associated with website hosting, hardware and software licenses, and depreciation and amortization increased by $2.7 million to $28.4 million for the six months ended June 30, 2019 compared to the same period in

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2018, driven primarily by 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 $6.5 million, or 8%, to $88.9 million in the six months ended June 30, 2019 compared to the same period in 2018. Expenses related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by $7.2 million, or 17%, for the six months ended June 30, 2019 compared to the same period in 2018 as a result of increased spending on affiliate, search advertising and other new channels, which was partially offset by a $0.9 million reduction in employee sales commissions. As a percent of revenue, for the six months ended June 30, 2019, sales and marketing expenses remained consistent with the same period in 2018. As we continue to invest in new customer acquisition, products and geographies, we expect sales and marketing expenses to increase in absolute dollars and remain consistent as a percentage of revenue in the foreseeable future.

Product Development. Product development expenses decreased by $4.6 million, or 14%, to $28.6 million for the six months ended June 30, 2019 as compared to $33.2 million for the same period in 2018. This decrease was driven by an approximately $6.2 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 six months ended June 30, 2019, as compared to the prior year. 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 developing new products and internal tools and enhancing the functionality of our existing products and technologies.

General and Administrative. General and administrative expenses increased by $7.1 million, to $58.6 million in the six months ended June 30, 2019 compared to the same period in 2018. This increase was driven by (i) higher employee-related costs of $3.6 million for the six months ended June 30, 2019 as compared to the same period in 2018; (ii) one-time severance charges of approximately $2.2 million incurred for the six months ended June 30, 2019; (iii) higher professional fees and IT-related costs of $2.1 million for the six months ended June 30, 2019, as compared to the same period in 2018, related primarily to enhancements to our corporate and technology infrastructure, intended to better support our growth initiatives and help sustain long-term profitability; and (iv) higher depreciation and amortization expense of $0.7 million for the six months ended June 30, 2019, which includes $1.5 million of accelerated amortization expense in connection with the Company’s re-branding of its Editorial product. These increases were partially offset by a $1.1 million reduction in bad debt expense for the six months ended June 30, 2019 as compared to the same period in 2018. 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.

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 2019. During the six months ended June 30, 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 / (Expense), Net. During the six months ended June 30, 2019, approximately $2.2 million of other income consisted of interest income which was partially offset by $0.7 million of unfavorable foreign currency fluctuations. During the six months ended June 30, 2018, we recorded a charge of $5.9 million as a result of the impairment of a long-term investment asset. During the six months ended June 30, 2018, we also recorded $1.5 million related to unfavorable foreign currency fluctuations and approximately $1.1 million of interest income.

Income Taxes. Income tax expense decreased by $8.4 million for the six months ended June 30, 2019 as compared to the same period in 2018. Our effective tax rates for the six months ended June 30, 2019 and 2018 were 14.5% and 24.0%, respectively.

For the six months ended June 30, 2019, the impact of discrete tax items decreased the effective tax rate by 1.8%. For the six months ended June 30, 2018, we incurred a net discrete tax benefit relating primarily to the gain on the Sale of Webdam, partially offset by discrete tax benefits relating to the impairment of a long-term investment asset. The net effect of these discrete items increased the effective tax rate for the six months ended June 30, 2018 by 8.7%. Excluding discrete items, our effective tax rate would have been 15.3% for the six months ended June 30, 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 quarter of each calendar year due to the year-end holiday vacation season and may increase in the first quarter of each calendar year as many customers return to work. 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

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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 on digital content by customers tend to be discretionary in nature, reflecting overall economic conditions, the economic prospects of specific industries, budgeting constraints, buying patterns and a variety of other factors, many of which are outside our control. As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indicators of our future operating performance.

Liquidity and Capital Resources

As of June 30, 2019, we had cash and cash equivalents totaling $259.1 million which primarily consisted of bank balances and money market mutual funds. Since inception, we have financed our operations primarily through cash flows generated from operations.

Historically, our principal uses of cash have been funding our operations, capital expenditures, content acquisition, business combinations that enhance our strategic position 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 of Webdam

On February 26, 2018, we 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 2019. We 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.

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 program, management is authorized to purchase shares of our common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.

As of June 30, 2019, we have repurchased approximately 2,558,000 shares of our common stock under the share repurchase program at an average per-share cost of $39.09. During the six months ended June 30, 2019, we did not repurchase any shares of our common stock under the share repurchase program. As of June 30, 2019, we had $100 million of remaining authorization for share repurchases under this program.

Equity-Based Compensation

Effective October 1, 2016, we implemented a practice of net share settlement upon the vesting of restricted stock units (“RSUs”) 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 equity-based compensation programs on stockholders.

During the six months ended June 30, 2019, shares with an aggregate value of $5.2 million were withheld upon vesting of RSUs and in connection with related remittance to taxing authorities.

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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 capital expenditures will primarily 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 14 to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding existing capital commitments as of June 30, 2019.

Cash Flows

The following table summarizes our cash flow data for the six months ended June 30, 2019 and 2018 (in thousands).



	Six Months Ended June 30,
	2019			2018
Net cash provided by operating activities	$	46,743		$	38,023
Net cash (used in) / provided by investing activities	$	(12,478	)	$	2,240
Net cash used in financing activities	$	(4,963	)	$	(3,093	)

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 $46.7 million for the six months ended June 30, 2019, compared to $38.0 million for the six months ended June 30, 2018. In the six months ended June 30, 2019, operating cash flows were favorably impacted by 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 $1.5 million for the six months ended June 30, 2019, and during the six months ended June 30, 2018, the Company received net cash tax refunds of $0.1 million.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2019 was $12.5 million, consisting primarily of capital expenditures of $13.7 million for internal-use software and website development costs and purchases of software and equipment and $1.3 million paid to acquire the rights to distribute certain digital content in perpetuity, partially offset by $2.5 million of cash received during the six months ended June 30, 2019 from escrowed funds related to the Sale of Webdam.

Cash provided by investing activities in the six months ended June 30, 2018 was $2.2 million, consisting primarily of cash received related to the Sale of Webdam, of approximately $42.4 million, which was partially offset by capital expenditures of $23.1 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 obligations related to the 2017 acquisition of Flashstock and $1.2 million paid to acquire the rights to distribute certain digital content in perpetuity.

Financing Activities

Cash used in financing activities in the six months ended June 30, 2019 was $5.0 million, consisting primarily of $5.2 million, which was paid in settlement of tax withholding obligations related to employee stock-based compensation awards. These amounts were partially offset by proceeds of approximately $0.2 million from the issuance of common stock in connection with the exercise of stock options.

Cash used in financing activities in the six months ended June 30, 2018 was $3.1 million, consisting primarily of $5.0 million which was paid in settlement of tax withholding obligations related to employee stock-based compensation awards and was partially offset by approximately $1.9 million of proceeds from the issuance of common stock in connection with the exercise of stock options.

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Contractual Obligations and Commitments

We lease real estate under operating lease agreements that expire on various dates during the period from 2019 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 $64.8 million. We are also party to a letter of credit as a security deposit for this leased facility, which was increased to $2.6 million in January 2016 in connection with an amendment of the lease. As of June 30, 2019, the letter of credit is 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 June 30, 2019.

Additionally, as of June 30, 2019, aggregate undiscounted future minimum lease payments under other operating leases are approximately $10.8 million.

We enter into unconditional purchase obligations related to contracts for cloud-based services, infrastructure and other business services as well as minimum royalty guarantees in connection with certain content licenses. As of June 30, 2019, our guaranteed royalty payments and unconditional purchase obligations for the remainder of 2019 and for the fiscal years ending December 31, 2020, 2021 and 2022 were approximately $15.5 million, $29.1 million, $12.5 million and $3.8 million, respectively.

Off-Balance Sheet Arrangements

As of June 30, 2019, 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.

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% for both the six months ended June 30, 2019 and 2018. 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 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 six months ended June 30, 2019, we estimate that a 10% change in the exchange rate of the U.S. dollar against all foreign currency denominated revenues would result in an approximately 3% impact on our revenue.

We have established foreign subsidiaries in various countries and have concluded that the functional currency of these entities is generally the local currency. Business transacted in currencies other than each entity’s functional currency results in transactional gains and losses. Translation adjustments resulting from converting the foreign subsidiaries’ financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive loss in stockholders’ equity. We do not currently enter into derivatives or other financial instruments in order to hedge our foreign currency exchange risk, but we may do so in the future.

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



	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
	U.S. Dollars		Originating Currency		U.S. Dollars		Originating Currency		U.S. Dollars		Originating Currency		U.S. Dollars		Originating Currency
Euro	$	33,460	€	29,467	$	29,731	€	24,950	$	66,535	€	58,138	$	61,114	€	50,496
British pounds	11,918		£	9,191	12,000		£	8,823	24,032		£	18,447	25,775		£	18,729
All other non-U.S. currencies⁽¹⁾	11,752				10,953				23,514				21,744
Total foreign currency	57,130				52,684				114,081				108,633

U.S. dollar	104,611				103,900				210,992				200,970
Total revenue	$	161,741			$	156,584			$	325,073			$	309,603


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

Interest Rate Fluctuation Risk

Our cash and cash equivalents consist of cash and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. The fair value of our cash and cash equivalents is not particularly sensitive to interest rate changes.

We did not have any long-term borrowings as of June 30, 2019.

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.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. However, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objective.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2019, our Chief Executive Officer and Interim 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.

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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.

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 Form 10-K, which could materially affect our business, financial condition or future results. During the three months ended June 30, 2019, there were no material changes to these risk factors as described in our 2018 Form 10-K.

Item 6. Exhibits.

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

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EXHIBIT INDEX



Exhibit
Number		Exhibit Description
10.1		Separation Agreement and General Release, dated June 22, 2019, between the Company and Steven Berns (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 3, 2019 (File No. 001-35669))
10.2		Employment Agreement, dated August 5, 2019, by and between Steven Ciardiello and Shutterstock, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed August 6, 2019 (File No. 001-35669)
31.1#		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2#		Certification of 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

______________________________________

# 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: August 6, 2019	By:	/s/ Jonathan Oringer
		Jonathan Oringer
		Chief Executive Officer
		(Principal Executive Officer)

Dated: August 6, 2019	By:	/s/ Steven Ciardiello
		Steven Ciardiello
		Interim Chief Financial Officer and Chief Accounting Officer
		(Principal Financial Officer)

Exhibit

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Jonathan Oringer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Shutterstock, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: August 6, 2019	By:	/s/ Jonathan Oringer
		Jonathan Oringer
		Chief Executive Officer
		(Principal Executive Officer)

Exhibit

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Steven Ciardiello, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Shutterstock, Inc.;

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: August 6, 2019	By:	/s/ Steven Ciardiello
		Steven Ciardiello
		Interim Chief Financial Officer and Chief Accounting Officer
		(Principal Financial Officer)

Exhibit

EXHIBIT 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Shutterstock, Inc., for the quarterly period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jonathan Oringer, as Chief Executive Officer of Shutterstock, Inc., hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Shutterstock, Inc.



Date: August 6, 2019	By:	/s/ Jonathan Oringer
		Jonathan Oringer
		Chief Executive Officer
		(Principal Executive Officer)

In connection with the Quarterly Report on Form 10-Q of Shutterstock, Inc., for the quarterly period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven Ciardiello, as Interim Chief Financial Officer and Chief Accounting Officer of Shutterstock, Inc., hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Shutterstock, Inc.



Date: August 6, 2019	By:	/s/ Steven Ciardiello
		Steven Ciardiello
		Interim Chief Financial Officer and Chief Accounting Officer
		(Principal Financial Officer)