Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2013

 

or

 

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

 

For the transition period from              to             

 

Commission File Number: 001-35669

 


 

SHUTTERSTOCK, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

80-0812659

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

Jonathan Oringer

Chief Executive Officer

Shutterstock, Inc.

60 Broad Street, 30th Floor

New York, NY 10004

(Address of principal executive offices, including zip code)

 

(646) 419-4452

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes  x  No

 

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

 

Class

 

Outstanding at August 7, 2013

Common Stock, $0.01 par value per share

 

33,695,653

 

 

 



Table of Contents

 

Shutterstock, Inc.

Table of Contents

 

 

Page No.

 

 

PART I: FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

4

 

Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012

4

 

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and June 30, 2012

5

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and June 30, 2012

6

 

Notes to Unaudited Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

29

 

 

PART II: OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

30

 

 

 

Signature

31

 

 

Exhibit Index

32

 

 

Certifications

 

 

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements.  These forward-looking statements can be identified by the use of forward-looking terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential”, project,” “guidance,” “target,” “forecast” or comparable terms.

 

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements as a result of certain factors, as more fully described in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the reports and documents filed from time to time by us with the Securities and Exchange Commission (the “SEC”).

 

Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

WHERE YOU CAN FIND MORE INFORMATION

 

Shutterstock’s corporate website is located at www.shutterstock.com.  Shutterstock makes available free of charge, on our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing to, the SEC. Information contained on Shutterstock’s corporate website is not part of this report or any other report filed with the SEC.

 

Prior to its initial public offering, Shutterstock operated as a New York limited liability company under the name Shutterstock Images LLC (the “LLC”). On October 5, 2012, Shutterstock reorganized by way of a merger of the LLC with and into Shutterstock, Inc., a newly-formed Delaware corporation, with Shutterstock, Inc. surviving in the merger. Since October 5, 2012, Shutterstock has operated as a Delaware corporation.

 

Unless the context otherwise indicates, references in this report to the terms “Shutterstock,” “the Company,” “we,” “our” and “us” refer to Shutterstock, Inc. and its subsidiaries including, for the period on and prior to October 5, 2012, Shutterstock Images LLC.

 

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PART I: FINANCIAL INFORMATION

 

Item 1.         Financial Statements

 

Shutterstock, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

112,803

 

$

102,096

 

Credit card receivables

 

2,442

 

1,373

 

Accounts receivable, net

 

4,435

 

1,738

 

Prepaid expenses and other current assets

 

6,598

 

2,008

 

Deferred tax assets, net

 

22,340

 

18,760

 

Total current assets

 

148,618

 

125,975

 

Property and equipment, net

 

6,778

 

5,255

 

Intangible assets, net

 

928

 

1,040

 

Goodwill

 

1,423

 

1,423

 

Deferred tax assets, net

 

12,786

 

13,239

 

Restricted cash

 

2,015

 

182

 

Total assets

 

$

172,548

 

$

147,114

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,213

 

$

2,606

 

Accrued expenses

 

16,857

 

15,606

 

Contributor royalties payable

 

8,142

 

6,984

 

Deferred revenue

 

46,736

 

37,934

 

Term loan facility

 

 

6,000

 

Other liabilities

 

158

 

161

 

Total current liabilities

 

75,106

 

69,291

 

Other non-current liabilities

 

1,840

 

889

 

Total liabilities

 

76,946

 

70,180

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value; 200,000 shares authorized; 33,692 and 33,513 shares outstanding as of June 30, 2013 and December 31, 2012, respectively

 

337

 

335

 

Additional paid-in capital

 

54,520

 

48,282

 

Retained earnings

 

40,745

 

28,317

 

Total stockholders’ equity

 

95,602

 

76,934

 

Total liabilities and stockholders’ equity

 

$

172,548

 

$

147,114

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

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Shutterstock, Inc.

Consolidated Statements of Operations

(In thousands, except for share and per share data)

(unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

56,809

 

$

40,625

 

$

107,926

 

$

78,199

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue

 

21,768

 

15,436

 

41,589

 

29,825

 

Sales and marketing

 

13,314

 

11,093

 

25,292

 

23,333

 

Product development

 

5,060

 

3,441

 

9,615

 

6,860

 

General and administrative

 

5,734

 

4,444

 

10,514

 

8,177

 

Total operating expenses

 

45,876

 

34,414

 

87,010

 

68,195

 

Income from operations

 

10,933

 

6,211

 

20,916

 

10,004

 

Other income, net

 

20

 

2

 

8

 

5

 

Income before provision for income taxes

 

10,953

 

6,213

 

20,924

 

10,009

 

Provision for income taxes

 

4,090

 

141

 

8,496

 

227

 

Net income

 

$

6,863

 

$

6,072

 

$

12,428

 

$

9,782

 

Less:

 

 

 

 

 

 

 

 

 

Preferred interest distributed

 

 

1,688

 

 

3,788

 

Undistributed earnings (loss) to participating stockholder/members

 

22

 

(170

)

41

 

(1,342

)

Net income available to common stockholders/members

 

$

6,841

 

$

4,554

 

$

12,387

 

$

7,336

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per basic share available to common stockholders/members:

 

 

 

 

 

 

 

 

 

Distributed

 

$

 

$

0.24

 

$

 

$

0.54

 

Undistributed

 

0.20

 

(0.02

)

0.37

 

(0.19

)

Basic

 

$

0.20

 

$

0.22

 

$

0.37

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per diluted share available to common stockholders/members:

 

 

 

 

 

 

 

 

 

Distributed

 

$

 

$

0.24

 

$

 

$

0.54

 

Undistributed

 

0.20

 

(0.02

)

0.37

 

(0.19

)

Diluted

 

$

0.20

 

$

0.22

 

$

0.37

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

33,471,679

 

20,849,242

 

33,435,439

 

20,849,242

 

Diluted

 

34,040,934

 

20,849,242

 

33,903,898

 

20,849,242

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

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Shutterstock, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

12,428

 

$

9,782

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,725

 

1,160

 

Deferred taxes

 

(3,127

)

(155

)

Non-cash equity-based compensation

 

2,570

 

2,157

 

Excess tax benefit from the exercise of stock options

 

(1,009

)

 

Bad debt reserve

 

244

 

50

 

Chargeback reserve

 

20

 

 

Amortization of deferred financing fees

 

125

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Credit card receivable

 

(1,069

)

(524

)

Accounts receivable

 

(2,941

)

(226

)

Prepaid expenses and other current and non-current assets

 

(3,748

)

(2,076

)

Due from member

 

 

168

 

Accounts payable and other liabilities

 

2,636

 

2,351

 

Contributors royalties payable

 

1,158

 

1,060

 

Deferred revenue

 

8,802

 

5,175

 

Net cash provided by operating activities

 

$

17,814

 

$

18,922

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(2,986

)

(2,671

)

Acquisition of patents

 

 

(193

)

Security (payment) deposit /receipt

 

(1,791

)

38

 

Net cash used in investing activities

 

$

(4,777

)

$

(2,826

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from exercise of stock options

 

2,681

 

 

Excess tax benefit from the exercise of stock options

 

1,009

 

 

Payment of term loan

 

(6,000

)

 

Payment of offering fees

 

(20

)

 

Members’ distributions

 

 

(15,151

)

Net cash used in financing activities

 

$

(2,330

)

$

(15,151

)

Net increase in cash and cash equivalents

 

10,707

 

945

 

Cash and cash equivalents—Beginning

 

102,096

 

14,097

 

Cash and cash equivalents—Ending

 

$

112,803

 

$

15,042

 

Supplemental Disclosure of Cash Information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Income taxes

 

$

14,194

 

$

300

 

Interest

 

$

34

 

$

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

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Shutterstock, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

(In Thousands, Except Share and Per Share Data)

 

(1) Summary of Operations and Significant Accounting Policies

 

Summary of Operations

 

Shutterstock, Inc. (the “Company” or “Shutterstock”) operates an industry-leading global marketplace for commercial digital imagery. Commercial digital imagery consists of licensed photographs, illustrations and videos that companies use in their visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and video content. The Company licenses commercial digital imagery to its customers. Contributors upload their digital imagery to the Company’s website in exchange for a royalty payment based on customer download activity. The Company maintains its primary office location in New York City.

 

Principles of Consolidation

 

The consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Unaudited Interim Financial Statements

 

The interim consolidated balance sheet as of June 30, 2013, the consolidated statements of operations for the three and six months ended June 30, 2013 and 2012, and the consolidated statements of cash flows for the six months ended June 30, 2013 and 2012 are unaudited. The unaudited interim financial statements have been prepared on a basis consistent with the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of June 30, 2013, its results of consolidated operations for the three and six months ended June 30, 2013 and 2012, and its results of consolidated cash flows for the six months ended June 30, 2013 and 2012. The financial data and the other financial information disclosed in these notes to the financial statements related to these periods are also unaudited. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 or for any other future annual or interim period.

 

There have been no changes in the significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed on March 1, 2013 with the Securities and Exchange Commission (the “SEC”). These financial statements should also be read in conjunction with the audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2012. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been omitted pursuant to the rules and regulations of the SEC. The consolidated balance sheet as of December 31, 2012 included herein was derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP.

 

Reorganization

 

In May 2012, in connection with the filing of a registration statement for the Company’s initial public offering (the “IPO”), Shutterstock Images LLC, a New York limited liability company (the “LLC”) formed Shutterstock, Inc., a Delaware corporation, as a wholly-owned subsidiary of the LLC. On October 5, 2012, the LLC reorganized, by way of a merger of the LLC with and into Shutterstock, Inc. with Shutterstock, Inc. surviving in the merger (the “Reorganization”). In connection with this Reorganization, the preferred and common membership interests in the LLC, including any interests that vested upon the Reorganization, were exchanged for shares of Shutterstock, Inc. common stock and the outstanding value appreciation rights of the LLC were exchanged for options to purchase shares of common stock of Shutterstock, Inc.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. The Company evaluates its significant estimates on an ongoing basis, including, but not limited to allowance for doubtful accounts, goodwill, intangibles, non-cash equity-based compensation, income tax provision and for certain non-income tax accruals. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

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Cash and Cash Equivalents

 

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash primarily consists of balances in checking, savings and money market accounts. The account balances are recorded at cost, which approximates fair value because of the short-term nature of the accounts, and are considered a Level 1 measurement based on bank reporting.

 

Revenue Recognition

 

All revenue, net of refunds, is generated from the license of digital content through subscription or usage based plans. The Company’s four plans are: subscription plans, On Demand plans, Pay As You Go, and credit pack plans. The Company recognizes revenue when the following basic criteria are met: there is persuasive evidence of an arrangement, performance or delivery of services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. The Company considers persuasive evidence of an arrangement to be an electronic order form, or a signed contract, which contains the fixed pricing terms. Performance or delivery is considered to have occurred upon the ratable passage of time for subscription plans, the download of digital content or the expiration of a contract period for which there are unused downloads or credits. Collectability is reasonably assured since most of the Company’s customers purchase products by making electronic payments at the time of a transaction with a credit card. The Company establishes a chargeback allowance based on factors surrounding historical credit card chargeback trends and other information. As of June 30, 2013 and December 31, 2012, the Company has recorded a chargeback allowance of $90 and $70, respectively, which is included in other liabilities. Collectability is assessed for customers who pay on credit based on a credit evaluation for new customers and transaction history with existing customers. Any cash received in advance of revenue recognition is recorded as deferred revenue.

 

Subscription plans range in length from thirty days to one year. Subscription plan revenues are recognized on a straight-line basis using a daily convention method over the plan term. On Demand plans are typically for a one-year term and permit the customer to download up to a fixed amount of digital content. On Demand revenues are recognized at the time the customer downloads the digital content on a per unit basis. Revenue related to unused digital content, if any, is recognized in full at the end of the plan term. Pay As You Go plans provide for individual image download. The Company recognizes Pay As You Go revenue as the customer downloads images. Credit pack plans are generally for a one-year term and enable the customer to purchase a fixed number of credits which can then be utilized to pay for downloaded digital content. The number of credits utilized for each download depends on the digital content size and format. Credit pack revenues are recognized based on customer usage on a per credit basis as digital content is downloaded. Revenue related to unused credits, if any, is recognized in full at the end of the plan term. Most plans automatically renew at the end of the plan term unless the customer elects not to renew. The Company recognizes revenue from its four types of plans on a gross basis in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-45, “Principal Agent Considerations,” as the Company is the primary obligor in the arrangement, has latitude in establishing the product’s price, performs a detailed review of the digital content before accepting it to its collection to ensure it is of high quality before it may be purchased by its customers, can reject contributor’s images in its sole discretion, and has credit risk.

 

Customers typically pay in advance (or upon commencement of the term) via credit card, wire or check. Fees paid or invoiced in advance are deferred and recognized as described above. Customers that do not pay in advance are invoiced and are required to make payment under standard credit terms. The Company does not generally offer refunds or the right of return to customers. There are situations in which a customer may receive a refund but the determination is made on a case-by-case basis.

 

The Company also licenses digital content to customers through third party resellers. The Company contracts with third party resellers around the world to access markets where the Company does not have a significant presence. Third party resellers sell the Company’s products directly to end-user customers and remit a fixed amount to the Company based on the type of plan sold. The terms of the reseller program indicate that the third party reseller is the primary obligor to the end-user customer and bears the risks and rewards as principal in the transaction. In assessing whether the Company’s revenue should be reported on a gross or net basis with respect to our reseller program, the Company follows the authoritative guidance in ASC 605-45, “Principle Agent Considerations.” The Company recognizes revenue net of reseller commission in accordance with the type of plan sold, consistent with the plan descriptions above. The Company generally does not offer refunds or the right of return to resellers.

 

Equity-Based Compensation

 

Between June 7, 2007 and October 5, 2012, the Company was organized as a limited liability company. Beginning in 2011, the Company granted equity rights similar to options under its Value Appreciation Rights Plan (“VAR Plan”) in the form of value appreciation rights (the “VAR Plan awards”). Each VAR Plan award had an exercise price, a vesting period and an expiration date, in addition to other terms and conditions similar to typical equity option grant terms and conditions. The VAR Plan awards were subject to a time-based vesting requirement and a condition that a change of control occur in order to trigger a payment with respect to the VAR Plan awards. In connection with the Reorganization, all of the VAR Plan awards were exchanged for options to purchase an aggregate of 1,661,719 shares of common stock of Shutterstock, Inc. with only a time-based vesting requirement, which were granted pursuant to the Company’s 2012 Omnibus Equity Incentive Plan (the “2012 Plan”).

 

The Company measures and recognizes non-cash equity-based compensation expense for all equity-based payment awards based on estimated fair values at the date awards are granted. The value portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period. 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. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options and other equity-based awards granted pursuant to the 2012 Plan, stock purchased pursuant to the Employee Stock Purchase Plan (“2012 ESPP”) and the VAR Plan awards, which are discussed further in Note 10, Equity-Based Compensation.

 

The determination of the grant date fair value using an option-pricing model requires judgment as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s fair value of the common ownership interest pre-IPO, the Company’s closing market price at the grant date post-IPO, the expected unit 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 Membership Unit. Prior to completion of the IPO, the Company’s fair value of common ownership interest was estimated internally and approved by the Board of Managers (“BOM”) because the Company was not publicly traded. The Company’s intention upon granting VAR Plan awards was for the granted award to have an exercisable price per unit that was not less than the per unit fair value of the Company’s common equity on the date of grant. The valuations of the Company’s common equity unit were prepared in accordance with the American Institute of Certified Public Accountants Statement on Standards for Valuation Services 1: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset. The assumptions used in the valuation model were based on future expectations combined with the Company’s judgment. In the absence of a public trading market, the Company exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the common equity unit as of the date of each VAR Plan award grant. Some, but not all of these factors included operating and financial performance, current business conditions and projections, the hiring of key personnel, the Company’s history and introduction of new functionality and services, the Company’s stage of development, the likelihood of achieving a liquidity event for the common ownership interests, any adjustment necessary to recognize a lack of marketability for our common ownership interests, the market performance of comparable publicly traded companies, and U.S. and global capital market conditions. The Company also obtained independent third party valuations on a periodic basis. After October 11, 2012, the date the Company’s common stock began trading on the NYSE, the grant date fair value for equity-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 equity-based awards shall be the closing price of the Company’s common stock on the NYSE on the relevant date.

 

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·                  Expected Term. The expected term was estimated using the simplified method allowed under SEC guidance.

 

·                  Volatility. As the Company did not have a trading history for its common ownership interest pre-IPO and does not have a significant trading history for its common stock post-IPO, the expected price volatility for the common ownership interests and common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the VAR Plan awards and stock options granted post-IPO. Industry peers consist of several public companies similar in size, stage of life cycle and financial leverage. The Company did not rely on implied volatilities of traded options in the industry peers’ common stock because the volume of activity was relatively low. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of the Company’s own common stock becomes available, or unless circumstances change such that the identified companies are no longer similar to the Company, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

·                  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 has historically paid cash dividends or distributions to its members. Post-IPO, the Company does not intend to pay cash dividends or distributions in the foreseeable future. As a result, the Company uses an expected dividend yield of zero.

 

If any of the assumptions used in the Black-Scholes 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, the 2012 ESPP and VAR Plan are subject to a time-based vesting requirement. The majority of stock option awards granted under the 2012 Plan vest over four years. The 2012 ESPP provides for purchase periods approximately every six months and a participant must be employed on the purchase date to participate in the 2012 ESPP. The VAR Plan awards had a condition that a change of control (as defined in the VAR Plan) must occur for a payment to trigger with respect to the VAR Plan awards. In connection with the Company’s Reorganization, all of the VAR Plan awards were exchanged for options to purchase shares of common stock of Shutterstock, Inc. which do not include a change of control condition. As of June 30, 2012, no equity-based compensation expense related to the VAR Plan awards had been recognized because the qualifying event had not occurred. As a result of the completion of the IPO, the Company began recording share-based compensation expense using the accelerated attribution method, net of forfeitures, based on the grant date fair value of the VAR Plan awards that were exchanged for options to purchase shares of common stock of Shutterstock, Inc. as part of the Company’s Reorganization.

 

For any equity-based awards that qualified for liability classification pre-IPO, the Company elected to use the intrinsic value method to value the common membership interest in accordance with authoritative guidance on stock compensation. See Note 10, Equity-Based Compensation, for further information.

 

Income Taxes

 

The Company filed its income tax returns as a limited liability company and was taxed as a “pass through” partnership for federal and state income tax purposes for all periods prior to its Reorganization on October 5, 2012. For all periods prior to the Reorganization, the Company recognized no federal and state income taxes, as the members of the LLC, and not the Company itself, were subject to income tax on their allocated share of the Company’s earnings. However, the Company was subject to taxation on allocable portions of its net income or other taxes based on various methodologies employed by taxing authorities in certain localities. The Company generally made monthly dividend distributions to its members under the terms of the LLC’s operating agreement, subject to the Company’s operating cash needs.

 

Effective with the Reorganization, the Company became a Delaware corporation, and therefore became subject to federal and state tax expense after October 5, 2012. As a result of this tax status change, the Company recorded an incremental net deferred tax asset and a one-time non-cash tax benefit of approximately $28,811 in the fourth quarter of the fiscal year ended December 31, 2012.

 

The Company filed tax returns as a partnership for the period from January 1, 2012 through October 5, 2012 and will file tax returns as a corporation for the period from October 6, 2012 through December 31, 2012 and all periods thereafter. Significant management judgment is required in projecting ordinary income in order to determine the Company’s estimated effective tax rate.

 

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, if any, for the difference 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, if any, are adjusted in light of changing facts and circumstances, such as the outcome of a tax audit or lapses in statutes of limitations. Any reserve for uncertain tax positions is included in the income tax provision. Penalties and interest, if any, on uncertain tax positions are included in income tax expense.

 

The Company assessed the realizability of deferred tax assets and determined that based on the available evidence, including a history of taxable income and estimates of future taxable income, it is more likely than not that the deferred tax assets will be realized. The Company will continue to evaluate its ability to realize deferred tax assets on a quarterly basis. 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.

 

The Company is subject to certain compliance requirements for non-income taxes, including but not limited to payroll, value-added and sales-based taxes. Where appropriate, the Company has made accruals for these matters, which are reflected in the Company’s consolidated financial statements.

 

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Net Income Per Share

 

Basic net income per share is computed by dividing the net income attributable to common stockholders/members by the weighted average number of common shares outstanding during the period. The Company applies the two-class method for calculating and presenting income per share. Under the two-class method, net income is allocated between shares of common stock and other participating securities based on their contractual participating rights to share in the earnings as if all of the earnings for the period have been distributed. Participating securities are defined as securities that participate in dividends with common stock according to a pre-determined formula or a contractual obligation to share in the income of the entity. Any potential issuance of common shares, including those that are contingent and do not participate in dividends, are excluded from weighted average number of common shares outstanding. Undistributed net income (loss) for a given period is apportioned to participating members based on the weighted average number of each class of securities outstanding during the applicable period as a percentage of the combined weighted average number of these securities outstanding during the period. Income available to common stockholders/members is computed by deducting dividends paid to preferred members, accretion to redemption value on preferred members shares, less income allocated to participating securities including unvested shares for the restricted award holder since these unvested shares have participating rights. See Note 10, Equity-Based Compensation, for further discussion.

 

Diluted net income per share is computed by dividing the net income available to common stockholders/members adjusted for any changes in income that would result from the assumed conversion of the potential common shares by the weighted average common shares outstanding and all potential common shares, if they are dilutive. For all periods presented, diluted net income available to common stockholders/members includes the effect of 1,716,301 options to purchase common stock while 257,800 options to purchase common stock were excluded since they were anti-dilutive. The Company had no assumed shares available to purchase for the three and six months ended June 30, 2012.

 

A reconciliation of assumed exercised shares used in calculating basic and diluted net income (loss) share available to common stockholders/members follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Basic

 

33,471,679

 

28,849,242

 

33,435,439

 

28,849,242

 

Stock options and employee stock purchase plan shares

 

523,613

 

 

440,345

 

 

Unvested restricted stock awards

 

45,642

 

 

28,114

 

 

Diluted

 

34,040,934

 

28,849,242

 

33,903,898

 

28,849,242

 

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) includes certain changes in stockholders’ equity that are excluded from net income (loss) such as cumulative foreign currency translation adjustments and unrealized gains or losses on marketable securities. The Company’s net income equals comprehensive income for the three and six months ended June 30, 2013 and 2012.

 

Recently Issued Accounting Standard Updates

 

None of the recently issued accounting standard updates is expected to have a material impact.

 

(2) Information About Revenue By Geographic Area

 

The following represents our revenue based on customer location:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

North America

 

$

20,830

 

$

14,496

 

$

39,201

 

$

27,610

 

Europe

 

20,129

 

15,080

 

39,181

 

29,578

 

Rest of the world

 

15,850

 

11,049

 

29,544

 

21,011

 

Total revenue

 

$

56,809

 

$

40,625

 

$

107,926

 

$

78,199

 

 

Included in North America is the United States which comprises 33% and 32% of total revenue for the three months ended June 30, 2013 and 2012, respectively, and 32% and 32% of total revenue for the six months ended June 30, 2013 and 2012, respectively. No other country accounts for more than 10% of the Company’s revenue in any period. All long-lived assets are located in the United States.

 

(3) Goodwill and Intangible Assets

 

The Company’s goodwill balance is attributable to its Bigstockphoto, Inc. (“Bigstock”) reporting unit and is tested for impairment at least annually on October 1 or upon a triggering event. There have been no changes in the carrying amount of goodwill through June 30, 2013.

 

Intangible assets consist of the following as of June 30, 2013 and December 31, 2012:

 

 

 

As of June 30, 2013

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Weighted
Average Life
(Years)

 

 

 

(unaudited)

 

Amortizing intangible assets:

 

 

 

 

 

 

 

 

 

Customer relationship

 

$

600

 

$

(561

)

39

 

4

 

Trade name

 

400

 

(105

)

295

 

14

 

Contributor content

 

450

 

(113

)

337

 

15

 

Non-compete agreement

 

100

 

(100

)

 

3

 

Patents

 

193

 

(16

)

177

 

17

 

Domain name

 

86

 

(6

)

80

 

15

 

Total

 

$

1,829

 

$

(901

)

$

928

 

 

 

 

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As of December 31, 2012

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Weighted
Average Life
(Years)

 

Amortizing intangible assets:

 

 

 

 

 

 

 

 

 

Customer relationship

 

$

600

 

$

(486

)

$

114

 

4

 

Trade name

 

400

 

(91

)

309

 

14

 

Contributor content

 

450

 

(98

)

352

 

15

 

Non-compete agreement

 

100

 

(100

)

 

3

 

Patents

 

193

 

(11

)

182

 

17

 

Domain name

 

86

 

(3

)

83

 

15

 

Total

 

$

1,829

 

$

(789

)

$

1,040

 

 

 

 

Amortization expense was $55 and $64 for the three months ended June 30, 2013 and 2012, respectively, and $112 and $124 for the six months ended June 30, 2013 and 2012, respectively. The Company also 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: $77 for the remaining six months of 2013, $78 in 2014, $78 in 2015, $78 in 2016, $78 in 2017 and $539 thereafter.

 

(4) Property and Equipment

 

Property and equipment is summarized as follows:

 

 

 

June 30,
2013

 

December 31,
2012

 

Computer equipment and software

 

$

10,050

 

$

8,971

 

Furniture and fixtures

 

881

 

806

 

Leasehold improvements

 

888

 

484

 

Property and equipment

 

11,819

 

10,261

 

Less accumulated depreciation

 

(5,041

)

(5,006

)

Properly and equipment, net

 

$

6,778

 

$

5,255

 

 

Depreciation expense amounted to $889 and $568 for the three months ended June 30, 2013 and 2012, respectively, and $1,613 and $1,036 for the six months ended June 30, 2013 and 2012, respectively. Depreciation expense is included in cost of revenue and general and administrative expense based on the nature of the asset.

 

(5) Accrued Expenses

 

Accrued expenses consisted of the following:

 

 

 

June 30,
2013

 

December 31,
2012

 

Royalty tax withholdings

 

$

4,976

 

$

4,644

 

Non-income taxes

 

5,394

 

3,567

 

Accrued compensation

 

3,752

 

4,246

 

Accrued marketing

 

393

 

588

 

Professional fees

 

355

 

469

 

Other accrued expenses

 

1,987

 

2,092

 

Total accrued expenses

 

$

16,857

 

$

15,606

 

 

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(6) Income Taxes

 

The Company’s effective tax rates for the three month periods ended June 30, 2013 and 2012 are 37.3% and 2.3%, respectively. The Company’s effective tax rates for the six month periods ended June 30, 2013 and 2012 are 40.6 % and 2.3%, respectively. The Company incurred a discrete tax expense relating to a change in its state apportionment percentage during the six months ended June 30, 2013, which increased the effective tax rate by 1.3%. Excluding this discrete expense, the effective rate would be 39.3%. The Company has computed the provision for income taxes based on the estimated annual effective tax rates and the application of discrete items, if any, in the period applicable. Effective with the Reorganization on October 5, 2012, the Company became a Delaware corporation, and therefore became subject to federal and state tax expense. For all periods prior to the Reorganization, the Company filed its income tax returns as a limited liability company and was taxed as a “pass through” partnership for federal and state income tax purposes and recognized no federal and state income taxes, as the members of the LLC, and not the Company itself, were subject to income tax on their allocated share of the Company’s earnings. The effective tax rate differs from the statutory tax rate due primarily to non-deductible expense related to non-cash equity-based compensation, and meals and entertainment.

 

During the three months ended June 30, 2013 and 2012, the Company recorded an unrecognized tax benefit in the amount of $973 and $18, respectively, and during the six months ended June 30, 2013 and 2012, the Company recorded an unrecognized tax benefit in the amount of $973 and $18, respectively, for uncertain tax positions taken in prior years. To the extent these unrecognized tax benefits are ultimately recognized, the Company’s effective tax rate may be impacted in future periods.

 

The Company recognizes interest expense and tax penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. The Company accrued interest and penalties in the amount of $2 and $11 related to unrecognized tax benefits for the three and six months ended June 30, 2013. The Company did not accrue any interest or penalties related to unrecognized tax benefits for the three and six months ended June 30, 2012.

 

(7) Term Loan Facility

 

On September 21, 2012, the Company entered into a Loan and Security Agreement with Silicon Valley Bank providing for a $12,000 term loan facility, which the Company refers to as the term loan facility. On December 24, 2012, the Company paid down $6,000 of the term loan facility. On March 25, 2013, the Company paid off the remaining $6,000 of the loan facility. At June 30, 2013 and December 31, 2012, the Company recorded accrued interest in the amount of $0 and $3, respectively, which is included in accrued expenses.

 

The Company capitalizes costs directly associated with acquiring third party financing. During the three and six months ended June 30, 2013, the Company accelerated and recognized $0 and $125 as a result of paying off the term loan facility. As of December 31, 2012, deferred financing costs, net of accumulated amortization were $125.

 

The Company was in compliance with the financial covenants and other covenants applicable to it under the term loan facility prior to paying off the term loan facility on March 25, 2013.

 

(8) Commitments and Contingencies

 

The Company leases facilities under agreements accounted for as operating leases. Rental expense, inclusive of operating leases, for the three months ended June 30, 2013 and 2012 was $531 and $389, respectively, and for the six months ended June 30, 2013 and 2012 was $1,029 and $720, respectively. Some leases have defined escalating rent provisions, which are expensed over the term of the related lease on a straight-line basis commencing with the date of possession. Any rent allowance or abatement is netted in this calculation. All leases require payment of real estate taxes and operating expense.

 

On March 21, 2013, the Company entered into an operating lease agreement to lease new office facilities in New York, New York. The lease commencement date shall be the later of August 1, 2013 and the date the Company takes possession; therefore, no expense was recorded during the three and six months ended June 30, 2013. The Company also entered into a letter of credit in the amount of $1,829 as a security deposit for the leased facilities. The letter of credit was collateralized by $1,829 of cash as of June 30, 2013, and as such, is reported as restricted cash on the consolidated balance sheet. The lease term is eleven years from the commencement date and aggregate future minimum lease payments are approximately $42,200.

 

Capital Expenditures

 

For the six months ended June 30, 2013 and 2012, the Company spent approximately $2,000 and $2,100, respectively, for servers and related hardware to accommodate increased business volume. The additions are included in “Assets—Property and equipment, net” on the balance sheet. As of June 30, 2013, the Company had no significant committed purchases related to data server equipment.

 

Unconditional Purchase Obligations

 

As of June 30, 2013 and December 31, 2012, the Company had unconditional purchase obligations in the amount of $2,250 and $3,409, which consisted primarily of contracts related to infrastructure services and contractual commitments for marketing services.

 

As of June 30, 2013, the Company’s unconditional purchase obligations for the remainder of 2013 and for the years ending December 31, 2014 and 2015 are $991, $1,063 and $196, respectively. As of December 31, 2012, the Company’s unconditional purchase obligations for the years ending December 31, 2013, 2014 and 2015 are $2,274, $943 and $192, respectively.

 

Legal Matters

 

                From time to time, the Company may become party to litigation in the ordinary course of business. 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’s reserves may change in the future due to new developments or changes in strategy in handling these matters. Although the results of litigation and threats of litigation, investigations and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these matters will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company currently has no material active litigation matters and, as such, no material reserves related to litigation. In addition, the Company receives, from time to time, inquiries related to potential intellectual property infringement matters. To date, the outcome of these inquiries has not had a material impact on the Company’s operations or financial results.

 

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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 limited to $10. The Company offers certain of its customers greater levels of indemnification, including, in some cases, unlimited indemnification. As of June 30, 2013 and as of December 31, 2012, the Company has recorded no liabilities related to indemnification obligations in accordance with the authoritative guidance for loss contingencies. Additionally, the Company believes that it has the appropriate insurance coverage in place to adequately cover such indemnification obligations, if necessary.

 

Employment Agreements

 

The Company has entered into employment and change of control arrangements 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.

 

(9) Employee Benefit Plans

 

The Company has a 401(k) defined contribution plan (“401(k) Plan”) and provides for annual discretionary employer matching contributions not to exceed 3% of employees’ compensation per year. Matching contributions also are fully vested and non-forfeitable at all times.

 

The Company recorded employer matching contributions of $178 and $121 for the three months ended June 30, 2013 and 2012, respectively, and $317 and $269 for the six months ended June 30, 2013 and 2012, respectively.

 

(10) Equity-Based Compensation

 

Between June 7, 2007 and October 5, 2012, the Company was organized as a limited liability company. Beginning in 2011, the Company granted equity rights similar to options under its VAR Plan in the form of value appreciation rights. Each VAR Plan award had an exercise price, a vesting period and an expiration date, in addition to other terms and conditions similar to typical equity option grant terms and conditions. For the convenience of communicating the issuance of VAR Plan awards to employees, the BOM designated a total of 3,000,000 notional units for the VAR Plan to represent 10% of the Company’s overall equity. The VAR Plan awards were subject to a time-based vesting requirement and a condition that a change of control occur for a payment to trigger with respect to the VAR Plan awards. Payment could occur in the form of cash, units or other securities at the discretion of the BOM and was equal to the appreciation in value over the participant’s grant date price. The determination of the type of payment was subject to the discretion of the Company and not the holder. Additionally, the Company has never settled any VAR units with cash. As a result, the VAR units were accounted for as equity awards. Given the change-of-control condition, there was no equity-based compensation charge recorded for the three and six months ended June 30, 2012. In connection with the Reorganization, all of the VAR Plan awards were exchanged for options to purchase an aggregate of 1,661,719 shares of common stock of Shutterstock, Inc. with only a time-based vesting requirement, which were granted pursuant to the Company’s 2012 Plan.

 

The Company’s VAR Plan awards were made in the form of notional units and were exchanged for options to purchase shares of common stock of Shutterstock, Inc. at the time of the Reorganization. Since the Reorganization, equity grants have been in the form of options to purchase common stock of Shutterstock, Inc. The following table represents a summary of the Company’s stock option activity for the six months ended June 30, 2013:

 

 

 

Plan
Options

 

Weighted Average
Exercise Price

 

Options outstanding at December 31, 2012

 

1,692,282

 

$

16.11

 

Options granted

 

293,100

 

42.07

 

Options exercised

 

(105,313

)

15.34

 

Options cancelled or forfeited

 

(34,745

)

18.93

 

Options outstanding at June 30, 2013

 

1,845,324

 

$

20.23

 

Vested and exercisable at June 30, 2013

 

560,372

 

$

15.43

 

 

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The intrinsic value of the total stock options outstanding at June 30, 2013 and at December 31, 2012 was approximately $65,600 and $16,700, respectively. The intrinsic value of the total stock options vested and exercisable at June 30, 2013 and at December 31, 2012 was approximately $22,600 and $4,300, respectively. No stock options expired during the six months ended June 30, 2013 or the year ended December 31, 2012.

 

The following weighted average assumptions were used in the fair value calculation for the three and six months ended June 30, 2013 and 2012:

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Expected term (in years)

 

6.3

 

6.3

 

6.3

 

5.2-6.3

 

Volatility

 

49

%

49

%

49

%

49

%

Risk-free interest rate

 

1.0-1.5

%

1.1

%

1.0-1.5

%

1.1-1.6

%

Dividend yield

 

0

%

0

%

0

%

0

%

 

The Company recognized non-cash equity-based compensation expense of $1,130 and $1,744, net of forfeitures, in connection with the vesting of stock options during the three and six months ended June 30, 2013. There was no non-cash equity-based compensation in connection with the 2012 Plan for the three and six months ended June 30, 2012. As of June 30, 2013, the total unrecognized compensation charge related to 2012 Plan non-vested options is approximately $11,500, which is expected to be recognized through fiscal year 2017.

 

On August 17, 2010, the Company entered into a Profits Interest Agreement with an executive whereby the Company issued a membership interest in the Company in consideration of future services to be rendered. The profits interest grant was to vest over a six year period. Upon consummation of the Reorganization, the vested portion of the profits interest was exchanged for shares of common stock of Shutterstock, Inc. and the liability relating to the vested portion of the profits interest, in the amount of $5,147, was re-classed to equity. The unvested portion of the profits interest was exchanged for shares of restricted stock having the same vesting terms as the profits interest.

 

On June 3, 2013, the Company issued 10,000 restricted stock units pursuant to the 2012 Plan. The restricted stock units vest 25% on the first anniversary of the relevant vesting commencement date and the remaining 75% vest quarterly over three years thereafter. The restricted stock units are accounted for as equity awards and expensed based on the fair value on the date of grant over the four year vesting period.

 

The Company recognized non-cash equity-based compensation expense of $277 and $536 during the three and six months ended June 30, 2013, respectively, related to the vesting of restricted stock/restricted stock units and recognized non-cash equity-based compensation expense of $1,493 and $2,157, respectively, during the three and six months ended June 30, 2012 related to the profits interest award.

 

As of June 30, 2013, the total unrecognized compensation charge related to the restricted stock/restricted stock units is approximately $3,300, which is expected to be recognized through fiscal year 2017.

 

On October 10, 2012, the Company’s 2012 ESPP became effective. The Company recognized non-cash equity-based compensation expense of $147 and $290, net of estimated forfeitures, in connection with the 2012 ESPP for the three and six months ended June 30, 2013, respectively. There was no non-cash equity-based compensation in connection with the 2012 ESPP for the three and six months ended June 30, 2012. As of June 30, 2013, 73,717 shares have been issued under the 2012 ESPP.

 

The following table summarizes non-cash equity-based compensation expense included in the Company’s statement of operations for the three and six months ended June 30, 2013 and 2012:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Cost of revenue

 

$

110

 

$

 

$

165

 

$

 

Sales and marketing

 

304

 

 

507

 

 

Product development

 

329

 

 

584

 

 

General and administrative

 

811

 

1,493

 

1,314

 

2,157

 

Total

 

$

1,554

 

$

1,493

 

$

2,570

 

$

2,157

 

 

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(11) Distributions to Members

 

Prior to the Reorganization and in accordance with the Company’s Amended and Restated Limited Liability Company Agreement, as amended, the LLC made cash distributions to the members based on their respective percentage interest to the extent cash was available as determined by the board. During the six months ended June 30, 2012, the LLC made $15,151 in cash distributions to the preferred and common members. There have been no distributions made since the Reorganization on October 5, 2012.

 

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Item 2:                          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Safe Harbor Cautionary Statement

 

The following discussion of our financial condition and results of operations should be read together with our interim unaudited consolidated financial statements contained elsewhere in this quarterly report on Form 10-Q and with information contained in our other filings, including the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” of this Quarterly Report on Form 10-Q and in other parts of this report.

 

Overview

 

We operate an industry-leading global marketplace for commercial digital imagery. Commercial digital imagery consists of licensed photographs, illustrations and videos that companies use in their visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and video content. Demand for commercial digital imagery comes primarily from businesses, marketing agencies and media organizations.

 

Our global online marketplace brings together users of commercial digital imagery with image creators from around the world. More than 750,000 active, paying users contributed to revenue in 2012. We have historically benefitted from a high degree of revenue retention from both subscription-based and On Demand customers. For example, in 2012, 2011 and 2010, we experienced year-to-year revenue retention of 100%, 102%, and 96%, respectively. This means that customers that contributed to revenue in 2011 contributed, in the aggregate, 100% as much revenue in 2012 as they did in 2011. More than 40,000 approved contributors make their images available in our collection, which has grown to more than 27 million images as of June 30, 2013. This makes our collection one of the largest of its kind and, in the twelve months ended December 31, 2012, we delivered more than 76 million paid downloads (including both commercial and editorial images) to our customers. We believe that we delivered the highest volume of commercial image downloads in this period of any single brand in our industry.

 

·                  In January 2013, we introduced four new website languages — Turkish, Polish, Czech and Hungarian — bringing the total number of languages we support to fourteen.

 

·                  In March 2013, we launched a new image discovery tool called Spectrum. The prototype, which is part of the Company’s Labs development program for exploratory tools and products, indexes hexagram data to yield search results by color. Designed and built entirely in-house, Spectrum offers an extraordinary experience for designers looking for ideas and inspiration.

 

·                  In March 2013, we announced the formation of Offset, a new brand featuring a collection of remarkable imagery from top photographers and illustrators around the world. Offset features the works from established and respected collections including National Geographic and Huber Images. With Offset, creative image buyers can purchase authentic, sophisticated imagery with a straightforward licensing process. Pricing is simple and transparent, and visible alongside each image and currently ranges between $250 and $500 depending on the size of the file. True to its name, Offset is revolutionary and unique, set apart from existing stock collections.

 

·                  In April 2013, we surpassed contributor payouts of $150 million since our founding in 2003, illustrating our dynamic global marketplace and ability to connect artists to image buyers around the world.

 

·                  In April 2013, we reached 25 million images in our collection, and our users have made more than 300 million paid image downloads from our content collection since our founding in 2003.

 

·                  In April 2013, we introduced four new website languages — Danish, Finnish, Norwegian and Swedish — bringing the total number of languages we support to eighteen.

 

·                  In May 2013, we announced the launch of a new tool called Keyword Suggestions. This tool suggests keywords based on similar images within the collection and reduces the time contributors need to spend creating keywords. The Keyword Suggestions tool is integrated into the Shutterstock Content Editor and can be used seamlessly with other programs like Adobe’s Lightroom, Photoshop and Bridge, making it a natural addition to the submission workflow.

 

·                  In May 2013, we surpassed one million licensable video clips in our collection of royalty-free stock footage.

 

·                  In June 2013, we announced a new online marketplace called Skillfeed. The platform reinvents online learning for digital professionals by offering a diverse collection of credible, curated video courses through a simple, affordable subscription plan. We obtain content from knowledgeable instructors from around the world, specializing in topics as diversed as graphic design, video and photo editing, Microsoft Excel and web development. Designed for brushing up on existing skills or developing extensive new ones, Skillfeed offers two types of courses:

 

·                  Comprehensive Courses: videos of 20 minutes or more, designed to develop in-depth professional skills, such as HTML or Adobe InDesign.

·                  Skill Snacks: short videos you can watch on your lunch break to pick up new tips and techniques on a range of topics from Photoshop to video editing.

 

We believe the global and crowdsourced marketplace knowledge we have gained building the Shutterstock model can be applied to this new online marketplace.

 

·                  In July 2013, we celebrated the 10th anniversary of the Company’s founding and also launched Shutterstock Stories which will highlight the unique life stories of Shutterstock contributors and will award $75,000 through creative grants to winning contributors.

 

·                  In August 2013, we introduced two new website languages — Thai and Korean — bringing the total number of languages we support to twenty.

 

As an online marketplace, we generate revenue by licensing images and paying royalties to contributors for each of their images that is downloaded. Approximately half of our revenue and the vast majority of our downloads come from subscription-based users. These customers can download and use a large number of images in their creative process without concern for the incremental cost of each image download. For

 

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users who need fewer images, we offer simple, affordable, On Demand pricing, which is presented as a flat rate across all images and sizes. Since the launch of our On Demand purchase options in 2008, revenue from our On Demand purchase options has increased as a percentage of our overall revenue and we expect that this trend will continue.

 

Each time an image or video is downloaded, we record a royalty expense for the amount due to the associated contributor. Royalties are calculated using either a fixed dollar amount or a fixed percentage of revenue as described on our websites. Royalties are typically paid to contributors on a monthly basis subject to certain payout minimums. Royalties represent the largest component of our operating expenses and tend to increase proportionally with revenue.

 

Our cost of revenue is substantially similar as a percentage of revenue for our On Demand and subscription-based purchase options. While contributors generally earn a fixed amount per download for some of our plans, we have set the per-download amount paid to our contributors for each of our purchase options so that contributors earn more per download from plans where we collect higher revenue per download. In other words, we strive to deliver a similar percentage of revenue to contributors regardless of which purchase option a customer chooses. Cost of revenue for our On Demand purchase options has been slightly lower than that of our subscription-based options; however, this difference has historically represented less than 5% of revenue. As a result, we expect that any shifts in the relative popularity of these two purchase options will not substantially impact our cost of revenue.

 

We manage customer acquisition costs based on the expected blended customer lifetime value across our purchase options so we are able to manage our marketing expenses to achieve certain desired growth targets. As a result, we do not believe that shifts in the mix between On Demand or subscription-based purchase options will materially impact our operating margins. In addition, the repeat revenue characteristics of customers whose first purchase was a subscription-based purchase option are substantially similar to those whose first purchase was an On Demand purchase option.

 

An important driver of our growth is customer acquisition, which we achieve primarily through online marketing efforts including paid search, organic search, online display advertising, email marketing, affiliate marketing, social media and strategic partnerships. Over the past number of years, we increased our investments in marketing as a percentage of revenue. Since we believe the market for commercial digital imagery is at an early stage, we plan to continue to invest aggressively in customer acquisition to achieve revenue and market share growth. We believe that another important driver of growth is the quality of the user experience we provide on our websites, especially the efficiency with which our search interfaces and algorithms help customers find the images that they need, the degree to which we make use of the large quantity of data we collect about images and search patterns, and the degree to which our websites have been localized for international audiences. To this end, we have also invested aggressively in product development and we plan to continue to invest in this area. Finally, the quality and quantity of content that we make available in our collection is another key driver of our growth. The number of approved and licensable images in the Shutterstock collection is currently over 27 million images as of June 30, 2013 and growing, making it one of the largest libraries of its kind.

 

Corporate History

 

From September 7, 2007 through October 5, 2012, we operated as a New York limited liability company (the “LLC”). In May 2012, in connection with the filing of a registration statement for our initial public offering (the “IPO”), we formed Shutterstock, Inc., a Delaware corporation, as a wholly-owned subsidiary of the LLC. On October 5, 2012, the Company reorganized by way of a merger of the LLC with and into Shutterstock, Inc., with Shutterstock, Inc. surviving in the merger (the “Reorganization”).

 

On October 16, 2012, we completed our IPO of 5,175,000 shares of common stock, including 675,000 shares sold as a result of the underwriters’ exercise of their overallotment option, at a price of $17.00 per share. The IPO resulted in net proceeds to the Company of approximately $81.8 million after deducting underwriting discounts and commissions, and before deducting total estimated expenses in connection with the offering of $4.9 million.

 

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Key Business Metrics

 

In addition to key financial metrics, we regularly review a number of key operating metrics to evaluate our business, determine the allocation of resources and make decisions regarding business strategies. We believe that these metrics are useful for understanding the underlying trends in our business. The following table summarizes our key operating metrics, which are unaudited, for the three and six months ended June 30, 2013 and 2012:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(in millions, except revenue per download)

 

(in millions, except revenue per download)

 

Paid downloads (during the period)

 

24.3

 

18.3

 

46.7

 

35.9

 

Revenue per download (during the period)

 

$

2.33

 

$

 2.22

 

$

2.31

 

$

2.18

 

Images in collection (end of period)

 

27.3

 

20.2

 

27.3

 

20.2

 

 

Paid Downloads

 

Measuring the number of paid downloads that our customers earn in any given period is important because our revenue and contributor royalties are driven by paid download activity. For customers that choose our On Demand purchase options, each incremental download results in incremental revenue. For customers that choose our subscription purchase options, we do not recognize revenue from each download, but we believe that download activity is an important measure of the value that a customer is getting from a subscription and the likelihood that they will renew. We define paid downloads as the number of downloads that our customers make in a given period of our photographs, vectors, illustrations or videos, excluding re-downloads of images that a customer previously downloaded (which do not generate contributor royalty expense) and downloads of our free image of the week (which we make available as a means of acquiring new customers and attracting existing customers to return to our websites more frequently).

 

Revenue per Download

 

We define revenue per download as the amount of revenue recognized in a given period divided by the number of paid downloads in that period. This metric captures both changes in our pricing, if any, as well as the mix of purchase options that our customers choose, some of which generate more revenue per download than others. For example, when a customer pays $49.00 for five On Demand images, we earn more revenue per download ($9.80) than when a customer purchases a one-month subscription for $249.00 and downloads 100 images during the month ($2.49 per download). Over the last three years, revenue from each of our purchase options has grown, however our fastest growing purchase options have been those that generate more revenue per download, most notably our On Demand purchase options. Revenue per download has increased steadily over the last three years, almost solely due to change in product mix. During this period pricing remained relatively consistent.

 

Images in Collection

 

We define images in collection as the total number of photographs, vectors and illustrations available to customers on our websites at any point in time. We report this metric as of the end of a given period. We believe that offering a large selection of images allows us to acquire and retain customers and, therefore, we believe that broadening our selection of high-quality images is an important driver of our revenue growth.

 

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Key Components of Our Results of Operations

 

Revenue

 

We generate revenue by licensing commercial digital imagery. The significant majority of our revenue is generated via either subscription or On Demand purchase options. We generate subscription revenue through the sale of subscriptions varying in length from 30 days to 1 year. Our most popular subscription offering currently allows up to 25 image downloads per day for a flat monthly fee. In substantially all cases, we receive the full amount of the subscription payment by credit card at the time of sale; however, subscription revenue is recognized on a straight-line basis over the subscription period. We generate On Demand revenue through the sale of fixed packages of downloads varying in quantity from 1 image to 60 images. We also generate On Demand revenue through Bigstock via the sale of both credits plans (which enable a customer to purchase a fixed number of credits which can then be utilized to download images anytime within one year) and Pay As You Go pricing (which provides for simple cash pricing of individual images). We recently introduced a subscription option for Bigstock varying in length from 30 days to 1 year offering up to 50 image downloads per day for a flat fee. We typically receive the full amount of the purchase at the time of sale; however, revenue is recognized as images are downloaded or when the right to download images expires (typically 365 days after purchase). We also provide a number of other purchase options. These purchase options include custom accounts (for customers that need multi-seat access, invoicing, higher or unlimited indemnification or a higher volume of images) and video footage (which are sold both individually and in fixed packages). We typically receive the full amount of the purchase at the time of sale; however, revenue is recognized as images or videos are downloaded or when the right to download expires, typically 365 days after purchase. Some of our larger custom accounts are invoiced at or after the time of sale and pay us on credit terms.

 

Our deferred revenue consists of paid but unrecognized subscription revenue, On Demand revenue, and other revenue. Deferred revenue is recognized as revenue when images or videos are downloaded (On Demand), through the passage of time (subscriptions) or when credits or the right to download images or videos expire, and when all other revenue recognition criteria have been met.

 

Costs and Expenses

 

Cost of Revenue.     Cost of revenue consists of royalties paid to contributors, credit card processing fees, image and video review costs, customer service expenses, the infrastructure costs related to maintaining our websites and associated employee compensation and non-cash equity-based compensation, facility costs and other supporting overhead costs. We expect that our cost of revenue will increase in absolute dollars in the foreseeable future as our revenue grows.

 

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

 

Product Development.     Product development expenses consist of personnel expenses, including employee compensation, non-cash equity-based compensation, benefits and bonuses for salaried employees and contractors engaged in product management, design, development and testing of our websites and products. Product development costs also include facility and other supporting overhead costs. We typically expense product development expenses as incurred. We expect product development expenses to increase in absolute dollars in the foreseeable future as we continue to invest in developing new products and enhancing the functionality of our existing products.

 

General and Administrative.     General and administrative expenses include employee salaries and non-cash equity-based compensation and benefits for executive, finance, business development, accounting, legal, human resources, internal information technology, business intelligence and other administrative personnel. In addition, general and administrative expenses include outside legal and accounting services, facilities costs, insurance and other supporting overhead costs. We expect to incur incremental general and administrative expenses to support our growth and to support operating as a public company.

 

Provision for Income Taxes.  Historically, we filed our income tax return as a “pass through” New York limited liability company for federal and state income tax purposes and were subject to taxation on allocable portions of our net income and other taxes based on various methodologies employed by taxing authorities in certain localities. As a limited liability company, we recognized no federal and state income taxes, as the members of the LLC, and not the entity itself, were subject to income tax on their allocated share of our earnings. On October 5, 2012, we reorganized from a limited liability company to a Delaware corporation. Consequently, our operating income tax rate has increased significantly as we are now subject to federal, state and city income tax at the Company level.

 

As we continue to expand our operations outside of the United States, we may become subject to taxation in non-US jurisdictions and our effective tax rate could fluctuate accordingly.

 

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

 

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Critical Accounting Policies and Estimates

 

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, goodwill, intangibles, non-cash equity-based compensation, income tax provisions and certain non-income tax accruals. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

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

 

A description of our critical accounting policies that involve significant management judgments appears in our Annual Report on Form 10-K for the year ended December 31, 2012 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” There have been no material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates filed in our Annual Report.

 

Emerging Growth Company

 

Section 107 of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. However, we have chosen to opt out of any extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

We are in the process of evaluating the benefits of relying on other reduced reporting requirements provided by the JOBS Act.  Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or the PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.

 

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Results of Operations

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(in thousands)

 

(in thousands)

 

Consolidated Statement of Operations:

 

 

 

 

 

 

 

 

 

Revenue

 

$

56,809

 

$

40,625

 

$

107,926

 

$

78,199

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue

 

21,768

 

15,436

 

41,589

 

29,825

 

Sales and marketing

 

13,314

 

11,093

 

25,292

 

23,333

 

Product development

 

5,060

 

3,441

 

9,615

 

6,860

 

General and administrative

 

5,734

 

4,444

 

10,514

 

8,177

 

Total operating expenses

 

45,876

 

34,414

 

87,010

 

68,195

 

Income from operations

 

10,933

 

6,211

 

20,916

 

10,004

 

Interest income, net

 

20

 

2

 

8

 

5

 

Income before provision for income taxes

 

10,953

 

6,213

 

20,924

 

10,009

 

Provision for income taxes

 

4,090

 

141

 

8,496

 

227

 

Net income

 

$

6,863

 

$

6,072

 

$

12,428

 

$

9,782

 

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Consolidated Statement of Operations:

 

 

 

 

 

 

 

 

 

Revenue

 

100

%

100

%

100

%

100

%

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue

 

38

 

38

 

39

 

38

 

Sales and marketing

 

24

 

27

 

23

 

30

 

Product development

 

9

 

8

 

9

 

9

 

General and administrative

 

10

 

11

 

10

 

10

 

Total operating expenses

 

81

 

84

 

81

 

87

 

Income from operations

 

19

 

16

 

19

 

13

 

Interest income, net

 

0

 

0

 

0

 

0

 

Income before provision for income taxes

 

19

 

16

 

19

 

13

 

Provision for income taxes

 

7

 

0

 

8

 

0

 

Net income

 

12

%

16

%

11

%

13

%

 

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Comparison of the Three Months Ended June 30, 2013 and 2012

 

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

 

 

 

Three Months Ended June 30,

 

 

 

2013

 

2012

 

$ Change

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

56,809

 

$

40,625

 

$

16,184

 

40

%

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue

 

21,768

 

15,436

 

6,332

 

41

 

Sales and marketing

 

13,314

 

11,093

 

2,221

 

20

 

Product development

 

5,060

 

3,441

 

1,619

 

47

 

General and administrative

 

5,734

 

4,444

 

1,290

 

29

 

Total operating expenses

 

45,876

 

34,414

 

11,462

 

33

 

Income from operations

 

10,933

 

6,211

 

4,722

 

76

 

Interest income, net

 

20

 

2

 

18

 

900

 

Income before provision for income taxes

 

10,953

 

6,213

 

4,740

 

76

 

Provision for income taxes

 

4,090

 

141

 

3,949

 

*

 

Net income

 

$

6,863

 

$

6,072

 

$

791

 

13

%

 


*Not Meaningful

 

Revenue

 

Revenue increased by $16.1 million, or 40%, to $56.8 million in the three months ended June 30, 2013 compared to the same period in 2012. This increase in revenue was primarily attributable to growth in the number of paid downloads and an increase in revenue per download. In the three months ended June 30, 2013 and 2012, respectively, we delivered 24.3 million and 18.3 million paid downloads, and our average revenue per download increased to $2.33 from $2.22. Paid downloads increased primarily due to the acquisition of new customers as a result of our marketing strategies. Revenue per download increased primarily due to growth in our On Demand offerings, which capture a higher effective price per image. In the three months ended June 30, 2013 compared to the same period in 2012, revenue from North America increased to 37% from 36% while revenue from Europe decreased to 35% from 37% and revenue from the rest of the world increased to 28% from 27%.

 

Cost and Expenses

 

Cost of Revenue.  Cost of revenue increased by $6.3 million, or 41%, to $21.8 million in the three months ended June 30, 2013 compared to the same period in 2012. Royalties increased $4.4 million, or 38%, driven by an increase in the number of downloads from existing and new customers. We anticipate royalties growing in line with revenues for the remainder of 2013 and beyond, although royalties as a percentage of revenue may vary somewhat from period to period primarily due to the contributor’s achievement level of royalty target thresholds. Credit card charges increased by $0.5 million, or 38%, to $2.0 million as a result of an increased card volume in the three months ended June 30, 2013. We anticipate credit card charges increasing for the remainder of 2013 and beyond as credit card transaction volume increases. Employee-related costs increased $0.6 million, or 62%, driven by increased headcount in customer service, content and website operations to support increased customer volume and a more robust hosting infrastructure. Other costs associated with website hosting, content consulting and allocation of depreciation and amortization expense increased by $0.5 million, or 43%, to $1.5 million in the three months ended June 30, 2013 compared to the same period in 2012.

 

Sales and Marketing.  Sales and marketing expenses increased by $2.2 million, or 20%, to $13.3 million in the three months ended June 30, 2013 compared to the same period in 2012. Advertising expenses, the largest component of our sales and marketing expenses, decreased by $0.6 million, or 7%, as compared to the prior period as a result of more efficient spending on both search and display advertising in the current period which has continued to yield a high level of returns. However, we anticipate that our global advertising spend will begin to increase in absolute dollars for the remainder of 2013 and beyond, as we further our international expansion while maintaining a cost effective customer acquisition ratio. Employee-related expenses, including travel and entertainment, increased by $2.3 million, or 109%, driven by an increase in sales and marketing headcount to support our expansion into new markets, increased sales commissions as a result of growing revenue from direct sales, and non-cash equity-based compensation.

 

Product Development.  Product development expenses increased by $1.6 million, or 47%, to $5.1 million in the three months ended June 30, 2013 compared to the same period in 2012. Employee-related costs increased by $1.2 million, or 51%, driven by headcount increases in product, engineering and quality assurance to support our increasing number of product development initiatives for our websites, including ongoing efforts to improve our search capabilities, and increased non-cash equity-based compensation.

 

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General and Administrative.  General and administrative expenses increased by $1.3 million, or 29%, to $5.7 million in the three months ended June 30, 2013 compared to the same period in 2012. Non-income tax expenses increased $0.6 million, or 180%, primarily due to our increased volume of sales activity. Employee-related expenses, excluding non-cash equity based compensation, increased by $0.7 million, or 57%, as we added finance, legal, human resources, internal information technology and business intelligence personnel to support the growth in our revenue and the infrastructure necessary to operate as a public company. Other corporate overhead expenses, including allocated insurance costs due to operating as a public company and increased recruiting costs driven by additional headcount increased by $0.4 million or 227%. Non-cash equity based compensation decreased by $0.7 million, or 46%, to $0.8 million due to the re-measuring of a profits interest award in 2012 to market value.

 

Income Taxes.  Effective October 5, 2012, the Company became a Delaware corporation, and therefore became subject to federal and state income tax expense. For all periods on and prior to October 5, 2012, the Company filed its income tax returns as a limited liability company and was taxed as a “pass through” partnership for federal and state income tax purposes and recognized no federal and state income taxes, as the members of the LLC, and not the Company itself, were subject to income tax on their allocated share of the Company’s earnings. As a result, the effective tax rate was 37.3% in the three months ended June 30, 2013 compared to 2.3% for the same period in 2012.

 

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Comparison of the Six Months Ended June 30, 2013 and 2012

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

$ Change

 

% Change

 

 

 

(in thousands)

 

 

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

107,926

 

$

78,199

 

$

29,727

 

38

%

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue

 

41,589

 

29,825

 

11,764

 

39

 

Sales and marketing

 

25,292

 

23,333

 

1,959

 

8

 

Product development

 

9,615

 

6,860

 

2,755

 

40

 

General and administrative

 

10,514

 

8,177

 

2,337

 

29

 

Total operating expenses

 

87,010

 

68,195

 

18,815

 

28

 

Income from operations

 

20,916

 

10,004

 

10,912

 

109

 

Interest (expense) income, net

 

8

 

5

 

3

 

60

 

Income before provision for income taxes

 

20,924

 

10,009

 

10,915

 

109

 

Provision for income taxes

 

8,496

 

227

 

8,269

 

*

 

Net income

 

$

12,428

 

$

9,782

 

$

2,646

 

27

%

 


*Not Meaningful

 

Revenue

 

Revenue increased by $29.7 million, or 38%, to $107.9 million in the six months ended June 30, 2013 compared to the same period in 2012. This increase in revenue was primarily attributable to growth in the number of paid downloads and an increase in revenue per download. In the six months ended June 30, 2013 and 2012, respectively, we delivered 46.8 million and 35.9 million paid downloads, and our average revenue per download increased to $2.31 from $2.18. Paid downloads increased primarily due to the acquisition of new customers as a result of our marketing strategies. Revenue per download increased primarily due to growth in our On Demand offerings, which capture a higher effective price per image. In the six months ended June 30, 2013 compared to the same period in 2012, revenue from North America increased to 36% from 35% while revenue from Europe decreased to 36% from 38% and revenue from the rest of the world was flat at 27%.

 

Cost and Expenses

 

Cost of Revenue.  Cost of revenue increased by $11.8 million, or 39%, to $41.6 million in the six months ended June 30, 2013 compared to the same period in 2012. Royalties increased $8.2 million, or 37%, driven by an increase in the number of downloads from existing and new customers. We anticipate royalties growing in line with revenues for the remainder of 2013 and beyond, although royalties as a percentage of revenue may vary somewhat from period to period primarily due to the contributor’s achievement level of royalty target thresholds. Credit card charges increased by $1.0 million, or 34%, to $3.8 million as a result of an increased card volume in the six months ended June 30, 2013. We anticipate credit card charges increasing for the remainder of 2013 and beyond as credit card transaction volume increases. Employee-related costs increased by $1.0 million, or 52%, driven by increased headcount in customer service, content and website operations to support increased customer volume and a more robust hosting infrastructure. Other costs associated with website hosting, content consulting and allocation of depreciation and amortization expense increased by $0.9 million, or 49%, to $2.8 million in the six months ended June 30, 2013 as compared to the same period in 2012.

 

Sales and Marketing.  Sales and marketing expenses increased by $2.0 million, or 8%, to $25.3 million in the six months ended June 30, 2013 compared to the same period in 2012. Advertising expenses, the largest component of our sales and marketing expenses, decreased by $2.5 million, or 14%, as compared to the prior period as a result of more efficient spending on both search and display advertising in the current period which has continued to yield a high level of returns. However, we anticipate that our global advertising spend will begin to increase in absolute dollars for the remainder of 2013 and beyond, as we further our international expansion while maintaining a cost effective customer acquisition ratio. Employee-related expenses, including travel and entertainment, increased by $3.6 million, or 90%, driven by an increase in sales and marketing headcount to support our expansion

 

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into new markets, increased sales commissions as a result of growing revenue from direct sales, and non-cash equity-based compensation. Other corporate overhead expenses, including allocated insurance costs due to operating as a public company and increased recruiting costs driven by headcount increases, increased by $0.3 million or 68%.

 

Product Development.  Product development expenses increased by $2.8 million, or 40%, to $9.6 million in the six months ended June 30, 2013 compared to the same period in 2012. Employee-related costs increased by $2.1 million, or 44%, driven by headcount increases in product, engineering and quality assurance to support our increasing number of product development initiatives for our websites, including ongoing efforts to improve our search capabilities, and increased non-cash equity-based compensation. In addition, other technology costs increased by $0.2 million, or 75%, to $0.5 million primarily due to costs associated with third party providers and the use of cloud based environments.

 

General and Administrative.  General and administrative expenses increased by $2.3 million, or 29%, to $10.5 million in the six months ended June 30, 2013 compared to the same period in 2012. Non-income tax expenses increased $1.1 million, or 182%, primarily due to our increased volume of sales activity. Employee-related expenses, excluding non-cash equity based compensation,  increased by $1.0 million, or 37%, as we added finance, legal, human resources, internal information technology and business intelligence personnel to support the growth in our revenue and the infrastructure necessary to operate as a public company. Other corporate overhead expenses, including allocated insurance costs due to operating as a public company, increased recruiting costs driven by headcount increases, and increased finance costs due to the accelerated repayment of the term loan in March 2013, increased by $0.7 million or 190%. Non-cash equity based compensation decreased by $0.8 million, or 39%, to $1.3 million due to re-measuring the profits interest award in 2012 to market value.

 

Income Taxes.  Effective October 5, 2012, the Company became a Delaware corporation, and therefore became subject to federal and state income tax expense. For all periods on and prior to October 5, 2012, the Company filed its income tax returns as a limited liability company and was taxed as a “pass through” partnership for federal and state income tax purposes and recognized no federal and state income taxes, as the members of the LLC, and not the Company itself, were subject to income tax on their allocated share of the Company’s earnings. As a result, the effective tax rate was 40.6% in the six months ended June 30, 2013 compared to 2.3% for the same period in 2012. The Company incurred a discrete tax expense relating to a change in its state apportionment percentage during the six months ended June 30, 2013 which increased the effective tax rate by 1.3%. Excluding this discrete expense, the effective rate would have been 39.3%.

 

Quarterly Trends

 

Our operating results may fluctuate from quarter to quarter as a result of a variety of factors, including, but not limited to the effects of some seasonal trends in customer behavior. For example, we expect usage to decrease during the fourth quarter of each calendar year due to the year-end holiday vacation season, and to increase in the first quarter of each calendar year as many customers return to work. While we believe these seasonal trends have affected and will continue to affect our quarterly results, our trajectory of rapid growth may have overshadowed these effects to date. Additionally, because a significant portion of our revenue is derived from repeat customers who have purchased subscription plans, our revenues tend to be smoother and less volatile than if we had no subscription-based customers.

 

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

 

Liquidity and Capital Resources

 

As of June 30, 2013, we had cash and cash equivalents of $112.8 million, which primarily consisted of money market mutual funds and checking accounts. Since inception, we have financed our operations primarily through cash flow generated from operations. Historically, our principal uses of cash have been funding our operations, capital expenditures and distributions to members. On October 4, 2012, we made a final distribution to the LLC members representing all undistributed earnings. The final distribution approximated all of the cash generated from the operations of the LLC through October 4, 2012. Following this final distribution, no additional distributions were made to members of the LLC prior to the Reorganization. Additionally, following the Reorganization, our tax rate and related tax payments have increased significantly as we became subject to federal, state and additional city income tax.

 

We entered into a term loan facility in September of 2012 that provided for a $12.0 million term loan. Following the final distribution to members described above, the borrowings from the term loan facility were used to fund the short-term capital needs of our operations following the final distribution to members described above and our IPO. On December 24, 2012, we paid down $6.0 million of the term loan and on March 25, 2013, we paid off the remaining outstanding balance of $6 million. As of June 30, 2013, we had no outstanding debt. Additionally, we believe our existing cash and cash equivalents and cash flow generated from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months.

 

We plan to finance our operations and capital expenses largely through our operations. Since our results of operations are sensitive to the level of competition we face, increased competition could adversely affect our liquidity and capital resources, both by reducing our revenues and our net income, as a result of reduced sales, reduced prices and increased promotional activities, among other factors, as well as by requiring us to spend cash on advertising and marketing in an effort to maintain or increase market share in the face of such competition. In addition, the advertising and marketing expenses used to maintain market share and support future revenues will be funded from current capital resources or from borrowings or equity financings. As a result, our ability to grow our business relying largely on funds from our operations is sensitive to competitive pressures and other risks relating to our liquidity or capital resources.

 

On October 16, 2012, we completed our IPO of 5,175,000 shares of common stock, including 675,000 shares sold as a result of the underwriters’ exercise of their overallotment option, at a price of $17.00 per share. The IPO resulted in net proceeds to the Company from the offering of approximately $81.8 million after deducting underwriting discounts and commissions, and before deducting total estimated expenses in connection with the offering of $4.9 million.

 

We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors, based on our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

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Sources of Funds

 

We believe, based on our current operating plan, that our cash and cash equivalents, and cash from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

 

Uses of Funds

 

Capital Expenditures.  Consistent with previous periods, we expect that future capital expenditures will primarily relate to acquiring additional servers and network connectivity hardware and software, leasehold improvements and furniture and fixtures related to office expansion and relocation and general corporate infrastructure. We anticipate capital expenditures of approximately $12 million for the remainder of 2013. See Note 8 to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding capital expenditures for the six months ended June 30, 2013 and 2012.

 

Cash Flows

 

Operating Activities

 

Our primary source of cash from operating activities is cash collections from our customers. The majority of our revenues are generated from credit card transactions and are typically settled within one to five business days. Our primary uses of cash for operating activities are for settlement of accounts payable to contributors, vendors and personnel-related expenditures.

 

In the six months ended June 30, 2013, net cash provided by operating activities was $17.8 million including net income of $12.4 million and non-cash equity-based compensation of $2.6 million. Cash inflows from changes in operating assets and liabilities included an increase in deferred revenue of $8.8 million, primarily related to an increase in orders for both subscription and On Demand products. Contributor royalties payable increased by $1.2 million due to increasing royalty expenses generated by increased customer download activity. Conversely, prepaid expenses decreased by $3.7 million primarily due to federal, state and city estimated income tax payments during the period.

 

Investing Activities

 

Cash used in investing activities in the six months ended June 30, 2013 was $4.8 million consisting of capital expenditures to purchase software and equipment related to our data centers, as well as capitalization of leasehold improvements in the amount of $3.0 million and payment of a security deposit of $1.8 million in connection with the lease for our new office facilities.

 

Financing Activities

 

Cash used in financing activities in the six months ended June 30, 2013 was $2.3 million consisting of payment of the remaining outstanding balance of our term loan facility in the amount of $6.0 million offset with proceeds of $2.7 million from the issuance of common stock in connection with the exercise of stock options and the corresponding excess tax benefit of $1.0 million as result of the subsequent disposition of the common stock issued. As of June 30, 2013, we had no outstanding debt.

 

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Table of Contents

 

Contractual Obligations and Commitments

 

We lease office facilities in New York City under operating lease agreements that expire on various dates between 2013 and 2015. Certain lease agreements provide for rental payments that increase on a graduated basis while other lease agreements provide for fixed rental payments over the lease terms. We recognize rent expense on a straight-line basis over the lease periods. We also have various co-location agreements with third-party hosting facilities that expire on various dates between 2013 and 2014. We anticipate expanding our co-location facilities as our revenue and customer base grow.

 

On March 21, 2013, we entered into an operating lease agreement to lease new office facilities in New York City. The lease term is eleven years from the commencement date and aggregate future minimum lease payments are approximately $42.2 million. The Company also entered into a letter of credit in the amount of $1.8 million as a security deposit for the leased facilities. The letter of credit was collateralized by $1.8 million of cash as of June 30, 2013, and as such, is reported as restricted cash on the consolidated balance sheet.

 

We do not have any material capital lease obligations, and our property, equipment and software have been purchased primarily with cash.

 

There have been no material changes in our contractual obligations since our disclosures within our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 1, 2013.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2013, we did not have any off-balance sheet arrangements.

 

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Item 3:                                Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks in the ordinary course of our business, including risks related to interest rate fluctuation, foreign currency exchange rate fluctuation and inflation.

 

Interest Rate Fluctuation Risk

 

Our cash and cash equivalents consist of cash and money market accounts. The primary objective of our investment activities is to preserve principal while generating income without significant risk. Because our cash and cash equivalents have a relatively short maturity, our portfolio’s fair value is not particularly sensitive to interest rate changes. We determined that the nominal difference in interest income that may be achieved from investing our cash and cash equivalents in securities with a higher risk and a longer-term did not warrant a change in our investment strategy. We will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.

 

Foreign Currency Exchange Risk

 

Revenues derived from customers residing outside North America as a percentage of total revenue was 63% and 64% for the three months ended June 30, 2013 and 2012, respectively, and 64% and 65% for the six months ended June 30, 2013 and 2012, respectively. Our sales to international customers are denominated in multiple currencies, including but not limited to the U.S. Dollar, the Euro, the British Pound and the Yen. Revenue denominated in foreign currencies as a percentage of total revenue was 32% and 33% for the three and six months ended June 30, 2013, respectively, and 31% and 32% for the three and six months ended June 30, 2012, respectively. We have foreign currency risks related to foreign-currency denominated revenues. All amounts owed and paid to our foreign contributors are denominated and paid in the U.S. Dollar. Accordingly, changes in exchange rates will affect our revenue and other operating results as expressed in the U.S. Dollar. Based on our foreign currency denominated revenue for the three and six months ended June 30, 2013, a 10% change in the exchange rate of the U.S. Dollar against all foreign currency denominated revenues would result in an approximately 3% impact on our revenue, respectively.

 

Because the majority of our revenue and expenses are denominated in the U.S. Dollar, we have not experienced material fluctuations in our net income as a result of transaction gains or losses. As we continue to expand internationally, our currency rate fluctuation risk associated with the exchange rate movement of the U.S. Dollar against other foreign currencies is expected to increase. We do not currently hedge our foreign currency risk exposure. We actively monitor the movement of the U.S. Dollar against various foreign currencies and have considered the use of financial instruments, including but not limited to derivative financial instruments, which could mitigate such risk. If we determine that our risk of exposure materially exceeds the potential cost of derivative financial instruments, we may in the future enter in to these types of investments. During the three and six months ended June 30, 2013 and 2012, our foreign currency transaction gains and losses were immaterial.

 

Inflation Risk

 

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

 

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Item 4:                          Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2013. 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. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

 

PART II. OTHER INFORMATION

 

Item 1.                           Legal Proceedings

 

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

 

Item 1A.                  Risk Factors

 

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with SEC on March 1, 2013, which could materially affect our business, financial condition or future results. There are no material changes to the risk factors described in our Annual Report.

 

Item 2.                           Unregistered Sales of Equity Securities and Use of Proceeds

 

There has been no material change in the planned use of proceeds from the Company’s IPO from that described in the final prospectus filed with the SEC pursuant to Rule 424(b) on October 11, 2012. On March 25, 2013, we used a portion of our IPO proceeds, together with a portion of our cash from operations, to pay off the remaining outstanding balance of $6.0 million on our term loan facility.

 

Item 3.                           Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.                                 Mine Safety Disclosures

 

Not applicable.

 

Item 5.                           Other Information

 

Not applicable.

 

Item 6.                           Exhibits

 

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

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

SHUTTERSTOCK, INC.

 

 

 

Dated: August 9, 2013

By:

/s/ Jonathan Oringer

 

 

Jonathan Oringer

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

Dated: August 9, 2013

By:

/s/ Timothy E. Bixby

 

 

Timothy E. Bixby

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

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Exhibit
Number

 

Exhibit Description

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

 

 

 

32.1*#

 

Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2*#

 

Certifications of 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

 


*                 Furnished herewith.

#                 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.

                 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.

 

32