Shutterstock, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under 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, without limitation, 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 December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management assessed our internal control over financial reporting as of December 31, 2020. Management based its assessment on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2020. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of the audit, has issued a report on the effectiveness of our internal control over financial reporting as of December 31, 2020, which begins on page F-2 of this Annual Report on Form 10-K. 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 three months ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on Controls Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. The design of a control system must reflect that there are resource constraints, and the benefits of controls must be considered relative to their costs. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Item 9B. Other Information. None. 63 Table of Contents PART III Item 10. Directors, Officers and Corporate Governance The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC, within 120 days after the end of the fiscal year ended December 31, 2020. We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer and our principal financial and accounting officer. The Code of Business Conduct and Ethics is available on our investor relations website (investor.shutterstock.com) in the “Corporate Governance” section. We will post any amendments to, or waivers from, a provision of this Code of Business Conduct and Ethics by posting such information on our website, at the address and location specified above. Item 11. Executive Compensation The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC, within 120 days after the end of the fiscal year ended December 31, 2020. Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC, within 120 days after the end of the fiscal year ended December 31, 2020. Item 13. Certain Relationships And Related Transactions, and Director Independence The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC, within 120 days after the end of the fiscal year ended December 31, 2020. Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC, within 120 days after the end of the fiscal year ended December 31, 2020. 64 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are included as part of this Annual Report on Form 10-K: (1) Financial Statements Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Comprehensive Income F-6 Consolidated Statements of Stockholders’ Equity F-7 Consolidated Statements of Cash Flows F- 8 Notes to Consolidated Financial Statements F-9 (2) Financial Statement Schedules Financial statement schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits See the Exhibit Index, which immediately precedes the signature page of this Annual Report on Form 10-K. Item 16. Form 10-K Summary. None. Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Shutterstock, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Shutterstock, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Changes in Accounting Principles As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. F-2 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition As described in Notes 1 and 8 to the consolidated financial statements, the majority of the Company’s revenue is earned from the license of content. Content licenses are generally purchased on a monthly or annual basis, whereby a customer pays for a predetermined quantity of content that may be downloaded over a specific period of time, or, on a transactional basis, whereby a customer pays for individual content licenses at the time of download. The Company recognizes revenue upon the satisfaction of performance obligations, which generally occurs when content is downloaded by a customer. The Company recognizes revenue on both its subscription-based and transaction-based products when content is downloaded, at which time the license is provided. For the year ended December 31, 2020, the Company’s total revenue was $666.7 million. The principal considerations for our determination that performing procedures relating to revenue recognition is a critical audit matter are the significant audit effort in performing procedures and evaluating audit evidence related to content license arrangements and customer download activity. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the completeness, accuracy and existence of revenue recognized. These procedures also included, among others, evaluating the completeness, accuracy and existence of revenue recognized on a sample basis by inspecting content license arrangements and evaluating the appropriateness of the revenue recognized based on the terms of each arrangement and customer download activity. /s/ PricewaterhouseCoopers LLP New York, New York February 11, 2021 We have served as the Company’s auditor since 2011. F-3 Table of Contents SHUTTERSTOCK, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value amount) December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 428,574 $ 303,261 Accounts receivable, net of allowance of $ 4,942 and $ 3,579 43,846 47,016 Prepaid expenses and other current assets 16,650 26,703 Total current assets 489,070 376,980 Property and equipment, net 50,906 58,834 Right-of-use assets 39,552 45,453 Intangible assets, net 25,765 26,669 Goodwill 89,413 88,974 Deferred tax assets, net 13,566 14,387 Other assets 21,372 19,215 Total assets $ 729,644 $ 630,512 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,442 $ 6,104 Accrued expenses 67,909 53,864 Contributor royalties payable 26,336 25,193 Deferred revenue 149,843 141,922 Other current liabilities 10,399 18,811 Total current liabilities 256,929 245,894 Lease liabilities 41,620 47,313 Other non-current liabilities 9,170 9,160 Total liabilities 307,719 302,367 Commitments and contingencies (Note 16) Stockholders’ equity: Common stock, $ 0.01 par value; 200,000 shares authorized; 38,803 and 38,055 shares issued and 36,245 and 35,497 shares outstanding as of December 31, 2020 and December 31, 2019, respectively 389 381 Additional paid-in capital 360,939 312,824 Treasury stock, at cost; 2,558 shares as of December 31, 2020 and December 31, 2019 ( 100,027 ) ( 100,027 ) Accumulated other comprehensive loss ( 7,681 ) ( 6,220 ) Retained earnings 168,305 121,187 Total stockholders’ equity 421,925 328,145 Total liabilities and stockholders’ equity $ 729,644 $ 630,512 See accompanying notes to consolidated financial statements F-4 Table of Contents SHUTTERSTOCK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, 2020 2019 2018 Revenue $ 666,686 $ 650,523 $ 623,250 Operating expenses: Cost of revenue 259,573 278,176 267,671 Sales and marketing 159,241 181,730 166,448 Product development 46,038 57,216 58,897 General and administrative 116,568 113,246 97,782 Total operating expenses 581,420 630,368 590,798 Income from operations 85,266 20,155 32,452 Gain on Sale of Webdam — — 38,613 Other income / (expense), net 4,257 4,761 ( 4,952 ) Income before income taxes 89,523 24,916 66,113 Provision for income taxes 17,757 4,808 11,426 Net income $ 71,766 $ 20,108 $ 54,687 Earnings per share: Basic $ 2.00 $ 0.57 $ 1.57 Diluted $ 1.97 $ 0.57 $ 1.54 Weighted average shares outstanding: Basic 35,844 35,285 34,935 Diluted 36,369 35,581 35,420 See accompanying notes to consolidated financial statements F-5 Table of Contents SHUTTERSTOCK, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2020 2019 2018 Net income $ 71,766 $ 20,108 $ 54,687 Foreign currency translation (loss) / gain ( 1,461 ) 251 ( 2,914 ) Other comprehensive (loss) / income ( 1,461 ) 251 ( 2,914 ) Comprehensive income $ 70,305 $ 20,359 $ 51,773 See accompanying notes to consolidated financial statements F-6 Table of Contents SHUTTERSTOCK, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Common Stock Treasury Stock Shares Amount Shares Amount Total Balance at December 31, 2017 37,270 $ 373 2,558 $ ( 100,027 ) $ 272,657 $ ( 3,557 ) $ 145,139 $ 314,585 Cumulative Effect of Accounting Change (See Note 1) — — — — — — 6,178 6,178 Balance at January 1, 2018 37,270 $ 373 2,558 $ ( 100,027 ) $ 272,657 $ ( 3,557 ) $ 151,317 $ 320,763 Equity-based compensation — — — — 23,869 — — 23,869 Issuance of common stock in connection with employee stock option exercises and RSU vesting 498 5 — — 2,450 — — 2,455 Common shares withheld for settlement of taxes in connection with equity-based compensation ( 150 ) ( 2 ) — — ( 7,266 ) — — ( 7,268 ) Payment of Special Dividend — — — — — — ( 104,925 ) ( 104,925 ) Other comprehensive income — — — — — ( 2,914 ) — ( 2,914 ) Net income — — — — — — 54,687 54,687 Balance at December 31, 2018 37,618 376 2,558 ( 100,027 ) 291,710 ( 6,471 ) 101,079 286,667 Equity-based compensation — — — — 22,815 — — 22,815 Issuance of common stock in connection with employee stock option exercises and RSU vesting 601 6 — — 5,359 — — 5,365 Common shares withheld for settlement of taxes in connection with equity-based compensation ( 164 ) ( 1 ) — — ( 7,060 ) — — ( 7,061 ) Other comprehensive loss — — — — — 251 — 251 Net income — — — — — — 20,108 20,108 Balance at December 31, 2019 38,055 381 2,558 ( 100,027 ) 312,824 ( 6,220 ) 121,187 328,145 Cumulative Effect of Accounting Change (See Note 1) — — — — — — ( 247 ) ( 247 ) Balance at January 1, 2020 38,055 381 2,558 ( 100,027 ) 312,824 ( 6,220 ) 120,940 327,898 Equity-based compensation — — — — 28,309 — — 28,309 Issuance of common stock, net of issuance costs 516 5 — — 23,148 — — 23,153 Issuance of common stock in connection with employee stock option exercises and RSU vesting 351 4 — — 1,167 — — 1,171 Common shares withheld for settlement of taxes in connection with equity-based compensation ( 119 ) ( 1 ) — — ( 4,509 ) — — ( 4,510 ) Cash dividends paid — — — — — — ( 24,401 ) ( 24,401 ) Other comprehensive income — — — — — ( 1,461 ) — ( 1,461 ) Net income — — — — — — 71,766 71,766 Balance at December 31, 2020 38,803 $ 389 2,558 $ ( 100,027 ) $ 360,939 $ ( 7,681 ) $ 168,305 $ 421,925 See accompanying notes to consolidated financial statements F-7 Table of Contents SHUTTERSTOCK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2020 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 71,766 $ 20,108 $ 54,687 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41,359 49,915 45,652 Deferred taxes 1,019 ( 2,025 ) ( 6,270 ) Non-cash equity-based compensation 28,309 22,815 23,869 Gain on Sale of Webdam — — ( 38,613 ) Loss on impairment of long-term investment — — 5,881 Bad debt expense 2,580 84 1,175 Changes in operating assets and liabilities: Accounts receivable 513 ( 6,169 ) 2,641 Prepaid expenses and other current and non-current assets 9,775 4,246 113 Accounts payable and other current and non-current liabilities 8,587 8,360 6,388 Long-term incentives related to acquisitions ( 7,759 ) — — Contributor royalties payable 1,075 2,168 3,021 Deferred revenue 7,848 3,144 3,658 Net cash provided by operating activities $ 165,072 $ 102,646 $ 102,202 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 25,630 ) ( 26,081 ) ( 34,890 ) Business and asset acquisitions ( 1,850 ) — ( 845 ) Proceeds from Sale of Webdam, net — 2,500 41,804 Long term investments ( 5,000 ) — ( 15,000 ) Acquisition of content ( 2,970 ) ( 3,344 ) ( 3,838 ) Security deposit release / (payment) 140 ( 309 ) ( 58 ) Net cash used in investing activities $ ( 35,310 ) $ ( 27,234 ) $ ( 12,827 ) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock 23,153 — — Proceeds from exercise of stock options 1,171 5,365 2,454 Cash paid related to settlement of employee taxes related to RSU vesting ( 4,510 ) ( 7,061 ) ( 7,268 ) Payment of cash dividends ( 24,401 ) — ( 104,925 ) Net cash used in financing activities $ ( 4,587 ) $ ( 1,696 ) $ ( 109,739 ) Effect of foreign exchange rate changes on cash ( 2,475 ) ( 1,307 ) ( 2,212 ) Net increase / (decrease) in cash, cash equivalents and restricted cash 122,700 72,409 ( 22,576 ) Cash, cash equivalents and restricted cash, beginning of period 305,874 233,465 256,041 Cash, cash equivalents and restricted cash, end of period $ 428,574 $ 305,874 $ 233,465 Supplemental Disclosure of Cash Information: Cash paid for income taxes $ 8,751 $ 1,902 $ 580 See accompanying notes to consolidated financial statements F-8 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Operations and Significant Accounting Policies Description of Business Shutterstock (the “Company” or “Shutterstock”) is a leading creative platform offering full-service solutions, high-quality content, and tools for brands, businesses and media companies. The Company’s platform brings together users and contributors of content by providing readily-searchable content that our customers pay to license and by compensating contributors as their content is licensed. The content licensed by the Company’s customers includes: • Images - consisting of photographs, vectors and illustrations. Images are typically used in visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and other similar uses. • Footage - consisting of video clips, premium footage filmed by industry experts and cinema grade video effects, available in HD and 4K formats. Footage is often integrated into websites, social media, marketing campaigns and cinematic productions. • Music - consisting of high-quality music tracks and sound effects, which are often used to complement images and footage. • 3D Models - following the Company’s acquisition of TurboSquid, Inc. on February 1, 2021, Shutterstock now offer 3D models, used in industries such as advertising, media & video production, gaming, retail, education, design and architecture. See Note 17 Subsequent Events. 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”). Principles of Consolidation and Basis of Presentation The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain immaterial changes in presentation have been made to conform the prior period presentation to current period reporting. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements. Actual results could differ from those estimates. Such estimates include, but are not limited to, the determination of the allowance for doubtful accounts, the volume of expected unused licenses for our subscription-based products, the assessment of recoverability of property and equipment, the fair value of acquired goodwill and intangible assets, the amount of non-cash equity-based compensation, the assessment of recoverability of deferred tax assets, the measurement of income tax and contingent non-income tax liabilities and the determination of the incremental borrowing rate used to calculate the lease liability. F-9 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Concentration of Risk Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable balances. Cash and cash equivalents are held with financial institutions of high quality. Balances may exceed the amount of insurance provided on such deposits. The majority of the Company’s revenues are derived from customers who license content using electronic payments at the time of a transaction. The Company’s accounts receivable are primarily from enterprise customers who require invoicing. The Company performs initial and ongoing credit reviews on these customers, which involve consideration of the customers’ financial information, their location, and other factors to assess the customers’ ability to pay. The Company also performs ongoing financial condition evaluations for its existing customers. As of December 31, 2020 and 2019, no single customer accounted for or exceeded 10% of accounts receivable. Additionally, no single customer accounted for or exceeded 10% of revenue for the years ended December 31, 2020, 2019 or 2018. Cash, Cash Equivalents and Restricted Cash The following represents the Company’s cash, cash equivalents and restricted cash as of December 31, 2020 and 2019 (in thousands): As of December 31, 2020 As of December 31, 2019 Cash and cash equivalents $ 428,574 $ 303,261 Restricted cash — 2,613 Total cash, cash equivalents and restricted cash $ 428,574 $ 305,874 The Company’s cash and cash equivalents consist primarily of (i) cash on hand and bank deposits and (ii) money market accounts. As of March 31, 2020, the Company was no longer required to provide cash collateral for its letter of credit for its New York City headquarters, and, accordingly, these funds are no longer restricted. Restricted cash is included as a component of other assets on the Consolidated Balance Sheets. Fair Value Measurements The Company records its financial assets and liabilities at fair value. Fair value is determined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. Fair value is estimated by applying inputs which are classified into the following levels of a three-tier hierarchy as follows: Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2- inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and Level 3 - unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions regarding what market participants would use in pricing. Accounts Receivable and Allowance for Doubtful Accounts The Company’s accounts receivable consists of customer obligations due under normal trade terms, carried at their face value less an allowance for doubtful accounts, if required. The Company determines its allowance for doubtful accounts based on an evaluation of (i) the aging of its accounts receivable considering historical receivables loss rates, (ii) on a customer-by-customer basis, where appropriate, and (iii) the economic environments in which the Company operates. Historically, the Company used an incurred loss model to calculate its allowance for doubtful accounts. Upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”) on January 1, 2020, the Company shifted to a current expected credit loss model. F-10 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the changes in the Company’s allowance for doubtful accounts (in thousands): Year Ended December 31, 2020 2019 2018 Balance, beginning of period $ 3,579 $ 4,697 $ 4,088 Add: bad debt expense 2,580 84 1,175 Less: write-offs, net of recoveries and other adjustments 1 ( 1,217 ) ( 1,202 ) ( 566 ) Balance, end of period $ 4,942 $ 3,579 $ 4,697 1 - Other adjustments includes the adoption of ASU 2016-13, which increased the allowance for doubtful accounts by $ 0.3 M. 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 December 31, 2020 and December 31, 2019, the Company’s combined allowance for chargebacks and sales refunds was $ 0.5 million, and $ 0.3 million, respectively, which is included as a component of other current liabilities on the Consolidated Balance Sheets. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the related assets. Generally, the useful lives are as follows: Equipment 3 years Furniture and fixtures 7 years Software 3 years Leasehold improvements Shorter of expected useful life or lease term Capitalized Internal Use Software The Company capitalizes the qualifying costs of computer software developed for internal use, which are incurred during the application development stage, and amortizes them over the software’s estimated useful life. Costs incurred in the preliminary and post-implementation stages of the Company’s products are expensed as incurred. The amounts capitalized include employee’s payroll and payroll-related costs directly associated with the development activities as well as external direct costs of services used in developing internal-use software. The Company’s policy is to amortize capitalized costs using the straight-line method over the estimated useful life, which is currently three years , beginning when the software is substantially complete and ready for its intended use. Impairment of Long-Lived Assets Long-lived assets, inclusive of definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying value of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying value or the fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. There were no long-lived asset impairment charges in 2020, 2019 or 2018. F-11 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Goodwill and Intangible Assets Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually on October 1 of each fiscal year or more frequently if events occur or circumstances exist that indicate that the fair value of a reporting unit may be below its carrying value. In 2020, the Company’s goodwill balance was allocated to a single reporting unit. Since inception through December 31, 2020, the Company has not had any impairment of goodwill. Revenue Recognition The majority of the Company’s revenue is earned from the license of content. Content licenses are generally purchased on a monthly or annual basis, whereby a customer pays for a predetermined quantity of content that may be downloaded over a specific period of time, or, on a transactional basis, whereby a customer pays for individual content licenses at the time of download. Prior to the Sale of Webdam, the Company also earned revenue from licensing hosted software services through Webdam’s cloud-based tools for businesses, which were purchased as part of a subscription. The Company recognizes revenue upon the satisfaction of performance obligations, which generally occurs when (i) content is downloaded by a customer or (ii) hosted software services are provisioned and available to a customer. For content licenses, the Company recognizes revenue on both its subscription-based and transaction-based products when content is downloaded, at which time the license is provided. In addition, the Company estimates expected unused licenses for subscription-based products and recognizes the revenue associated with the unused licenses as digital content is downloaded and licenses are obtained for such content by the customer during the subscription period. The estimate of unused licenses is based on historical download activity and future changes in the estimate could impact the timing of revenue recognition of the Company’s subscription products. 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 electronic payments with a credit card at the time of the 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. 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 Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“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 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. Cost of Revenue The Company’s cost of revenue includes royalties paid to contributors, credit card processing fees, content reviewer costs, customer service expenses, infrastructure and hosting costs, content personnel salaries, non-cash equity-based compensation, amortization of content and technology intangible assets, and depreciation of network equipment, which are the direct costs related to providing content and service to customers. Additionally, the Company includes an allocation of overhead costs primarily related to payroll, insurance, and facilities expenses based on headcount. F-12 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Contributor Royalties and Internal Sales Commissions The Company expenses contributor royalties in the period a customer download occurs and includes the corresponding contributor royalties in cost of revenue. Contributor royalties are generally paid monthly. The Company advances certain contributor royalties which are initially deferred and expensed based on the contractual royalty rate at the time of customer download or when the Company determines future recovery is not probable. For the years ended December 31, 2020, 2019 and 2018, the Company deferred $ 3.6 million, $ 8.4 million and $ 6.2 million, respectively, in royalty advances and amortized $ 5.5 million, $ 9.2 million and $ 6.1 million, respectively, in royalty advance expense which is included in cost of revenue. As of December 31, 2020, the balance of deferred contributor royalties was not significant. As of December 31, 2019, the Company has deferred contributor royalties of $ 1.9 million, which is included in prepaid expenses and other current assets in the Consolidated Balance Sheets. Internal sales commissions are generally paid in the month following collection or invoicing of the commissioned receivable and is reported in sales and marketing expense on the Consolidated Statements of Operations. The Company expenses contract acquisition costs, including internal sales commissions, as incurred, to the extent that the amortization period would otherwise be one year or less. Product Development The Company expenses product development costs as incurred, except for costs that are capitalized for certain internal software development projects. Product development costs are primarily comprised of development personnel salaries, non-cash equity-based compensation, software and other IT equipment costs as well as allocated facility costs and related overhead. Advertising Costs The Company expenses the cost of advertising and promoting its products as incurred. Such costs totaled $ 81.2 million, $ 102.3 million and $ 91.5 million for the years ended December 31, 2020, 2019 and 2018, respectively, which are included in sales and marketing expense in the Consolidated Statements of Operations. Leasing The Company records rent expense on a straight-line basis over the term of the related lease. In accordance with FASB ASU 2016-02, Leases (Topic 842), as amended (“ASC 842”), which the Company adopted effective January 1, 2019, 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. F-13 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Equity-Based Compensation The Company grants Restricted Stock Units, Performance-based Restricted Stock Units (“PRSUs” and, collectively with Restricted Stock Units, “RSUs”) and Stock Options to directors and officers and certain other employees of the Company. All awards are granted pursuant to the 2012 Omnibus Equity Incentive Plan (the “2012 Plan”), which is discussed further in Note 9, Equity-Based Compensation. The Company measures and recognizes non-cash equity-based compensation expense for all stock-based awards granted to employees based on estimated fair values. The value portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period. Forfeitures are accounted for as they occur. For awards with a change of control condition, an evaluation is made at the grant date and future periods as to the likelihood of the condition being met. Compensation expense is adjusted in future periods for subsequent changes in the expected outcome of the change of control conditions until the vesting date. Compensation expense related to awards with a market condition is recognized over the requisite service period regardless of the achievement of the market condition. Compensation expense related to awards with a performance condition is recognized over the requisite service period based on the expected levels of achievement. To the extent that the expected levels of achievement change, stock-based compensation expense 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. The Company uses the closing price of the Company’s common stock on the date of grant to determine the fair value of RSUs. The Company uses the Black Scholes option pricing model, to determine the fair value of stock options on the date of grant. The Monte Carlo simulation model is used if the award has a market condition. The determination of the grant date fair value using an option-pricing model and simulation model requires judgment as well as assumptions regarding a number of other complex and subjective variables. These variables include the Company’s closing market price at the grant date, the expected stock price volatility over the expected term of the awards, awards’ exercise and cancellation behaviors, risk-free interest rates, and expected dividends, which are estimated as follows: • Fair Value of Common Stock. The grant date fair value for stock-based awards is based on the closing price of the Company’s common stock on the NYSE on the date of grant and fair value for all other purposes related to stock-based awards shall be the closing price of the Company’s common stock on the NYSE on the relevant date. • Expected Term. The expected term is estimated using the simplified method allowed under Securities and Exchange Commission (“SEC”) guidance. In certain cases for market based awards, the Company’s expected term is based on a combination of historical data and estimates of the period of time the award will be outstanding. • Volatility. The volatility is estimated based on historical price volatility of the Company’s common stock. • Risk-free Interest Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of each award group. • Dividend Yield. The Company determines the dividend yield based on management’s expectations of future dividends. The Company has historically used an expected dividend yield of zero for options granted. If any of the assumptions used in the Black-Scholes pricing model or Monte Carlo simulation model changes significantly, the fair value for future awards may differ materially compared with the awards granted previously. The awards granted pursuant to the 2012 Plan are subject to a time-based vesting requirement and certain award grants may also include market based or performance based vesting conditions. While each PRSU corresponds to one target share of the Company’s stock, 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. Stock option awards granted under the 2012 Plan vest over three or four years while the majority of the restricted stock units granted under the 2012 Plan vest over three years . Employee Benefit Plans The Company offers a 401(k) defined contribution plan and provides for discretionary employer matching contributions. All matching contributions are recognized as an expense in the Statement of Operations, as incurred. The Company recorded employer matching contributions of $ 3.8 million, $ 3.7 million and $ 3.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. F-14 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Income Taxes The Company’s income tax expense includes U.S. (federal and state) and foreign income taxes. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. The Company accounts for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. The Company records an income tax liability for the difference, if any, between the benefit recognized and measured and the tax position taken or expected to be taken on the Company’s tax returns. To the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The reserves are adjusted in light of changing facts and circumstances, such as the outcomes of tax audits or lapses in statutes of limitations. Any reserve for uncertain tax provisions and related penalties and interest is included in the income tax provision. On a quarterly basis, the Company assesses the realizability of deferred tax assets, based on the available evidence including a history of taxable income, estimates of future taxable income and planning strategies and a valuation allowance is recorded to the extent that it is not more likely than not that the deferred tax assets will be realized. Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities. In the event that actual results differ from these estimates, the Company will adjust these estimates in future periods which may result in a change in the effective tax rate in a future period. Except as required under U.S. tax laws, the Company does not provide for U.S. taxes on the undistributed earnings and profits of its foreign subsidiaries. With the enactment of the TCJA, the Company is required to treat the undistributed earnings and profits of its foreign subsidiaries accumulated through a measurement period that should not extend more than one year beyond the date of the enactment of the TCJA as if they were repatriated to the U.S., and pay a current U.S. tax amount as a result of such “deemed” repatriation. The Company has not recorded any provision for potential deferred U.S. income taxes or foreign withholding taxes that otherwise may be payable if it were to repatriate such earnings, since the Company does not intend to repatriate such amounts. In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the TCJA. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. In the first quarter of 2018, the Company elected to treat any potential GILTI inclusions as a period cost. The Company continues to assess the impacts of the TCJA on future fiscal years and is monitoring the Internal Revenue Service guidance intended to interpret the provisions of the TCJA. Other Non-income Taxes The Company is subject to certain non-income taxes, including value added taxes, sales taxes and royalty withholding taxes. Where appropriate, the Company has made accruals for these taxes, which are reflected in the Company’s consolidated financial statements. These accruals are subject to statute of limitations requirements and review by governmental authorities. Treasury Stock The Company accounts for treasury stock under the cost method and is included as a component of stockholders’ equity. Treasury stock held by the Company may be reissued in the future. The Company’s policy is to account for reissued shares as a reduction of Treasury stock on a first-in, first-out basis. Net Income Per Share Basic net income per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Any potential issuance of common shares, including those that are contingent and do not participate in dividends, is excluded from basic weighted average number of common shares outstanding. Diluted net income per share is computed by dividing the net income attributable to common stockholders by the weighted average common shares outstanding and all potential common shares, if they are dilutive. F-15 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Reportable Segments For the year ended December 31, 2020, the Company has identified one operating segment, which has also been determined to be the Company’s primary reportable business segment. Prior to the Sale of Webdam on February 26, 2018, the Company had also identified a non-reportable segment which was classified in the Other Category, included the Company’s digital asset management operating segment and failed to meet the quantitative or qualitative thresholds for separate segment reporting. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Contingent Consideration The Company records a liability for contingent consideration at the date of a business combination and reassesses the fair value of the liability each period until it is settled. Upon settlement of these liabilities, the portion of the contingent consideration payment that is attributable to the initial amount recorded as part of the business combination is classified as a cash flow from financing activities and the portion of the settlement that is attributable to subsequent changes in the fair value of the contingent consideration is classified as a cash flow from operating activities in the Consolidated Statement of Cash Flows. Foreign Currency The functional currency of the Company’s foreign subsidiaries is generally the respective local currency. Monetary assets and liabilities that are denominated in currencies other than each entity’s functional currency are remeasured into the functional currency at the period-end exchange rates and result in transactional gains and losses. The net impact of foreign currency transactional gains and losses on the Company’s results of operations were gains of $ 2.4 million and $ 0.2 million in 2020 and 2019, respectively, and a loss of $ 2.2 million in 2018. Translation adjustments resulting from converting the foreign subsidiaries financial statements into U.S. dollars using the period-end exchange rates for balance sheet accounts and the period average exchange rate for the Statements of Operations are recorded as a component of accumulated other comprehensive income / (loss) within stockholders’ equity. Recently Adopted Accounting Standard Updates In June 2016, the FASB issued ASU 2016-13, which as amended, replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. The ASU is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Adoption of this guidance was required, prospectively, for annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Company adopted ASU 2016-13, as amended, effective January 1, 2020 using the modified retrospective method and recorded a cumulative-effect adjustment of $ 0.2 million, net of tax, in retained earnings as of January 1, 2020. In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. Adoption of this guidance was required for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-13, effective January 1, 2020. The impact of adoption of this standard on the consolidated financial statements, including accounting policies, processes and systems, was not material. In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting For Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with the requirements for capitalizing implementation costs incurred for an internal-use software license. Adoption of this guidance was required for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and early adoption is permitted. Entities are permitted to choose to adopt the new guidance (1) prospectively for eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company adopted ASU 2018-15 on a prospective basis, effective January 1, 2020. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements. F-16 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Recently Issued Accounting Standard Updates In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes (“ASU-2019-12”). ASU 2019-12 eliminates certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes, enacted changes in tax laws or rates and clarifies the accounting transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Adoption of ASU 2019-12 is not expected to have a material effect on the Company’s consolidated financial statements. The Company is finalizing its evaluation of the impact of this new standard on the consolidated financial statements. (2) Fair Value Measurements and Other Long-term Investments Fair Value Measurements The Company had no assets or liabilities requiring fair value hierarchy disclosures as of December 31, 2020 and 2019, except as noted below. Money Market Accounts Cash equivalents include money market accounts and are classified as a level 1 measurement based on quoted prices in active markets for identical assets that the reporting entity can access at the measurement date. As of December 31, 2020, the Company had a balance of $ 250.0 million in money market accounts. The Company did no t have any money market accounts as of December 31, 2019. Other Fair Value Measurements The carrying amounts of cash, accounts receivable, restricted cash, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The Company’s non-financial assets, which include property and equipment, intangible assets and goodwill, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and the Company is required to evaluate the non-financial asset for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the fair value. Long-Term Investments As of December 31, 2020 and 2019, the Company’s Long-Term Investments totaled $ 20.0 million and $ 15.0 million, respectively, which is reported within other assets on the Consolidated Balance Sheets. The Company uses the measurement alternative for equity investments with no readily determinable fair value and are reported at cost, adjusted for impairments or any observable price changes in ordinary transactions with identical or similar investments. On a quarterly basis, the Company evaluates the carrying value of its Long-Term Investments for impairment, which includes an assessment of revenue growth, earnings performance, working capital and the general market conditions. As of December 31, 2020, no adjustments to the carrying values of the Company’s Long-Term Investments were identified as a result of this assessment. Changes in performance negatively impacting operating results and cash flows of these investments could result in the Company recording an impairment charge in future periods. Investment in ZCool Technologies Limited (“ZCool”) In 2018, the Company invested $ 15.0 million in convertible preferred shares issued by ZCool (the “Preferred Shares”), which is equivalent to a 25 % fully diluted equity ownership interest. ZCool’s primary business is the operation of an e-commerce platform in China whereby customers can pay to license content contributed by creative professionals. ZCool and its affiliates have been the exclusive distributor of Shutterstock content in China since 2014. ZCool is a variable interest entity that is not consolidated because the Company is not the primary beneficiary. The Preferred Shares are not deemed to be in-substance common stock and are accounted for using the measurement alternative for equity investments with no readily determinable fair value. F-17 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other Equity Investments In 2020, the Company invested $ 5.0 million in preferred shares of an entity with a creative production and analytics platform. These preferred shares do not have a readily determinable fair value, and give the Company less than a 2 % fully diluted ownership interest. Long-term Lending Facility and Note Receivable In 2016, as amended in 2017, the Company entered into a multi-part investment with SilverHub Media Limited (“SHM”), an unrelated third-party contributor, which resulted in the Company investing $ 5.9 million into SHM. During 2018, the Company determined that its investment in SHM experienced an other-than-temporary impairment and therefore, the Company recorded a $ 5.9 million impairment charge in order to reduce the fair value of the Company’s investment in SHM to zero . This charge was recorded in Other income / (expense), net in the Consolidated Statements of Operations. (3) Sale of Webdam 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 year ended December 31, 2019, from the release of escrowed funds. During 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): December 31, 2020 2019 Computer equipment and software $ 193,141 $ 165,950 Furniture and fixtures 10,235 10,199 Leasehold improvements 19,382 19,203 Property and equipment 222,758 195,352 Less: accumulated depreciation ( 171,852 ) ( 136,518 ) Property and equipment, net $ 50,906 $ 58,834 Depreciation and amortization expense related to property and equipment amounted to $ 35.6 million, $ 42.9 million and $ 40.1 million, for the years ended December 31, 2020, 2019 and 2018, respectively. Of these amounts, $ 31.6 million, $ 38.1 million and $ 34.0 million are included in cost of revenue for the years ended December 31, 2020, 2019 and 2018, respectively, and $ 4.0 million, $ 4.8 million and $ 6.1 million are included in general and administrative expense for the years ended December 31, 2020, 2019 and 2018, respectively. Depreciation and amortization expense is included in cost of revenue and general and administrative expense based on the nature of the asset. There was no loss on disposal for the years ended December 31, 2020, 2019 and 2018, respectively. Capitalized Internal-Use Software The Company capitalized costs related to the development of internal-use software of $ 25.1 million, $ 23.6 million and $ 27.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Capitalized amounts are included as a component of property and equipment under computer equipment and software. During 2020, 2019 and 2018, the Company invested significantly in its product development and hosting infrastructure to enhance its customer experience and increase the efficiency with which management deploys new products and features. The portion of total depreciation expense related to capitalized internal-use software was $ 28.9 million, $ 30.3 million and $ 24.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Depreciation expense related to capitalized internal-use software is included in cost of revenue in the Consolidated Statement of Operations. F-18 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2020 and 2019, the Company had capitalized internal-use software of $ 38.0 million and $ 41.8 million, respectively, net of accumulated depreciation, which was included in property and equipment, net. (5) Goodwill and Intangible Assets Goodwill The following table summarizes the changes in the Company’s goodwill balance for the year ended December 31, 2020 (in thousands): Goodwill Balance as of December 31, 2019 $ 88,974 Foreign currency translation adjustment 439 Balance as of December 31, 2020 $ 89,413 In 2020, the Company’s goodwill balance was allocated to a single reporting unit. The Company performed its annual goodwill assessment as of October 1, 2020 and concluded that the fair value of its reporting unit was greater than its carrying amount, and therefore, no adjustment to the carrying value of goodwill was necessary. The Company utilized a qualitative assessment of its content business reporting unit to determine whether a quantitative assessment was necessary and determined there were no indicators of potential impairment. There were no impairments of goodwill in any of the periods presented in the consolidated financial statements. Intangible Assets Intangible assets, all of which are subject to amortization, consist of the following as of December 31, 2020 and 2019 (in thousands): As of December 31, 2020 As of December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Life (Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships $ 18,132 $ ( 11,032 ) $ 7,100 9 $ 17,729 $ ( 9,294 ) $ 8,435 Trade name 6,669 ( 6,328 ) 341 7 6,517 ( 5,941 ) 576 Developed technology 6,930 ( 5,039 ) 1,891 4 4,841 ( 4,226 ) 615 Contributor content 26,669 ( 10,378 ) 16,291 9 23,510 ( 6,626 ) 16,884 Patents 259 ( 117 ) 142 18 259 ( 100 ) 159 Total $ 58,659 $ ( 32,894 ) $ 25,765 $ 52,856 $ ( 26,187 ) $ 26,669 Amortization expense related to the intangible assets was $ 5.8 million, $ 7.0 million and $ 5.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Of these amounts, $ 3.4 million, $ 2.3 million and $ 1.7 million are included in cost of revenue for the years ended December 31, 2020, 2019 and 2018, respectively, and $ 2.4 million, $ 4.7 million and $ 3.8 million are included in general and administrative expense for the years ended December 31, 2020, 2019 and 2018, respectively. The Company determined that there was no indication of impairment for the intangible assets for all periods presented. Estimated amortization expense for the next five years is: $ 5.7 million in 2021, $ 5.4 million in 2022, $ 5.1 million in 2023, $ 3.6 million in 2024, $ 2.1 million in 2025 and $ 3.9 million thereafter. F-19 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) Accrued Expenses Accrued expenses consisted of the following (in thousands): December 31, 2020 2019 Compensation $ 31,499 $ 20,776 Non-income taxes 17,164 15,332 Website hosting and marketing fees 9,991 8,657 Other expenses 9,255 9,099 Total accrued expenses $ 67,909 $ 53,864 (7) Stockholders’ Equity Common Stock The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the prior distribution rights of any outstanding preferred stock. The common stock has no preemptive or conversion rights or other subscription rights. The outstanding shares of common stock are fully paid and non-assessable. Under the amended and restated certificate of incorporation, which became effective upon completion of the IPO, the Company’s certificate of incorporation authorized 200,000,000 shares of $ 0.01 per share par value common stock. Preferred Stock Under the amended and restated certificate of incorporation, which became effective upon completion of the IPO, the Company’s Board of Directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock, $ 0.01 par value, in one or more series. The Board of Directors also has the authority to designate the rights, preferences, privileges and restrictions of each such series, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of Shutterstock without further action by the stockholders. The issuance of preferred stock with voting and conversion rights may also adversely affect the voting power of the holders of common stock. In certain circumstances, an issuance of preferred stock could have the effect of decreasing the market price of the common stock. As of December 31, 2020, the Company has no t issued and has no plans to issue any shares of preferred stock. 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 purchase an additional $ 100 million of its common stock. As of December 31, 2020, the Company has repurchased approximately 2,558,000 shares of its common stock under the share repurchase program at an average per-share cost of approximately $ 39.09 . As of December 31, 2020, there is $ 100 million of remaining authorization for purchases under the share repurchase program. During 2020, the Company did no t repurchase any shares under the share repurchase program. The Company expects to fund repurchases through a combination of cash on hand, cash generated by operations and future financing transactions, if appropriate. Accordingly, the share repurchase program is subject to the Company having available cash to fund repurchases. Under the share repurchase program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. F-20 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock Offering On August 14, 2020, the Company completed an offering (the “Stock Offering”), whereby 2,580,000 shares of its common stock were sold to the public at a price to the public of $ 48.50 per share. The Company sold 516,000 shares of common stock in the Stock Offering and the Company’s Founder and Executive Chairman of the Board sold 2,064,000 shares of common stock in the Stock Offering. The Company received net proceeds from the shares it sold, after deducting underwriting discounts and commissions and offering expenses payable by the Company, of approximately $ 23.2 million. The Company did not receive any proceeds from the shares sold by the Company’s Founder and Executive Chairman of the Board. Dividends On February 11, 2020, the Board of Directors approved the initiation of a quarterly cash dividend. The Company declared and paid cash dividends totaling $ 0.68 per share of common stock, or $ 24.4 million, during the year ended December 31, 2020. On January 12, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $ 0.21 per share of outstanding common stock payable on March 18, 2021 to stockholders of record at the close of business on March 4, 2021. Future declaration of dividends are subject to the final determination of the Board of Directors, and will depend on, among other things, the Company’s future financial condition, results of operations, capital requirements, capital expenditure requirements, contractual restrictions, anticipated cash needs, business prospects, provisions of applicable law and other factors the Board of Directors may deem relevant. On August 1, 2018, the Company’s Board of Directors declared a special cash dividend of $ 3.00 per share (the “Special Dividend”), which was paid on August 29, 2018 to stockholders of record at the close of business on August 15, 2018. The aggregate payment made in connection with the Special Dividend was $ 104.9 million. In connection with the Special Dividend, and in accordance with the terms of the Company’s Amended and Restated 2012 Omnibus Equity Incentive Plan (the “2012 Plan”), the Company adjusted outstanding equity awards in order to prevent dilution of such awards. Accordingly, the Company prevented dilution from the impact of the Special Dividend by adjusting the number of outstanding unvested RSUs and outstanding stock options, as well as the exercise price of such outstanding stock options, using a conversion ratio of 1.055 , which was determined using a ratio of the closing and opening stock price of the Company’s common stock immediately prior to, and on, the ex-dividend date (the “Special Dividend Adjustment”). (8) Revenue The Company distributes its content offerings through two primary channels: E-commerce: The majority of the Company’s customers license content directly through the Company’s self-service web properties. E-commerce customers have the flexibility to purchase a subscription-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 the Company’s standard or enhanced licenses, with additional licensing options available to meet customers’ individual needs. E-commerce customers typically pay the full amount of the purchase price in advance or at the time of license, generally with a credit card. Enterprise: The Company also has a base of customers with unique content, licensing and workflow needs. These customers benefit from communication with dedicated sales professionals, service and research teams which provide a number of tailored enhancements to their creative workflows including non-standard licensing rights, multi-seat access, ability to pay on credit terms, multi-brand licensing packages, increased indemnification protection and content licensed for use-cases outside of those available on the e-commerce platform. In addition to the Company’s content offerings, the Company has historically generated revenue through other channels: Other: The Company’s Other sales channel previously included revenue from Webdam’s digital asset management offerings which provided 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. F-21 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes the Company’s revenue by distribution channel for the years ended December 31, 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 E-commerce $ 412,521 $ 392,241 $ 365,730 Enterprise 254,165 258,282 254,809 Other (1) — — 2,711 Total Revenues $ 666,686 $ 650,523 $ 623,250 (1) As previously discussed in Note 3, 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 December 31, 2020 deferred revenue balance will be earned as content is downloaded or upon the expiration of subscription-based products, and nearly all is expected to be earned within the next twelve months. $ 136.8 million of total revenue recognized for the year ended December 31, 2020 was reflected in deferred revenue as of January 1, 2020. (9) Equity-Based Compensation The Company recognizes stock-based compensation expense for all share-based payment awards including employee stock options and RSUs granted under the 2012 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 line item included in the Company’s Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Cost of revenue $ 430 $ 220 $ 523 Sales and marketing 1,887 1,934 2,218 Product development 4,494 4,737 5,815 General and administrative 21,498 15,924 15,313 Total $ 28,309 $ 22,815 $ 23,869 F-22 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes non-cash equity-based compensation expense, net of forfeitures, by award type included in the Company’s Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Stock options $ 2,088 $ 5,721 $ 6,009 RSUs 26,221 17,094 17,860 Total $ 28,309 $ 22,815 $ 23,869 2012 Omnibus Equity Incentive Plan On October 10, 2012, the Company’s 2012 Plan became effective. The 2012 Plan provides for the grant of incentive stock options to Company employees, and for the grant of non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to employees, directors and consultants. The maximum aggregate number of shares that may be issued under the 2012 Plan was initially 6,750,000 shares of common stock. The number of shares available for issuance under the 2012 Plan will be increased annually commencing January 1, 2013 by an amount equal to the lesser of 1,500,000 shares of common stock, 3 % of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year, or such other amount as determined by the Company’s Board of Directors. Any awards issued under the 2012 Plan that are forfeited by the participant will become available for future grant under the 2012 Plan. The number of shares of common stock available under the 2012 Plan was automatically increased by approximately 1,065,000 and 1,052,000 shares on January 1, 2020 and 2019, respectively, pursuant to the automatic increase provisions of the 2012 Plan. Stock Option Awards The following is a summary of stock option awards and weighted average exercise price per option: Plan Options Weighted Average Exercise Price Options outstanding at December 31, 2019 989,485 $ 57.45 Options granted 53,022 42.96 Options exercised ( 33,755 ) 34.69 Options canceled or expired ( 31,719 ) 43.70 Options outstanding at December 31, 2020 977,033 $ 57.90 Options exercisable at December 31, 2020 334,199 $ 34.06 Intrinsic value of stock options is calculated as the excess of market price of the Company’s common stock over the strike price of the stock options, multiplied by the number of stock options. The intrinsic value of the Company’s stock options is as follows (in thousands): As of December 31, 2020 2019 Stock options outstanding $ 16,100 $ 4,000 Stock options exercisable $ 12,600 $ 3,000 Stock options vested and expected to vest $ 16,100 $ 4,000 The intrinsic value of stock options exercised for the years ended December 31, 2020, 2019 and 2018 was approximately $ 0.5 million, $ 1.1 million and $ 2.0 million, respectively. F-23 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following weighted average assumptions were used in the fair value calculation for the years ended December 31, 2020, 2019 and 2018: Year Ended December 31, 2020 2019 2018 Expected term (in years) 6.0 6.3 6.3 Volatility 43.8 % 45.4 % 47.8 % Risk-free interest rate 1.73 % 1.83 % 2.63 % Dividend yield — — — Valuation Data: Weighted average fair value per share granted $ 18.86 $ 18.05 $ 23.64 On April 24, 2014, the Company granted 500,000 stock options with a market-based condition to its Founder and Executive Chairman. The stock options have an exercise price of $ 80.94 per share and will not vest or become exercisable unless (i) the Founder and Executive Chairman remains continuously employed by the Company until the fifth anniversary of the date of grant and (ii) the average 90-day closing price of the Company’s common stock equals or exceeds $ 161.88 per share for any 90 consecutive calendar days during the period commencing on the fifth anniversary of the date of grant and ending on the tenth anniversary of the date of grant, inclusive provided that the Founder and Executive Chairman remains continuously employed by the Company until the date of satisfaction of such condition. The derived requisite service period was determined to be six years based on a valuation technique. The total fair value of the grant is $ 21.6 million and is being recognized over the derived requisite service period. In the event that the market condition remains unsatisfied upon completion of the requisite service period, no charge will be reversed. In conjunction with the Special Dividend Adjustment, the Company adjusted the number of stock options to approximately 527,000 from 500,000 and the exercise price of each option to $ 76.73 , from $ 80.94 pursuant to the anti-dilution provisions of the 2012 Plan. The market-based conditions required for vesting remain unchanged. As of December 31, 2020, the total unrecognized compensation charge related to 2012 Plan non-vested options is approximately $ 1.6 million, which is expected to be recognized through fiscal year 2023. Restricted Stock Units Awards (including PRSUs) The following table presents a summary of the Company’s RSUs activity for the year ended December 31, 2020: Plan RSUs Weighted Average Fair Value Non-vested balance at December 31, 2019 1,113,679 $ 45.03 Units granted 900,422 36.42 Units vested ( 317,240 ) 43.84 Units canceled or forfeited ( 288,838 ) 40.50 Non-vested balance at December 31, 2020 1,408,023 $ 40.72 Non-vested and deferred balance at December 31, 2020 1,452,245 $ 40.94 On April 24, 2014, the Company granted 100,000 restricted stock units with a market-based condition to its Founder and Executive Chairman. The restricted stock units will vest only if (i) the reporting person remains continuously employed by the Company until the fifth anniversary of the date of grant and (ii) the average 90-day closing price of the Company's common stock equals or exceeds $ 161.88 for any 90 consecutive calendar days during the period commencing on the fifth anniversary of the date of grant and ending on the tenth anniversary of the date of grant, inclusive; provided that the reporting person remains continuously employed by the Company until the date of satisfaction of such condition. The derived requisite service period was determined to be six years based on a valuation technique. The total fair value of the grant is $ 5.8 million and is being recognized over the derived requisite service period. In the event that the market condition remains unsatisfied upon completion F-24 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) of the requisite service period, no charge will be reversed. In conjunction with the Special Dividend Adjustment, the Company adjusted the number of restricted stock units to approximately 105,000 from 100,000 , pursuant to the anti-dilution provisions of the 2012 Plan. The market-based conditions required for vesting remain unchanged. As of December 31, 2020, the total unrecognized compensation charge related to the restricted stock units is approximately $ 30.0 million, which is expected to be recognized through fiscal 2023. (10) Other Income / (Expense), net The following table presents a summary of the Company’s other income / (expense) activity included in the accompanying Consolidated Statements of Operations (in thousands): Year Ended December 31, 2020 2019 2018 Foreign currency gain / (loss) $ 3,067 $ 540 $ ( 1,807 ) Impairment of a long-term investment asset — — ( 5,881 ) Interest income 1,190 4,221 2,736 Other income / (expense), net $ 4,257 $ 4,761 $ ( 4,952 ) (11) Income Taxes The Company’s geographical breakdown of its income / (loss) before income taxes is as follows (in thousands): Year Ended December 31, 2020 2019 2018 Domestic $ 83,255 $ 25,549 $ 68,596 Foreign 6,268 ( 633 ) ( 2,483 ) Income before income taxes $ 89,523 $ 24,916 $ 66,113 The following table summarizes the consolidated provision for income taxes (in thousands): Year Ended December 31, 2020 2019 2018 Current provision: Federal $ 11,287 $ 2,824 $ 7,670 State and local 2,294 1,127 4,800 Foreign 3,158 2,882 5,226 Deferred provision (benefit): Federal ( 1,147 ) ( 2,337 ) ( 2,901 ) State and local 149 ( 52 ) ( 164 ) Foreign 2,016 364 ( 3,205 ) Provision for income taxes $ 17,757 $ 4,808 $ 11,426 F-25 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The provision for income taxes differs from statutory income tax rate as follows: Year Ended December 31, 2020 2019 2018 U.S. income tax at federal statutory rate 21.0 % 21.0 % 21.0 % Tax credits ( 1.7 ) ( 12.6 ) ( 5.4 ) State and local taxes, net of federal benefit 1.5 1.7 1.9 Equity-based compensation 2.4 2.0 ( 0.4 ) Foreign rate differential 0.5 0.3 0.5 Foreign-derived intangible income deduction ( 6.0 ) ( 12.0 ) ( 3.7 ) Uncertain tax positions 1.0 12.4 3.6 Valuation allowance 0.9 3.9 — Transition tax related to TCJA — — ( 0.3 ) Non-deductible—other 0.2 2.6 0.1 Total provision for income taxes 19.8 % 19.3 % 17.3 % The tax effect of the Company’s temporary differences that give rise to deferred tax assets and liabilities are presented below (in thousands): Year Ended December 31, 2020 2019 Deferred tax assets: Non-cash equity-based compensation $ 11,508 $ 9,806 Intangible amortization 850 2,252 Non-income tax accruals 2,499 2,647 Lease liabilities 10,995 12,645 Other liabilities 5,804 6,508 Gross deferred tax assets 31,656 33,858 Valuation allowance ( 1,861 ) ( 965 ) Net deferred tax assets 29,795 32,893 Deferred tax liabilities: Right-of-use assets ( 8,557 ) ( 10,125 ) Depreciation and amortization ( 7,672 ) ( 8,381 ) Net deferred tax assets $ 13,566 $ 14,387 The non-cash equity-based compensation for the Company includes a deferred tax asset of $ 6.2 million associated with the performance-based grant of stock options and restricted stock units to the Company’s Founder and Executive Chairman. In addition, the $ 1.9 million valuation allowance relates to certain foreign net operating loss carryforwards, where the Company has determined that there is sufficient uncertainty regarding the future realization of these net operating losses. F-26 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes changes to the Company’s unrecognized tax benefits as follows (in thousands): Year Ended December 31, 2020 2019 2018 Balance of unrecognized tax benefits at January 1 $ 8,949 $ 5,846 $ 2,966 Gross additions for tax positions for prior years — 173 332 Gross additions for tax positions for current year 724 3,842 3,476 Gross reductions for tax positions of prior years ( 81 ) — — Gross expirations — ( 912 ) ( 928 ) Balance of unrecognized tax benefits at December 31 $ 9,592 $ 8,949 $ 5,846 The total amount of unrecognized tax benefits as of December 31, 2020, was $ 8.7 million, which, if recognized, would impact the Company’s effective tax rate in future periods. Unrecognized tax benefits is included within prepaid expenses and other current assets and other non-current liabilities on the Consolidated Balance Sheets. The Company recognizes interest expense and tax penalties related to unrecognized tax benefits as a component of income tax expense in the Consolidated Statements of Operations. Interest and penalties included in the Company’s provision for income taxes were not material in all the periods presented. The Company and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Company is currently under examination by the U.S. Internal Revenue Service for tax year 2017 and 2018, Wisconsin for years 2015 - 2018 and New York State for years 2016 - 2018. The Company is no longer subject to U.S. federal tax examinations for years before 2016, or state and local tax examinations by tax authorities for years before 2015. The Company has determined that it is reasonably possible that there will be a reversal of unrecognized tax benefits by as much as $ 1.6 million in the next fiscal year due to the expected resolution of prior year tax matters. As of December 31, 2020, the Company has $ 16.5 million in tax net operating loss carryforwards in foreign tax jurisdictions which are available to reduce future income taxes and the majority of this amount relates to jurisdictions with an indefinite carryforward period. As of December 31, 2020, the Company had approximately $ 12.1 million of undistributed earnings attributable to its foreign subsidiaries. It is the Company’s practice and intention to indefinitely reinvest the earnings of its foreign subsidiaries in those operations. The Company has not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences resulting from the earnings indefinitely reinvested outside the United States. An estimate of the associated unrecognized deferred tax liability related to these undistributed earnings is not material. F-27 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (12) Net Income Per Share Basic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested RSUs and stock options. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common shares, 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 fiscal years 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Net income $ 71,766 $ 20,108 $ 54,687 Shares used to compute basic net income per share 35,844 35,285 34,935 Dilutive potential common shares: Stock options and employee stock purchase plan shares 99 83 117 Unvested restricted stock awards 426 213 368 Shares used to compute diluted net income per share 36,369 35,581 35,420 Basic net income per share $ 2.00 $ 0.57 $ 1.57 Diluted net income per share $ 1.97 $ 0.57 $ 1.54 Potentially dilutive shares included in the calculation 1,286 917 1,285 Anti-dilutive shares excluded from the calculation 931 1,202 1,020 (13) Segment and Geographic Information Segment Financial Information As of December 31, 2020, 2019 and 2018, the Company identified one operating and reportable segment for purposes of allocating resources and evaluating financial performance. Prior to the Sale of Webdam on February 26, 2018, the Company also identified a non-reportable segment which was classified in the Other Category, included the Company’s digital asset management operating segment and failed to meet the quantitative or qualitative thresholds for separate segment reporting. During the year ended December 31, 2018, which includes the period from January 1 through February 26, 2018, prior to the Sale of Webdam, Revenue, Operating Expenses and Income from Operations related to the Company’s reportable content segment were $ 620.5 million, $ 491.0 million and $ 129.6 million, respectively. Revenue, Operating Expense and Loss from Operations related to Other and Corporate category were $ 2.7 million, $ 99.8 million and $ 97.1 million, respectively. Other and corporate operating expenses include unallocated corporate expenses of $ 97.8 million for the year ended December 31, 2018 and primarily relate to shared operational support functions and general and administrative functions of human resources, legal, finance and information technology. Asset information on a segment basis is not disclosed as this information is not separately identified or internally reported to the Company’s CODM. F-28 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Geographic Financial Information The following represents the Company’s geographic revenue based on customer location (in thousands): Year Ended December 31, 2020 2019 2018 North America $ 236,599 $ 228,185 $ 230,890 Europe 220,665 217,397 207,634 Rest of the world 209,422 204,941 184,726 Total revenue $ 666,686 $ 650,523 $ 623,250 Included in North America is the United States which comprises approximately 33 % of total revenue for the year ended December 31, 2020, and 32 % of total revenue for the years ended December 31, 2019 and 2018. Included in Europe is the United Kingdom which accounts for approximately 8 % of total revenue for the year ended December 31, 2020. No other country accounts for more than 10% of the Company’s revenue in any period presented. The Company’s long-lived tangible assets were located as follows (in thousands): December 31, 2020 2019 North America $ 43,451 $ 51,954 Europe 7,192 6,541 Rest of world 263 339 Total long-lived tangible assets $ 50,906 $ 58,834 Included in North America is the United States, which comprises 75 % and 79 % of total long-lived tangible assets as of December 31, 2020 and 2019, respectively. (14) Leasing 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 $ 10.5 million, $ 11.1 million and $ 9.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company made cash payments for operating leases of $ 10.0 million for the year ended December 31, 2020, which were included in cash flows from operating activities within the Consolidated Statements of Cash Flows. In addition, for the year ended December 31, 2020, the Company also recorded right-of-use assets of $ 0.2 million obtained in exchange for lease obligations. The Company’s operating leases have a weighted average remaining lease term of 7.5 years and a weighted average discount rate of 6.2 %. Balance sheet information for the Company’s leases as of December 31, 2020, is as follows: December 31, (in thousands) 2020 2019 Right-of-use assets $ 39,552 $ 45,453 Lease liabilities, current $ 9,097 $ 9,573 Lease liabilities, non-current 41,620 47,313 Total lease liabilities $ 50,717 $ 56,886 F-29 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Lease Commitments Future undiscounted lease payments for the Company’s operating lease liabilities and a reconciliation of these payments to its lease liabilities at December 31, 2020 are as follows (in thousands): Reconciliation of future undiscounted lease payments to lease liabilities Lease Commitments Year ending December 31, 2020 9,334 2021 8,131 2022 6,594 2023 6,879 2024 7,728 Thereafter 25,651 Total undiscounted lease payments 64,317 Less: imputed interest ( 13,600 ) Total lease liabilities $ 50,717 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 $ 56.3 million. The Company is also party to a letter of credit as a security deposit for this leased facility, which was reduced from $ 2.6 million to $ 1.7 million in February 2020. As of March 31, 2020, the Company is no longer required to provide cash collateral for its letter of credit, and, accordingly, these funds are no longer restricted. (15) Commitments and Contingencies Other Non-Lease Obligations As of December 31, 2020, the Company’s other unconditional cash obligations, consisting primarily of 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, are as follows: Year Ending December 31, Other Obligations 2021 $ 26,524 2022 7,988 2023 4,125 2024 — 2025 — Thereafter — Total non-lease unconditional obligations $ 38,637 F-30 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Customer Indemnifications In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to customers with respect to certain matters, including, but not limited to, losses arising out of the breach of the Company’s intellectual property warranties for damages to the customer directly attributable to the Company’s breach. The Company is not responsible for any damages, costs, or losses to the extent such damages, costs or losses arise as a result of the modifications made by the customer, or the context in which an image is used. The standard maximum aggregate obligation and liability to any one customer for all claims is generally limited to ten thousand dollars. The Company offers certain of its customers greater levels of indemnification, including unlimited indemnification. As of December 31, 2020, the Company has recorded no liabilities related to indemnification for loss contingencies. Additionally, the Company believes that it has the appropriate insurance coverage in place to adequately cover such indemnification obligations, if necessary. Employment Agreements and Indemnification Agreements The Company has entered into employment arrangements and indemnification agreements with certain executive officers and with certain employees. The agreements specify various employment-related matters, including annual compensation, performance incentive bonuses, and severance benefits in the event of termination with or without cause. F-31 Table of Contents SHUTTERSTOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (16) Unaudited Quarterly Financial Data The following table sets forth, for the periods indicated, the Company’s financial information for the eight most recent quarters ended December 31, 2020. In the Company’s opinion, this unaudited information has been prepared on a basis consistent with the annual consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the unaudited information for the periods presented. Three Months Ended Dec 31, 2020 Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 (in thousands, except per share data) Revenue $ 180,944 $ 165,227 $ 159,230 $ 161,285 $ 166,371 $ 159,079 $ 161,741 $ 163,332 Operating expenses (1) : Cost of revenue 66,308 60,331 63,811 69,123 71,797 68,635 68,526 69,218 Sales & marketing 44,369 36,655 35,557 42,660 47,182 45,614 44,488 44,446 Product development 9,867 10,617 12,485 13,069 15,103 13,533 13,594 14,986 General and administrative 32,807 28,277 24,832 30,652 26,486 28,114 32,063 26,583 Total operating expenses 153,351 135,880 136,685 155,504 160,568 155,896 158,671 155,233 Income from operations 27,593 29,347 22,545 5,781 5,803 3,183 3,070 8,099 Other income / (expense), net (2) 4,763 ( 1,168 ) 149 513 2,816 465 584 896 Income before income taxes 32,356 28,179 22,694 6,294 8,619 3,648 3,654 8,995 Provision / (Benefit) for income tax 6,477 5,597 3,707 1,976 4,266 ( 1,286 ) 355 1,473 Net income $ 25,879 $ 22,582 $ 18,987 $ 4,318 $ 4,353 $ 4,934 $ 3,299 $ 7,522 Net income per common share: Basic $ 0.71 $ 0.63 $ 0.53 $ 0.12 $ 0.12 $ 0.14 $ 0.09 $ 0.21 Diluted $ 0.70 $ 0.62 $ 0.53 $ 0.12 $ 0.12 $ 0.14 $ 0.09 $ 0.21 Weighted average common shares outstanding: Basic 36,234 35,962 35,652 35,521 35,478 35,309 35,232 35,114 Diluted 37,183 36,494 35,906 35,882 35,786 35,541 35,504 35,491 ____________________________________________________________________________ (1) Includes non-cash equity-based compensation of $ 28,309 and $ 22,815 for the years ended December 31, 2020 and 2019, respectively. (2) Includes transaction gains and losses primarily related to cash balances of subsidiaries denominated in a currency other than the subsidiaries’ functional currencies; and interest income and expense, which is not material in any period presented. (17) Subsequent Events On February 1, 2021, the Company completed its acquisition of all of the outstanding shares of TurboSquid, Inc. (“TurboSquid”), a company that offers a marketplace for 3D models, for approximately $ 75 million, subject to customary working capital and other adjustments, paid from existing cash on hand. The purchase accounting is not complete due to the timing of the availability of information. The Company is currently evaluating the fair values of the consideration transferred, assets acquired and liabilities assumed and expects to complete its initial purchase price allocation in the first quarter of 2021. F-32 Table of Contents EXHIBIT INDEX Exhibit Number Incorporated by Reference Exhibit Description Form File No. Exhibit Filing Date 2.1 Agreement and Plan of Merger, dated as of October 5, 2012, between the Registrant and Shutterstock Images LLC. S-1/A 333-181376 2.1 October 5, 2012 2.2 Agreement and Plan of Merger, dated as of October 5, 2012, among the Registrant, Shutterstock Investors II, Inc., Insight Venture Partners (Cayman) V, L.P., Shutterstock Investors III, Inc. and Insight Venture Partners V Coinvestment Fund, L.P. S-1/A 333-181376 2.2 October 5, 2012 3.1 Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. S-1/A 333-181376 3.2 June 29, 2012 3.2 Amended and Restated Bylaws of the Registrant, as currently in effect. S-1/A 333-181376 3.4 September 27, 2012 4.1 Specimen Stock Certificate of the Registrant S-3ASR 333-243706 4.1 August 10, 2020 4.2 § Description of the Registrant’s Securities 10-K 001-35669 4.1 February 13, 2020 10.1 § Form of Indemnification Agreement between the Registrant and each of its Officers and Directors. S-1/A 333-181376 10.1 August 30, 2012 10.2 § 2012 Omnibus Equity Incentive Plan and Form of Award Agreements. 10-K 001-35669 10.2 February 27, 2015 10.3 § 2012 Employee Stock Purchase Plan and Form of Subscription Agreement. S-1/A 333-181376 10.3 June 29, 2012 10.4 § Shutterstock, Inc. Short-Term Incentive Plan. S-1/A 333-181376 10.7 August 30, 2012 10.5(a) § Employment Agreement between Shutterstock Images LLC and Jonathan Oringer dated September 24, 2012. S-1/A 333-181376 10.8(a) September 27, 2012 10.5(b) § Severance and Change in Control Agreement between Shutterstock Images LLC and Jonathan Oringer dated September 24, 2012. S-1/A 333-181376 10.8(b) September 27, 2012 10.5(c) § Summary of Compensatory Arrangements with Jonathan Oringer, dated April 24, 2014. 8-K 001-35669 N/A April 28, 2014 10.5(d) § Amendment to Employment Agreement, dated February 11, 2020, by and between Jon Oringer and Shutterstock, Inc. 10-K 001-35669 10.5(d) February 13, 2020 10.5(e) § Amendment to Severance and Change in Control Agreement, dated February 11, 2020, by and between Jon Oringer and Shutterstock, Inc. 10-K 001-35669 10.5(e) February 13, 2020 10.6 Lease Agreement, between Shutterstock, Inc. and Empire State Building Company LLC, dated March 21, 2013. 10-Q 001-35669 10.1 May 10, 2013 10.7 First Lease Modification Agreement, by and between Shutterstock, Inc. and ESRT Empire State Building, L.L.C., dated August 31, 2015. 10-Q 001-35669 10.3 November 6, 2015 10.8 Second Lease Modification and Extension Agreement, by and between Shutterstock, Inc. and ESRT Empire State Building, L.L.C., dated January 8, 2016. 8-K 001-35669 10.1 January 13, 2016 10.9 Third Lease Modification Agreement, dated July 19, 2016, by and between Shutterstock, Inc. and ESRT Empire State Building, L.L.C. 10-Q 001-35669 10.1 August 4, 2016 10.10 § Shutterstock, Inc. Director Compensation Policy 10-K 001-35669 10.1 February 26, 2019 10.11 § Shutterstock, Inc. Form of 2012 Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement 10-Q 001-35669 10.5 May 4, 2016 10.12 § Shutterstock, Inc. Form of 2012 Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement for Canadian Employees 10-Q 001-35669 10.6 May 4, 2016 10.13 § Shutterstock, Inc. Form of 2012 Omnibus Equity Incentive Plan Deferred Restricted Stock Unit Award Agreement 10-Q 001-35669 10.7 May 4, 2016 10.14 § Shutterstock, Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan 10-Q 001-35669 10.4 August 4, 2016 10.15 § Shutterstock, Inc. 2012 Amended and Restated Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement, as amended September 15, 2016 10-Q 001-35669 10.1 November 4, 2016 10.16 § Shutterstock, Inc. 2012 Amended and Restated Omnibus Equity Incentive Plan Restricted Stock Unit Award Agreement for Canadian Employees, as amended September 15, 2016 10-Q 001-35669 10.2 November 4, 2016 10.17 § Shutterstock, Inc. 2012 Amended and Restated Omnibus Equity Incentive Plan Deferred Restricted Stock Unit Award Agreement, as amended September 15, 2016 10-Q 001-35669 10.3 November 4, 2016 10.18 § Shutterstock, Inc. 2012 Amended and Restated Omnibus Equity Incentive Plan Performance Stock Unit Award Agreement 8-K 001-35669 10.1 February 11, 2020 Table of Contents Exhibit Number Incorporated by Reference Exhibit Description Form File No. Exhibit Filing Date 10.19(a) § Employment Agreement, dated August 5, 2019, by and between the Company and Steven Ciardiello 8-K 001-35669 10.1 August 6, 2019 10.19(b) § Amendment to Employment Agreement, dated November 5, 2019, by and between the Company and Steven Ciardiello 10-Q 001-35669 10.4 November 5, 2019 10.20 § Employment Agreement, dated December 7, 2016 between the Company and Martin Brodbeck 10-Q 001-35669 10.1 April 26, 2018 10.21(a) § Amended and Restated Employment Agreement, dated November 5, 2019, by and between the Company and Lisa Nadler 10-Q 001-35669 10.2 November 5, 2019 10.21(b) § Mutual Separation Agreement and General Release, dated February 25, 2020, between the Company and Lisa Nadler 10-Q 001-35669 10.1 April 28, 2020 10.22(a) § Amended and Restated Employment Agreement, dated November 5, 2019, by and between the Company and Louis Weiss 10-Q 001-35669 10.3 November 5, 2019 10.22(b) § Separation Agreement and General Release, dated March 23, 2020, by and between Lou Weiss and Shutterstock, Inc. 8-K 001-35669 10.1 April 15, 2020 10.23(a) § Employment Agreement, dated March 13, 2019, by and between the Company and Stan Pavlovsky 10-Q 001-35669 10.1 April 25, 2019 10.23(b) § Amendment to Employment Agreement, dated November 5, 2019, by and between the Company and Stan Pavlovsky 10-Q 001-35669 10.1 November 5, 2019 10.23(c) § Second Amendment to Employment Agreement, dated February 11, 2020, by and between Stan Pavlovsky and Shutterstock, Inc. 10-K 001-35669 10.25(c) February 13, 2020 10.24 § Employment Agreement, dated November 7, 2019, by and between the Company and Jarrod Yahes 8-K 001-35669 10.1 November 18, 2019 10.25 § Employment Agreement, dated November 4, 2019, between the Company and Pietro Silvio 10-Q 001-35669 10.2 July 28, 2020 21.1 ** List of Subsidiaries. 23.1 ** Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. 24.1 ** Power of Attorney (included on signature page of this Annual Report on Form 10-K). 31.1 ** Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 ** Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 #** Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS * XBRL Instance Document. 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. _______________________________________________________________________________ * XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document. § Management contract or compensatory plan or arrangement. # These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. ** Filed herewith. Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: February 11, 2021 By: /s/ STAN PAVLOVSKY Stan Pavlovsky Chief Executive Officer Each person whose individual signature appears below hereby authorizes and appoints Stan Pavlovsky and Jarrod Yahes, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signature Title Date /s/ JONATHAN ORINGER Founder and Executive Chairman of the Board February 11, 2021 Jonathan Oringer /s/ STAN PAVLOVSKY Chief Executive Officer and Director (Principal Executive Officer) February 11, 2021 Stan Pavlovsky /s/ JARROD YAHES Chief Financial Officer (Principal Financial Officer) February 11, 2021 Jarrod Yahes /s/ STEVEN CIARDIELLO Chief Accounting Officer (Principal Accounting Officer) February 11, 2021 Steven Ciardiello /s/ RACHNA BHASIN Director February 11, 2021 Rachna Bhasin /s/ DEIRDRE M. BIGLEY Director February 11, 2021 Deirdre M. Bigley /s/ JEFF EPSTEIN Director February 11, 2021 Jeff Epstein /s/ THOMAS R. EVANS Director February 11, 2021 Thomas R. Evans /s/ PAUL J. HENNESSY Director February 11, 2021 Paul J. Hennessy /s/ ALFONSE UPSHAW Director February 11, 2021 Alfonse Upshaw