Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
 
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 001-33031

SHUTTERFLY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
94-3330068
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)

2800 Bridge Parkway
Redwood City, California
 
94065
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s Telephone Number, Including Area Code
(650) 610-5200

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

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.0001 Par Value Per Share
 
The Nasdaq Global Select Market

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

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).  
Yes ý      No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer   x
Accelerated Filer   o
Non-accelerated Filer   o
Smaller reporting company o
 
Emerging growth company o
(Do not check if a smaller reporting company)


1


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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of August 6, 2018
Common stock, $0.0001 par value per share
 
33,442,465
 

2


TABLE OF CONTENTS

 
Page
Number
Part I - Financial Information
 
 
Part II - Other Information
 







3


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based upon our current expectations. These forward-looking statements include statements related to expanding our product range to Lifetouch customers; accelerating the development of Lifetouch’s online order-taking platform; the impact on us of general economic conditions, trends in key metrics such as total number of customers; our business strategy and plans; the seasonality of and growth of our business; growing and strengthening our talented leadership team; realizing significant supply chain, manufacturing and fulfillment synergies over time; total number of orders and average order value; technology initiatives, expected SBS gross margins in the short and longer term; our capital expenditures for 2018; the sufficiency of our cash and cash equivalents and cash generated from operations for the next twelve months; our operating expenses remaining a consistent percentage of our net revenue; our manufacturing capabilities; our new production facilities; effective tax rates; outstanding convertible senior notes; the incremental term loan as well as other statements regarding our future operations, financial condition and prospects and business strategies. In some cases, you can identify forward-looking statements by terminology such as “guidance,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “seek,” “continue,” “should,” “would,” “could,” “will,” or “may,” or the negative of these terms or other comparable terminology. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including but not limited to, decreased consumer discretionary spending as a result of general economic conditions; our ability to expand our customer base and increase sales to existing customers; our ability to meet production requirements; our ability to retain and hire necessary employees, including seasonal personnel, and appropriately staff our operations; the impact of seasonality on our business; our ability to develop innovative, new products and services on a timely and cost-effective basis; failure to realize the anticipated benefits of our 2017 restructuring activities; the retention of Lifetouch employees and our ability to successfully integrate the Lifetouch businesses; consumer acceptance of our products and services; our ability to develop additional adjacent lines of business; successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; unforeseen changes in expense levels; competition and the pricing strategies of our competitors, which could lead to pricing pressure; the anticipated benefits of expanding the portions of our public cloud infrastructure and the other risks set forth below under “Risk Factors” in Part II, Item 1A of this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We assume no obligation to update any of the forward-looking statements after the date of this report or to compare these forward-looking statements to actual results.

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Table of Contents

PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SHUTTERFLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
 
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
146,701

 
$
489,894

Short-term investments
53,890

 
178,021

Accounts receivable, net
58,578

 
82,317

Inventories
15,269

 
11,019

Prepaid expenses and other current assets
112,196

 
41,383

Total current assets
386,634

 
802,634

Long-term investments
24,974

 
9,242

Property and equipment, net
392,662

 
266,860

Intangible assets, net
341,769

 
29,671

Goodwill
841,374

 
408,975

Other assets
23,623

 
17,418

Total assets
$
2,011,036

 
$
1,534,800

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
15,249

 
$
297,054

Accounts payable
33,178

 
91,473

Accrued liabilities
146,372

 
159,248

Deferred revenue
29,448

 
24,649

Total current liabilities
224,247

 
572,424

Long-term debt
1,094,347

 
292,457

Other liabilities
148,146

 
119,195

Total liabilities
1,466,740

 
984,076

Commitments and contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Common stock, $0.0001 par value; 100,000 shares authorized; 33,381 and 32,297 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively
3

 
3

Additional paid-in capital
1,036,962

 
996,301

Accumulated other comprehensive income
4,164

 
1,778

Accumulated deficit
(496,833
)
 
(447,358
)
Total stockholders' equity
544,296

 
550,724

Total liabilities and stockholders' equity
$
2,011,036

 
$
1,534,800

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

SHUTTERFLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)


Three Months Ended
 
Six Months Ended

June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net revenue
$
443,372

 
$
209,032

 
$
643,097

 
$
401,004

Cost of net revenue
233,228

 
118,205

 
359,275

 
234,324

Restructuring

 
196

 

 
1,436

Gross profit
210,144

 
90,631

 
283,822

 
165,244

Operating expenses:
 
 
 

 
 
 
 

Technology and development
44,420

 
39,398

 
82,924

 
85,353

Sales and marketing
130,643

 
42,987

 
168,363

 
85,874

General and administrative
55,040

 
27,511

 
86,604

 
55,306

Capital lease termination

 
8,098

 

 
8,098

Restructuring
2,952

 
4,477

 
2,952

 
12,213

Total operating expenses
233,055

 
122,471

 
340,843

 
246,844

Loss from operations
(22,911
)
 
(31,840
)
 
(57,021
)
 
(81,600
)
Interest expense
(17,769
)
 
(5,955
)
 
(27,402
)
 
(11,919
)
Interest and other income, net
1,561

 
244

 
3,310

 
433

Loss before income taxes
(39,119
)
 
(37,551
)
 
(81,113
)
 
(93,086
)
Benefit from income taxes
12,607

 
14,713

 
27,436

 
37,054

Net loss
$
(26,512
)
 
$
(22,838
)
 
$
(53,677
)
 
$
(56,032
)
 
 
 
 
 
 
 
 
Net loss per share - basic and diluted
$
(0.80
)
 
$
(0.68
)
 
$
(1.63
)
 
$
(1.67
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
33,234

 
33,579

 
32,970

 
33,646

 
 
 
 
 
 
 
 
Stock-based compensation expense is allocated as follows (Note 4):
 
 
 
 
 
 
 
Cost of net revenue
$
943

 
$
1,074

 
$
1,942

 
$
2,243

Technology and development
2,571

 
2,179

 
5,001

 
4,875

Sales and marketing
2,941

 
2,980

 
6,445

 
6,153

General and administrative
5,242

 
4,236

 
10,001

 
8,703

Restructuring

 

 

 
814


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

SHUTTERFLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(26,512
)
 
$
(22,838
)
 
$
(53,677
)
 
$
(56,032
)
Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation losses
(401
)
 

 
(401
)
 

Unrealized losses on investments, net
(16
)
 
(15
)
 
(46
)
 
(28
)
Tax benefit on unrealized losses on investments, net
4

 
6

 
11

 
16

Unrealized gains on cash flow hedges
1,000

 

 
3,770

 

Tax expense on unrealized gains on cash flow hedges
(249
)
 

 
(948
)
 

Other comprehensive income (loss), net of tax
338

 
(9
)
 
2,386

 
(12
)
Comprehensive loss
$
(26,174
)
 
$
(22,847
)
 
$
(51,291
)
 
$
(56,044
)

The accompanying notes are an integral part of these condensed consolidated financial statements.
 

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Table of Contents

SHUTTERFLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(53,677
)
 
$
(56,032
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
50,111

 
45,121

Amortization of intangible assets
15,164

 
8,200

Amortization of debt discount and issuance costs
7,009

 
7,524

Stock-based compensation expense
23,389

 
21,974

Loss on disposal of property and equipment
154

 
467

Deferred income taxes
17,571

 
(7,103
)
Restructuring
752

 
10,764

Other
(272
)
 

Changes in operating assets and liabilities, net of acquisition:
 

 
 

Accounts receivable
30,767

 
27,286

Inventories
15,607

 
1,415

Prepaid expenses and other assets
(42,795
)
 
(19,776
)
Accounts payable
(69,708
)
 
(39,949
)
Accrued and other liabilities
(130,127
)
 
(58,605
)
Net cash used in operating activities
(136,055
)
 
(58,714
)
Cash flows from investing activities:
 

 
 

Acquisition of business, net of cash acquired
(890,052
)
 

Purchases of property and equipment
(17,692
)
 
(8,176
)
Capitalization of software and website development costs
(21,392
)
 
(17,058
)
Purchases of investments
(9,523
)
 
(39,805
)
Proceeds from the maturities of investments
174,329

 
19,033

Proceeds from the sales of investments
45,106

 

Proceeds from sale of property and equipment
1,132

 
11,678

Net cash used in investing activities
(718,092
)
 
(34,328
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock upon exercise of stock options
16,577

 
520

Repurchases of common stock

 
(50,000
)
Principal payments of capital lease and financing obligations
(9,396
)
 
(20,621
)
Principal payments of borrowings
(302,608
)
 

Proceeds from borrowings, net of issuance costs
806,652

 

Net cash provided by (used in) financing activities
511,225

 
(70,101
)
Effect of exchange rate changes on cash and cash equivalents
(271
)
 

Net decrease in cash and cash equivalents
(343,193
)
 
(163,143
)
Cash and cash equivalents, beginning of period
489,894

 
289,224

Cash and cash equivalents, end of period
$
146,701

 
$
126,081

 
 
 
 
Supplemental schedule of non-cash investing / financing activities:
 
 
 

Net (decrease) increase in accrued purchases of property and equipment
$
(1,200
)
 
$
745

Net increase in accrued capitalized software and website development costs
1,119

 
270

Stock-based compensation capitalized with software and website development costs
697

 
758

Property and equipment acquired under capital leases
2,969

 
6,228

Net increase in receivable proceeds from the sale of property and equipment

 
9,250


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company and Summary of Significant Accounting Policies

Shutterfly, Inc., (the “Company” or "Shutterfly") is the leading digital retailer and manufacturer of high-quality personalized products and services. Founded and incorporated in the state of Delaware in 1999, Shutterfly brings your photos to life in photo books, gifts, and cards and stationery - through its flagship Shutterfly products, premium offerings in its Tiny Prints boutique, as well as wedding invitations and stationery for every step of the wedding planning process; and BorrowLenses, the premier online marketplace for photographic and video equipment rentals. Shutterfly, Inc. also operates Shutterfly Business Solutions (“SBS”), delivering high quality digital printing services to the enterprise market. The Company is headquartered in Redwood City, California.

On April 2, 2018, the Company completed its acquisition of Lifetouch Inc. ("Lifetouch"), the leading professional photographer of children and families in the United States and Canada. Professional photographers at Lifetouch capture the classic images of school-age children under the Lifetouch brand. In addition, Prestige Portraits help high school and college seniors celebrate those graduation milestones. Lifetouch also provides schools with yearbooks and memory books and churches and other groups with pictorial directories and images for purchase. Over 400 retail studios operated by Lifetouch under the JCPenney Portrait brand also provide professional photographic services for infants, toddlers, families and business professionals throughout the United States. As a result of the acquisition, the Company has a new operating segment for the Lifetouch business (refer to Note 10 - Segment Reporting for further details).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and, accordingly, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements include the accounts of Shutterfly, Inc. and its wholly owned subsidiaries including the financial results of Lifetouch which are included prospectively from the acquisition date of April 2, 2018. In the opinion of management, all adjustments, consisting primarily of normal recurring accruals, considered necessary for a fair statement of the Company’s results of operations for the interim periods reported and of its financial condition as of the date of the interim balance sheet have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or for any other period.

The December 31, 2017 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K.

Tax Cuts and Jobs Act

As of December 31, 2017, the Company recorded provisional estimates of the tax impacts of the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). The Company provisionally recorded an income tax benefit related to the Tax Act primarily for the impact of the remeasurement of its deferred tax assets and liabilities at the newly enacted 21% tax rate, the enhanced accelerated depreciation deductions available on qualified property, and estimates of other elements of the Tax Act. The Company's accounting for the Tax Act as of December 31, 2017 was incomplete due to the complexity involved and the absence of regulatory guidance, and therefore its provisional accounting was based on reasonable estimates. In accordance with Staff Accounting Bulletin 118, the measurement period extends up to one year from the enactment date. As the Company completes its analysis of regulatory guidance, adjustments to its provisional amounts may have a material impact to the Company’s provision for income taxes in the period they are recognized. For the three and six months ended June 30, 2018, the Company did not record any adjustments to its provisional amounts. The Company expects to complete its analysis by the fourth quarter of 2018.

Foreign Currency Translation Policy

As a result of the acquisition of Lifetouch, the Company has subsidiaries in Canada for which the functional currency is the local currency. As such, exchange rate fluctuations for these subsidiaries are included in stockholders' equity as a component of accumulated other comprehensive income. Prior to the acquisition of Lifetouch, the Company only had one foreign subsidiary in Israel for which the functional currency is the U.S. Dollar and exchange rate fluctuations are recorded as part of earnings.


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Table of Contents
SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Recently Adopted Accounting Pronouncements
    
In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). This new standard replaces all current GAAP guidance on this topic and eliminates all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange of those goods or services. The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method. Refer to Note 2 - Revenue for further details.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The Company adopted ASU 2016-15 as of January 1, 2018 on a retrospective basis with no material impact to the consolidated statements of cash flows for the six months ended June 30, 2018 and 2017.

Recent Accounting Pronouncements Pending Adoption
    
In February 2018, the FASB issued ASU No. 2018-02, Income Statement, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows a reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings, as a result of the Tax Act. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted and can be applied either in the period of adoption or retrospectively to all applicable periods. The Company does not expect that the pending adoption of ASU 2018-02 will have a material impact on its consolidated financial statements.
    
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 on a modified retrospective basis, and earlier adoption is permitted. The Company anticipates that most of its operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets upon adoption, which will increase the total assets and total liabilities. The Company is currently evaluating the accounting transition and disclosure requirements of this standard, and due to the magnitude of leases assumed in the recent acquisition of Lifetouch, the Company cannot currently estimate the financial statement impact of adoption.
    
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Earlier adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is evaluating the impact of adopting this new accounting guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). The updated guidance simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The new standard is effective for annual or any interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact this new accounting guidance will have on the consolidated financial statements.

Note 2 — Revenue

Adoption of ASC 606, Revenue from Contracts with Customers

The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method. Under the modified retrospective method, ASC 606 is only applied to contracts that were not complete as of the adoption date. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition.


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Table of Contents
SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


As a result of the adoption of ASC 606, the Company identified an impact related to timing and measurement of breakage revenue for the Shutterfly consumer and the Lifetouch businesses and for one of the Company's significant multiple-element arrangements in connection with the SBS business. Upon adoption of ASC 606, the Company recognized the expected breakage amounts as revenue in proportion to the pattern of rights exercised by the customer, rather than the previous method of recognizing breakage revenue when the Company believed the redemption was remote. As it relates to timing and measurement of one of the Company's multiple-element arrangements in connection with the SBS business, deferred revenue was previously recognized over the stated term of the contract. Upon adoption of ASC 606, deferred revenue for this particular arrangement is now recognized ratably over a period of time that is shorter than the stated contract term, as this arrangement does not contain substantive termination penalties after a certain initial number of years within the contractual term. 

The cumulative impact of the adoption of ASC 606 resulted in a decrease to opening accumulated deficit of $4.2 million as of January 1, 2018, which consisted of a decrease in total liabilities of $5.1 million primarily related to deferred revenue and a decrease in total assets of $0.9 million primarily related to deferred costs.

The impact as a result of applying ASC 606 was:
an increase of $0.7 million and $1.2 million to net revenue for the three and six months ended June 30, 2018, respectively; and
a decrease to deferred revenue of $7.5 million as of June 30, 2018.

The impact to other accounts is not material as of June 30, 2018 and for the three and six months ended June 30, 2018.

Revenue Recognition Policy

The Company derives its revenue from Shutterfly Consumer, Lifetouch and SBS product sales, net of applicable sales tax and allowances for returns. Revenue is recognized when control of the promised products or services is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those products or services. Shipping charged to its customers is recognized upon shipment and the related shipping costs are recognized as cost of net revenue.

Shutterfly Consumer and Lifetouch. The Company’s Shutterfly Consumer revenue is primarily derived from the sale of products such as, professionally-bound photo books, cards and stationery, custom home décor products and unique photo gifts, calendars and prints, etc. Customers place Shutterfly Consumer product orders through the Shutterfly website or mobile apps and pay primarily using credit cards.

The Company’s Lifetouch revenue is primarily derived from the sale of photographic and publishing products. Customers place Lifetouch product orders through the Lifetouch website, via order forms or in person at the JCPenney photo studios and churches. Customers pay using credit cards, or fill out an order form and enclose exact payment.  

Revenue is recognized upon shipment of the fulfilled orders, which generally occurs upon delivering to the carrier. If multiple products are ordered together, each product is a separate performance obligation, and the transaction price is allocated to each performance obligation based upon standalone selling price as each performance obligation is satisfied. The Company generally determines the standalone selling prices based on the prices charged to its customers or using expected cost plus margin.

For flash deal promotions through group buying websites, the Company recognizes revenue on a gross basis, as it is the primary obligor, when redeemed items are shipped. Revenue from sales of flash deal promotions are deferred until shipment of fulfilled orders or until unredeemed flash deal promotions are recognized as breakage revenue. The Company recognizes the expected breakage amounts as revenue in proportion to the pattern of rights exercised by the customer.

The Company periodically provides incentive offers to its new customers in exchange for setting up an account as well as to its existing customers to encourage purchases. These incentive offers are readily available to all of its customers. Therefore, these do not represent a performance obligation as its customers are not required to enter into any enforceable commitment by receiving these incentive offers. The discounts are treated as a price reduction when accepted and used by customers. Production costs related to free products are included in cost of net revenue upon redemption.

SBS. The Company’s SBS revenue is derived from personalized direct marketing and other end-consumer communications as well as just-in-time, inventory-free printing for its business customers. The services that the Company promises to its SBS customers are typically composed of a series of services that are performed over time. The Company accounts for these series of services as one performance obligation which represents a series of distinct services that are substantially the same and have the same pattern of transfer.

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



The Company recognizes revenue from the satisfaction of performance obligations when it invoices its customers (that is, when it has the contractual right to bill under the contract). The Company has the contractual right to consideration from its customers in an amount that corresponds directly with the value to the customer of the services it has performed to date. For contracts that do not contain a significant non-refundable up-front fee, the Company applies the “right to invoice” practical expedient as it has the right to consideration from its customers in an amount that corresponds directly with the value to the customer of the services it has performed to date. For contracts that contain a significant non-refundable up-front fee, the Company considers whether these fees are related to the transfer of a promised good or service to the customer, and therefore represent a performance obligation. When the up-front fees do not represent a distinct performance obligation, the Company recognizes revenue ratably over the period for which there is a significant termination contractual penalty.

The Company's incremental direct costs of obtaining a contract consist of Lifetouch and SBS sales commissions. The Company does not defer such incremental direct costs as the related performance obligations are satisfied within a short period of time and the Company elected to apply the practical expedient per ASC 340-40-25-4 related to expensing contract acquisition costs with the amortization period of less than one year. The Company does not provide any financing service to its customer as payment term.

Deferred Revenue

The Company records deferred revenue when cash payments are received in advance of our performance and primarily relate to flash deal promotions, gift cards, yearbooks and portrait proofs as well as up-front fees received from an SBS customer. The decrease of $0.6 million in deferred revenue balance during the six months ended June 30, 2018 is primarily driven by the aforementioned impact of ASC 606 adoption and $3.3 million of revenue recognized that was included in deferred revenue balance as of December 31, 2017. The decrease is partially offset by the assumed deferred revenue from the acquisition of Lifetouch (deferred revenue balance as of June 30, 2018 for Lifetouch is $8.5 million) and by cash payments received in advance of the Company's performance obligations during the six months ended June 30, 2018.

Net Revenue by Brand

The following table disaggregates the Company’s net revenue by brand for the three and six months ended June 30, 2018 and 2017 (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Shutterfly consumer net revenue:
 
 
 
 
 
 
 
Shutterfly brand
$
154,181

 
$
139,908

 
$
296,845

 
$
263,811

Tiny Prints Boutique(1)
1,397

 

 
3,500

 

Tiny Prints(1)

 
12,917

 

 
23,382

Wedding Paper Divas(2)

 
11,365

 

 
25,655

MyPublisher(3)

 
6,056

 

 
10,992

Other
9,425

 
8,844

 
16,717

 
15,895

Shutterfly consumer net revenue
165,003

 
179,090

 
317,062

 
339,735

Lifetouch net revenue(4)
228,560

 

 
228,560

 

Shutterfly Business Solutions net revenue
49,809

 
29,942

 
97,475

 
61,269

Net revenue
$
443,372

 
$
209,032

 
$
643,097

 
$
401,004

 
 
 
 
 
 
 
 
(1) On June 28, 2017, the Company created a Tiny Prints boutique on a dedicated tab on Shutterfly.com and shut down the legacy Tiny Prints website.
(2) On September 13, 2017, the Company launched the new Shutterfly Wedding Shop and shut down the Wedding Paper Divas legacy website.
(3) The MyPublisher brand was shut down on May 15, 2017.
(4) On April 2, 2018, the Company acquired Lifetouch.


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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 3 — Acquisition
On January 30, 2018, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Lifetouch and Lifetouch Inc. Employee Stock Ownership Trust (collectively, the “Seller”). On April 2, 2018, pursuant to the Purchase Agreement, the Company completed the acquisition of 100% of the issued and outstanding shares of common stock of Lifetouch from the Seller. Under the terms of the Purchase Agreement, the consideration for the acquisition consisted of an all-cash purchase price of $825.0 million subject to certain adjustments based on a determination of Closing Net Working Capital, Transaction Expenses, Cash and Investments, and Closing Indebtedness, as defined in the Purchase Agreement. The Company financed the all-cash purchase price with an incremental $825.0 million term loan issuance under its existing credit agreement, which closed simultaneous with the acquisition (refer to Note 9 - Debt for further details).
Lifetouch provides the Company with a highly complementary business. Lifetouch will be able to offer Shutterfly’s broader product range to Lifetouch customers, as well as to accelerate the development of Lifetouch’s online order-taking platform. The Company expects to gain access to many Lifetouch customers as Shutterfly customers, where they will benefit from Shutterfly’s leading cloud-based photo management service, product creation capabilities, mobile apps, and broad product range.
The Company elected to treat the acquisition of Lifetouch as an asset acquisition under section 338(h)(10) of the U.S. Internal Revenue Service tax code. As such, the goodwill that the Company recognizes as part of the Lifetouch acquisition will be deductible for U.S. income tax purposes. The goodwill recognized represents the assembled workforce of Lifetouch and the value of growth in revenue from future customers of Lifetouch.
During the three and six months ended June 30, 2018, the Company recorded approximately $8.0 million and $12.6 million, respectively, of direct and incremental costs associated with acquisition-related activities. These costs were incurred primarily for banking, legal, and professional fees associated with the Lifetouch acquisition. These costs were recorded in general and administrative expenses in the consolidated statement of operations.
During the three and six months ended June 30, 2018, Lifetouch contributed to $228.6 million to net revenue and $124.2 million to gross profit, respectively.

Under the terms of the Purchase Agreement, the amount of consideration that the Company paid consisted of an all-cash purchase price of $825.0 million subject to certain adjustments based on a determination of Closing Net Working Capital, Transaction Expenses, Cash and Investments, and Indebtedness, as defined by the Purchase Agreement. The total preliminary purchase consideration paid by the Company during the second quarter of 2018 was $982.0 million. The following table shows the calculation of how the preliminary purchase consideration paid by the Company was determined in accordance with the Purchase Agreement (in thousands):
Cash consideration at closing
$
825,000

Less: Closing Indebtedness(1)
(27,742
)
Less: Net Working Capital Adjustment(1)
(10,559
)
Less: Transaction Expenses(1)(2)
(17,614
)
Add: Closing Cash and Investments(1)
212,872

Purchase price adjustments
156,957

Total preliminary purchase consideration
$
981,957

 
 
(1) As defined in the Purchase Agreement.
(2) Transaction expenses incurred by Lifetouch in connection with the transaction as defined by the Purchase Agreement.

In accordance with ASC 805, Business Combinations, the Company has recorded the acquired assets (including identifiable intangible assets) and liabilities assumed at the acquisition date fair values. The purchase price allocation for the Lifetouch acquisition is preliminary and subject to revision as additional information about fair value of assets acquired and liabilities assumed becomes available. Additional information that existed as of the acquisition date but at that time was unknown may become known during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date.


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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following table shows the preliminary allocation of the total purchase price to the net assets acquired based on their estimated fair values as of April 2, 2018 (in thousands):

Cash and cash equivalents
$
91,905

Investments
101,269

Accounts receivable, net
7,029

Inventories
19,857

Property and equipment, net
135,968

Intangible assets, net
326,700

Goodwill
432,399

Prepaid expenses and other assets
32,281

Accounts payable
(15,331
)
Deferred revenue, current portion
(29,984
)
Notes payable
(9,065
)
Accrued and other liabilities
(111,071
)
Total
$
981,957


The following table shows the valuation of the intangible assets acquired from Lifetouch along with their estimated remaining useful lives:
 
Approximate Fair Value
(in thousands)
Weighted Average Life
(in years)
Customer contracts and related relationships
$
200,100

10
Developed technology
68,600

5
Trade names / trademarks / domain name
57,600

5
Favorable/unfavorable leases
400

7
Total intangible assets
$
326,700

 

Identifiable Intangible Assets
Customer contracts and related relationships. These assets primarily relate to the existing relationships that Lifetouch has developed with a number of schools and preschools. These relationships provide economic value to the Company and therefore were valued separately from goodwill. The Company valued these assets utilizing a form of the income approach known as the "Multi-Period Excess Earnings Method" ("MPEEM") since these customer assets were identified as the primary asset. Under the MPEEM, the value of these assets was estimated based on the expected future economic earnings attributable to the assets. The key assumptions used in the valuation of these assets include future revenue from existing customers and estimated expenses forecast, contributory asset charges (such as cash-free debt-free working capital, fixed assets, brand assets and assembled workforce), the discount rate, expected tax rate(s) and tax amortization benefit.
Developed technology. Lifetouch has a number of developed technology platforms that are internally-used (e.g., field operations management and production management systems) and customer-facing (e.g., order management and yearbook design systems). These technologies will continue to be used by the Company. Given that the technologies are specific to Lifetouch and have minimal possibility of being licensed out to third parties, the "Cost to Recreate Method" under the Cost approach was used to value this asset. The key assumptions used in the valuation of these assets include direct and indirect developer costs, developer's profit, and opportunity cost.
Trade names / trademarks / domain name. Lifetouch is the leading provider of school photography services in the U.S. and has a number of registered trade names, trademarks and domain names that are recognized and well known in the marketplace. These brand names are expected to continue to be used, providing economic value to the Company, and therefore were valued separately from goodwill. The "Relief from Royalty Method" of the income approach was used in the valuation of trade names, trademarks and domain names.

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Unaudited Pro Forma Financial Information
The following table summarizes the pro forma consolidated information for the Company assuming the acquisition of Lifetouch had occurred as of January 1, 2017. The unaudited pro forma information for all periods presented includes the business combination accounting effects resulting from the acquisition, including amortization for intangible assets acquired, depreciation expense for tangible assets acquired, interest expense for the additional indebtedness incurred to complete the acquisition, acquisition-related charges and the impact of adopting ASC 606. The impact of applying ASC 606 to Lifetouch’s historical periods as presented below was not material. The pro forma results also include the effects of the purchase accounting adjustments for the fair value of deferred revenue and inventory. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2017.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 (in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Total net revenue
$
476,723

 
$
470,531

 
$
810,917

 
$
789,010

Net loss
$
14,791

 
$
(3,488
)
 
$
(69,359
)
 
$
(115,667
)
Basic earnings per share
$
0.45

 
$
(0.10
)
 
$
(2.10
)
 
$
(3.44
)
Diluted earnings per share
$
0.41

 
$
(0.10
)
 
$
(2.10
)
 
$
(3.44
)

Note 4 — Stock-Based Compensation

Stock Option Activity

A summary of the Company’s stock option activity for the six months ended June 30, 2018 is as follows (share numbers and aggregate intrinsic values in thousands):
 
Number of
Options
Outstanding (in thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
(in thousands)
Balance as of December 31, 2017
1,529

 
$
46.77

 
 
 
 
Granted
228

 
$
76.73

 
 
 
 
Exercised
(361
)
 
$
45.87

 
 
 
 
Forfeited, cancelled or expired
(28
)
 
$
45.49

 
 
 
 
Balance as of June 30, 2018
1,368

 
$
52.03

 
5.5
 
$
51,997

Options vested and expected to vest as of June 30, 2018
1,264

 
$
51.48

 
5.4
 
$
48,748

Options vested as of June 30, 2018
338

 
$
47.12

 
5.0
 
$
14,514

 
During the six months ended June 30, 2018, the Company granted options to purchase an aggregate of approximately 228,000 shares of common stock with an estimated weighted-average grant-date fair value of $23.57. The total intrinsic value of options exercised during the three months ended June 30, 2018 and 2017 was $2.8 million and $0.6 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2018 and 2017 was $10.7 million and $0.7 million, respectively.

Net cash proceeds from the exercise of stock options for the three months ended June 30, 2018 and 2017 were $2.8 million and $0.4 million, respectively. Net cash proceeds from the exercise of stock options for the six months ended June 30, 2018 and 2017 were $16.6 million and $0.5 million, respectively.

Valuation of Stock Options

The Company estimates the fair value of each option award on the date of grant using the Black-Scholes option-pricing model. The Company calculates volatility using an average of its historical and implied volatilities as it has sufficient public trading history to cover the entire expected term. The expected term of options gives consideration to historical exercises, post-vest cancellations and the options contractual term. The risk-free rate for the expected term of the option is based on the U.S. Treasury Constant

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Maturity at the time of grant. The assumptions used to value options granted during the three and six months ended June 30, 2018 and 2017 are as follows (there were no option awards granted during the three months ended June 30, 2018):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2018
 
2017
Dividend yield

 

 

Annual risk-free rate of return
1.8
%
 
2.6
%
 
1.9
%
Expected volatility
30.0
%
 
33.7
%
 
29.8
%
Expected term (years)
4.1

 
4.1

 
4.1


Restricted Stock Unit Activity

The Company grants restricted stock units (“RSUs”) and performance-based restricted stock units ("PBRSUs") to its employees under the provisions of the 2015 Equity Incentive Plan and inducement awards to certain new employees upon hire in accordance with Nasdaq Listing Rule 5635(c)(4). The cost of RSUs is determined using the fair value of the Company’s common stock on the date of grant. RSUs typically vest and are settled annually, based on a four-year total vesting term. Compensation cost associated with RSUs is amortized on a straight-line basis over the requisite service period.

A summary of the Company’s RSU activity for the six months ended June 30, 2018, is as follows (share numbers in thousands):
 
Number of
Units
Outstanding
 
Weighted
Average
Grant Date
Fair Value
Awarded and unvested as of December 31, 2017
2,293

 
$
44.64

Granted
629

 
$
76.93

Vested
(720
)
 
$
45.01

Forfeited
(127
)
 
$
45.45

Awarded and unvested as of June 30, 2018
2,075

 
$
54.24

RSUs expected to vest as of June 30, 2018
1,746

 
 

Employee stock-based compensation expense recognized in the three and six months ended June 30, 2018 and 2017 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

At June 30, 2018, the Company had $87.8 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock options, RSUs and PBRSUs that will be recognized over a weighted-average period of approximately two years.

Note 5 — Net Loss Per Share

Basic net loss per share attributed to common shares is computed by dividing the net loss attributable to common shares for the period by the weighted average number of common shares outstanding during the period.

Diluted net loss per share attributed to common shares is computed by dividing the net loss attributable to common shares for the period by the weighted-average number of common and potential common shares outstanding during the period, if the effect of each class of potential common shares is dilutive. Potential common shares include RSUs and incremental shares of common stock issuable upon the exercise of stock options, and conversion of warrants.

A summary of the net loss per share for the three and six months ended June 30, 2018 and 2017 is as follows (in thousands, except per share amounts):

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net loss per share:
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
Net loss
$
(26,512
)
 
$
(22,838
)
 
$
(53,677
)
 
$
(56,032
)
Denominator for basic and diluted net loss per share
 

 
 
 
 
 
 
Weighted-average common shares outstanding
33,234

 
33,579

 
32,970

 
33,646

Net loss per share - basic and diluted
$
(0.80
)
 
$
(0.68
)
 
$
(1.63
)
 
$
(1.67
)

The following weighted-average outstanding stock options and RSUs were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Stock options and RSUs
3,571

 
4,060

 
3,629

 
4,004



As described in Note 9 - Debt, the Company entered into warrant transactions (the "Warrant") in May 2013. The average market value per share of the Company's common stock for the three months ended June 30, 2018, as measured under the Warrant, exceeded the strike price of the Warrant. The dilutive effect of the potential exercise of the Warrant of approximately 345,000 shares was excluded from the computation of diluted net loss per common share for the three months ended June 30, 2018 because including it would have had an anti-dilutive effect. The average market value per share of the Company's common stock for the six months ended June 30, 2018, as measured under the Warrant, did not exceed the strike price of the Warrant.

With respect to the convertible senior notes issued in 2013 as described in Note 9 - Debt, the Company settled the principal of the convertible senior notes in cash upon their maturity in May 2018. The weighted-average impact to dilution for the period that the conversion option was outstanding was 660,000 shares and 690,000 shares for the three and six months ended June 30, 2018. The potential conversion impact was excluded from the computation of diluted net loss per common share for such periods because including it would have had an anti-dilutive effect.

Note 6 — Investments

At June 30, 2018 and December 31, 2017, the estimated fair value of short-term and long-term debt securities investments, all of which are classified as available-for-sale, was as follows (in thousands):

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 
 
June 30, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Short-term investments
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
39,103

 
$
4

 
$
(59
)
 
$
39,048

Agency securities
 
5,120

 

 
(11
)
 
5,109

Commercial paper
 
3,441

 

 

 
3,441

U.S. government securities and other
 
6,300

 

 
(8
)
 
6,292

Total short-term investments
 
$
53,964

 
$
4

 
$
(78
)
 
$
53,890

Long-term investments
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
12,958

 
$
1

 
$
(34
)
 
$
12,925

Agency securities
 
5,694

 

 
(29
)
 
5,665

U.S. government securities
 
6,411

 

 
(27
)
 
6,384

Total long-term investments
 
$
25,063

 
$
1

 
$
(90
)
 
$
24,974


 
 
December 31, 2017
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Short-term investments
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
54,911

 
$
3

 
$
(52
)
 
$
54,862

Agency securities
 
10,781

 

 
(14
)
 
10,767

Commercial paper
 
101,546

 

 

 
101,546

U.S. government securities
 
10,857

 

 
(11
)
 
10,846

Total short-term investments
 
$
178,095

 
$
3

 
$
(77
)
 
$
178,021

Long-term investments
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
6,287

 
$

 
$
(25
)
 
$
6,262

Agency securities
 
2,000

 

 
(17
)
 
1,983

U.S. government securities
 
998

 

 
(1
)
 
997

Total long-term investments
 
$
9,285

 
$

 
$
(43
)
 
$
9,242


The Company had no available-for-sale investments with a significant unrealized loss that have been in a continuous unrealized loss position for more than 12 months as of June 30, 2018, and no impairments were recorded during the three and six months ended June 30, 2018 and 2017. The Company had no material realized gains or losses during the three and six months ended June 30, 2018 and 2017.

The following table summarizes the contractual maturities of the Company's investments as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
One year or less
$
53,890

 
$
178,021

One year through three years
24,974

 
9,242

 
$
78,864

 
$
187,263


Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.


18

Table of Contents
SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 7 — Fair Value Measurement

Cash Equivalents and Investments

The Company measures the fair value of money market funds and investments based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. The Company did not hold any cash equivalents or investments categorized as Level 3 as of June 30, 2018 and December 31, 2017.

The following table summarizes, by major security type, the Company's cash equivalents and investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
 
Total Estimated Fair Value as of
 
June 30, 2018
 
December 31, 2017
 
Cash Equivalents
 
Investments
 
Cash Equivalents
 
Investments
Level 1 Securities:
 
 
 
 
 
 
 
Money market funds
$
94,765

 
$

 
$
151,071

 
$

Level 2 Securities:
 
 
 
 
 
 
 
Corporate debt securities

 
51,974

 
21,592

 
61,124

Agency securities

 
10,773

 
6,444

 
12,750

Commercial paper

 
3,441

 
85,599

 
101,546

U.S. government securities and other

 
12,676

 

 
11,843

Total cash equivalents and investments
$
94,765

 
$
78,864

 
$
264,706

 
$
187,263


Derivative Assets

As of June 30, 2018 and December 31, 2017, the fair value of certain of the Company's term loans interest-rate swap agreements, which were determined based on an income-based valuation model that takes into account the contract terms as well as multiple observable market inputs such as LIBOR-based yield curves, futures, volatilities and basis spreads (Level 2), were as follows (in thousands):
 
Total Estimated Fair Value as of
 
June 30, 2018
 
December 31, 2017
Derivative assets
$
6,749

 
$
2,979


Borrowings

As of June 30, 2018 and December 31, 2017, the fair value of the Company's borrowings, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price, interest rates and credit spread (Level 2) were as follows (in thousands):
 
Total Estimated Fair Value as of
 
June 30, 2018
 
December 31, 2017
Convertible senior notes
$

 
$
296,550

Term Loans
$
1,128,658

 
$
300,000


As of June 30, 2018 and December 31, 2017, the carrying value of other financial instruments, including accounts receivable, accounts payable and other payables, approximates fair value due to their short maturities.


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Table of Contents
SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 8 — Balance Sheet Components

Prepaid Expenses and Other Current Assets
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Intra-period deferred tax asset
$
44,821

 
$

Restricted investment
18,745

 

Prepaid service contracts – current portion
15,597

 
12,861

Other prepaid expenses and current assets
33,033

 
28,522

 
$
112,196

 
$
41,383


Intra-period income tax asset represents the cumulative income tax benefit recorded as of the balance sheet date, which will offset against taxes payable or become a component of deferred taxes on a full year basis. The restricted investment relates to collateral required for insurance policies for Lifetouch.

Property and Equipment, Net
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Manufacturing equipment
$
218,416

 
$
192,494

Computer equipment and software
170,020

 
188,593

Capitalized software and website development costs
154,001

 
134,585

Buildings under build-to-suit leases
56,468

 
56,468

Photography equipment
53,375

 

Owned buildings and building improvements
38,622

 

Leasehold improvements
27,188

 
22,145

Rental equipment
18,628

 
19,208

Land
17,000

 

Furniture and fixtures
12,529

 
8,255

 
766,247

 
621,748

Less: Accumulated depreciation and amortization
(373,585
)
 
(354,888
)
Property and equipment, net
$
392,662

 
$
266,860

 
Included within manufacturing equipment is approximately $92.9 million and $89.9 million of capital lease obligations for various manufacturing facility equipment as of June 30, 2018 and December 31, 2017, respectively. Accumulated depreciation of assets under capital leases totaled $40.0 million and $32.4 million at June 30, 2018 and December 31, 2017, respectively.

Rental equipment includes camera lenses, camera bodies, video equipment and other camera peripherals which are rented through the BorrowLenses website.

Depreciation and amortization expense totaled $27.5 million and $22.1 million for the three months ended June 30, 2018 and 2017, respectively. Depreciation and amortization expense totaled $50.1 million and $45.1 million for the six months ended June 30, 2018 and 2017, respectively.

Included in property and equipment is approximately $27.7 million and $15.8 million of assets in construction as of June 30, 2018 and December 31, 2017, respectively, the majority of which relates to capitalized software and website development costs.


20

Table of Contents
SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Intangible Assets

Intangible assets are comprised of the following:

 
 
Weighted Average
 
 
 
 
 
 
Useful Life
 
June 30, 2018
 
December 31, 2017
 
 
 
 
(in thousands)
Purchased technology
 
8 years
 
$
173,469

 
$
104,869

Less: accumulated amortization
 
 
 
(81,742
)
 
(76,585
)
 
 
 
 
91,727

 
28,284

 
 
 
 


 


Customer relationships
 
9 years
 
275,246

 
75,146

Less: accumulated amortization
 
 
 
(80,310
)
 
(73,759
)
 
 
 
 
194,936

 
1,387

 
 
 
 


 


Other(1)
 
5 years
 
65,202

 
7,202

Less: accumulated amortization
 
 
 
(10,096
)
 
(7,202
)
 
 
 
 
55,106

 

 
 
 
 


 


Total
 
 
 
$
341,769

 
$
29,671

 
 
 
 
 
 
 
(1) The unamortized balance for other intangible assets primarily relate to the trade name, trademarks and domain name assets acquired as part of the acquisition of Lifetouch during the second quarter of 2018.

Intangible asset amortization expense for the three months ended June 30, 2018 and June 30, 2017 was $12.5 million and $3.6 million, respectively. Intangible asset amortization expense for the six months ended June 30, 2018 and June 30, 2017 was $14.6 million and $7.6 million, respectively. Amortization of existing intangible assets is estimated to be as follows (in thousands):

Year Ending December 31:
 
Remainder of 2018
$
24,691

2019
49,360

2020
49,134

2021
49,059

2022
48,553

Thereafter
120,972

 
$
341,769


Goodwill

The following table presents the goodwill allocated to the Company's reportable segments as of and during the six months ended June 30, 2018 (in thousands):

 
December 31, 2017
 
Acquisitions
 
June 30, 2018
Shutterfly Consumer
$
372,072

 
$

 
$
372,072

Lifetouch

 
432,399

 
432,399

Shutterfly Business Solutions
36,903

 

 
36,903

 
$
408,975

 
$
432,399

 
$
841,374



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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The allocation of goodwill from the acquisition of Lifetouch to the Company's reporting units has not been finalized and will be allocated based upon the finalization of the valuation.

Accrued Liabilities
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Accrued compensation
$
52,614

 
$
31,331

Capital lease obligations, current portion
16,865

 
16,859

Accrued marketing expenses
10,992

 
22,874

Accrued production costs
9,639

 
37,552

Accrued income, sales and other taxes
9,516

 
21,745

Accrued other
46,746

 
28,887

 
$
146,372

 
$
159,248

 
Other Liabilities

 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Financing obligations
$
52,761

 
$
53,682

Capital lease obligations, non-current portion
43,280

 
48,620

Other liabilities
52,105

 
16,893

 
$
148,146

 
$
119,195


Financing obligations relate to the Company's build-to-suit leases. 

Note 9 — Debt

2017 Syndicated Credit Facility

On August 17, 2017 (“Closing Date”), the Company entered into a credit agreement (“Credit Agreement”) with certain lenders and Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent. The Credit Agreement provides for (a) a secured revolving loan facility in an aggregate principal amount of up to $200.0 million (“Revolving Loan Facility”) and (b) a secured delayed draw term loan facility (“Initial Term Loan”) in an aggregate principal amount of up to $300.0 million. The Credit Agreement permits the Company to add one or more incremental term loan facilities and/or increase the commitments for revolving loans subject to certain conditions.

In October 2017, the Company fully drew the $300.0 million Initial Term Loan under the Credit Agreement. The proceeds of the Initial Term Loan were used (1) to settle the Company's existing 0.25% Convertible Senior Notes due May 15, 2018 and (2) for working capital and general corporate purposes.

On April 2, 2018, the Company entered into an amendment under the Credit Agreement for an incremental term loan in an aggregate principal amount of $825.0 million ("Incremental Term Loan") to finance the acquisition of Lifetouch, Inc. The full amount of the $200.0 million Revolving Loan Facility remains undrawn as of June 30, 2018.

Upon funding of the Initial Term Loan, the Company elected to bear interest at a rate of one-month LIBOR, subject to a floor of 0.0%, plus an applicable margin of 2.50% per annum. Upon funding of the Incremental Term Loan, the Company elected to bear interest at a rate of one-month LIBOR, subject to a floor of 0.0%, plus an applicable margin of 2.75% per annum. The applicable margin of 2.75% for the Incremental Term Loan is determined based on a secured leverage ratio as defined by the Incremental Term Loan Amendment dated April 2, 2018.

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The effective interest rates for the unhedged portion of the Initial Term Loan for three and six months ended June 30, 2018 were 4.43% and 4.27%, respectively. The effective interest rate for the Incremental Term Loan, which was drawn during the current quarter, was 4.68%.
The revolving loans under the Credit Agreement bear interest, at the election of the Company, at either (a) the base rate (the "Base Rate"), which is defined as a fluctuating rate per annum equal to the greatest of (1) the prime rate then in effect, (2) the federal funds rate then in effect, plus 0.50%, and (3) an adjusted LIBOR rate determined on the basis of a one-month interest period, plus 1.0% or (b)  an adjusted LIBOR Rate, subject to a floor of 0.0% (the "LIBOR Rate"), in each case, plus an applicable margin of (1) initially, 0.75% per annum in the case of Base Rate loans and 1.75% per annum in the case of LIBOR Rate loans or (2) following the Company’s delivery of financial statements for the first full fiscal quarter following the Closing Date, 0.50% to 0.75% per annum in the case of Base Rate loans and 1.50% to 1.75% per annum in the case of LIBOR Rate loans, in each case based on the Company’s consolidated secured net leverage ratio, measured as of the end of the most recently ended fiscal quarter. In connection with the Credit Agreement, the Company is also required to pay commitment fees, closing fees, arrangement fees, ticking fees and administration fees, and other customary fees and costs.
Both the Initial Term Loan and the Incremental Term Loan have a maturity date of August 17, 2024. Commencing on the respective last day of the first full fiscal quarter following the Company's respective borrowings of the Initial Term Loan and the Incremental Term Loan, the respective Initial Term Loan and Incremental Term Loan amortize in equal quarterly installments of 0.25% of the outstanding principal balance for each loan, with the remaining respective principal balances payable on the maturity date. Amounts drawn on the Revolving Loan Facility, if any, mature on August 17, 2022. Further, the Company has the right to prepay its borrowings under the Credit Agreement in whole or in part at any time without a premium or penalty, subject to certain limitations and a 1.0% repricing premium applicable during the first six months for the Initial Term Loan and/or the Incremental Term Loan. The Credit Agreement also contains certain customary mandatory prepayments under certain conditions as set forth in the Credit Agreement.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company’s and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, undergo certain fundamental changes, dispose of assets, make investments, enter into transactions with affiliates, and make certain restricted payments (including declaration and payment of dividends), in each case subject to limitations and exceptions set forth in the Credit Agreement. The Company is also required to maintain compliance, measured as of the end of each fiscal quarter, with a consolidated secured net leverage ratio and a consolidated interest expense coverage ratio. As of June 30, 2018, the Company is in compliance with these covenants.
In August 2017, the Company entered into certain interest-rate swap agreements with an effective date of October 18, 2017 that have the economic effect of modifying a portion of the variable interest-rate obligations associated with the Initial Term Loan so that the interest payable on such portion become fixed (refer to Note 14 - Derivative Financial Instruments for further details regarding the interest-rate swap agreements).
The Company incurred $5.6 million in credit facility origination costs during the year ended December 31, 2017 related to the Credit Agreement and $18.3 million in origination costs during the six months ended June 30, 2018 related to the Incremental Term Loan. The origination costs attributable to the Revolving Loan Facility were capitalized within prepaid expenses for the current portion and other assets for the non-current portion. The origination costs attributable to the Initial Term Loan and the Incremental Term Loan are presented as a reduction to the carrying value of the debt in the consolidated balance sheet. Fees attributable to the Revolving Loan Facility of $0.8 million are being amortized over five years as component of interest expense. The fees attributable to the Initial Term Loan of $4.8 million and the Incremental Term Loan of $18.3 million are being amortized over the term of the loans, both as a component of interest expense.

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The Initial Term Loan and Incremental Term Loan consist of the following (in thousands):

 
June 30, 2018
 
December 31, 2017
Liability component:
 
 
 
Principal borrowings
$
1,125,000

 
$
300,000

Less: principal payments
(1,500
)
 

Less: debt issuance costs, net of amortization
(21,827
)
 
(4,543
)
Net carrying amount
$
1,101,673

 
$
295,457

 
 
 
 
Term loans, current
$
11,219

 
$
3,000

Term loans, non-current
$
1,090,454

 
$
292,457


The following table sets forth the total interest expense recognized related to the Initial Term Loan and the Incremental Term Loan for the three and six months ended June 30, 2018 (in thousands). The Initial Term Loan was drawn in October 2017 and the Incremental Term Loan was draw in April 2018. Therefore, there was no interest expense for the three and six months ended June 30, 2017 associated with these loans.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Floating interest (including the effects of cash flow hedges)
$
12,849

 
$

 
$
16,100

 
$

Amortization of debt issuance costs
891

 

 
1,063

 

 
$
13,740

 
$

 
$
17,163

 
$


Assumed Notes Payable from the Acquisition of Lifetouch

In connection with the acquisition of Lifetouch in the second quarter of 2018 (refer to Note 2 - Acquisition), the Company assumed $9.1 million of legacy Lifetouch notes payable (of which $4.0 million was classified as current), which is payable in varying principal payments plus interest rates ranging from 0% to 2.2% with maturities at various dates through July 2022. These notes payable were issued by Lifetouch to finance various acquisitions and represents promissory notes issued to the owners of the acquired companies for an amount equal to the purchase consideration. Payments of principal for these notes payable during the three months ended June 30, 2018 were $1.1 million.

As of June 30, 2018, the estimated future principal and interest payments of these assumed notes payable is as follows (in thousands):
Year Ending December 31:
 
Remainder of 2018
$
1,429

2019
3,357

2020
2,082

2021
1,196

2022
740

Total principal and interest payments
$
8,804



0.25% Convertible Senior Notes Due May 15, 2018
In May 2013, the Company issued $300.0 million aggregate principal amount of 0.25% convertible senior notes (the "Notes") which were due and paid on May 15, 2018. Upon maturity, the Company paid the aggregate principal amount of $300.0 million and delivered 1,108,000 shares of the Company's common stock.

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) was amortized to interest expense over the term of the Notes.
In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the liability component, totaling $6.4 million, were amortized to expense over the term of the Notes, and issuance costs attributable to the equity component, totaling $1.7 million, were netted with the equity component in stockholders' equity. Additionally, the Company recorded a deferred tax asset of $0.6 million on a portion of the equity component transaction costs which are deductible for tax purposes.
Concurrently with the Note issuance, the Company repurchased 0.6 million shares of common stock for approximately $30.0 million.
The Notes consist of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
Liability component:
 
 
 
Principal
$

 
$
300,000

Less: debt issuance costs, debt discount, net of amortization

 
(5,946
)
Net carrying amount (classified as current)
$

 
$
294,054

 
 
 
 
Equity component (1)
$

 
$
63,510


(1) 
Recorded in the consolidated balance sheets within additional paid-in capital, net of the $1.7 million of issuance costs in equity.

The following table sets forth total interest expense recognized related to the Notes (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
0.25% coupon
$
94

 
$
188

 
$
281

 
$
375

Amortization of debt issuance costs
182

 
347

 
543

 
688

Amortization of debt discount
1,814

 
3,442

 
5,403

 
6,836

 
$
2,090

 
$
3,977

 
$
6,227

 
$
7,899

 
Note Hedge
To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions with respect to its common stock (the “Note Hedge”). In May 2013, the Company paid an aggregate amount of $63.5 million for the Note Hedge. The Note Hedge expired upon maturity of the Notes in May 2018. The Note Hedge was intended to offset the potential dilution upon conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount upon conversion of the Notes in the event that the market value per share of the Company's common stock, as measured under the Notes, is greater than the strike price of the Note Hedge, which initially corresponds to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. Upon expiration of the Note Hedge in May 2018, the Company received 1,108,000 shares of the Company's common stock from the Note Hedge counterparties.

Warrant
Separately, in May 2013, the Company entered into warrant transactions (the “Warrant”), whereby the Company sold warrants to acquire shares of the Company's common stock at a strike price of $83.18 per share. The Company received aggregate proceeds

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


of $43.6 million from the sale of the Warrant. As of June 30, 2018, there are 4,675,000 warrants that will settle ratably over an 80-day period commencing on August 15, 2018. The Company intends to net share settle the warrants.
If the average market value per share of the Company's common stock for the reporting period, as measured under the Warrant, exceeds the strike price of the Warrant, the Warrant will have a dilutive effect on the Company's earnings per share (refer to Note 5 - Net Loss per Share for dilution considerations). The Warrant is a separate transaction, entered into by the Company and is not part of the Notes or the Note Hedge, and has been accounted for as part of additional paid-in capital. Holders of the Notes and Note Hedge will not have any rights with respect to the Warrant.

Note 10 — Segment Reporting

The Company reports segment information based on its internal reporting used by management for making decisions and assessing performance as the source of its reportable segments. As a result of the acquisition of Lifetouch in the second quarter of 2018, the Company entered into a new business and as a result, the Company has a new reportable and operating segment described further below.
    
The Chief Operating Decision Maker ("CODM") function uses segment margin to evaluate the performance of the segments and allocate resources. Management considers segment margin to be the appropriate metric to evaluate and compare the ongoing performance of each reportable segment as it is the level at which direct costs associated with the performance of the segment are monitored.

During the second quarter of 2018, the Company expanded its segment reporting. As a result, the profitability metric by which the Company's CODM measures segment performance and allocates resources changed from segment gross profit to segment margin. Segment margin includes technology and development expenses, sales and marketing expenses, and credit card fees, arriving at a margin for the segment. Segment margin excludes corporate expenses, amortization of intangible assets, stock-based compensation expense, and other non-recurring items including restructuring charges and acquisition-related costs. Corporate expenses include activities that are not directly attributable or allocable to a specific segment.

The Company’s segments are determined based on the products and services each segment provides and how the CODM evaluates the business. The Company has the following reportable segments:
Shutterfly Consumer - Includes sales from the Company's brands and are derived from the sale of a variety of products, such as cards and stationery, professionally-bound photo books, home décor, personalized gifts, high quality prints, and other photo-based merchandise, and related shipping revenue, as well as rental revenue from its BorrowLenses brand. Revenue from advertising displayed on the Company's websites is also included in Shutterfly Consumer revenue.    
Lifetouch - Includes revenue from professional photography services provided at schools, preschools and churches, as well as retail studios operated by Lifetouch under the JCPenney Portrait brand.
Shutterfly Business Solutions - Includes revenue from personalized direct marketing and other end-consumer communications as well as just-in-time, inventory-free printing for the Company's business customers.
Segment assets are not reported to, or used by, the CODM to allocate resources or assess performance of the Company's segments. Accordingly, the Company has not disclosed asset information by segment. Substantially all of the Company's revenue is generated from sales originating in the United States.

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SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The Company’s segment results for the three and six months ended June 30, 2018 and 2017 were as follows (dollars in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Shutterfly Consumer:
 
 
 
 
 
 
 
Net revenue
$
165,003

 
$
179,090

 
$
317,062

 
$
339,735

Cost of net revenue
86,065

 
92,049

 
170,909

 
181,903

Technology and development
29,830

 
33,037

 
61,959

 
71,966

Sales and marketing
29,956

 
36,406

 
60,681

 
72,144

Credit card fees
4,349

 
4,654

 
8,548

 
8,943

Margin(1)
$
14,803

 
$
12,944

 
$
14,965

 
$
4,779

Margin %
9
%
 
7
%
 
5
%
 
1
%
 
 
 
 
 
 
 
 
Lifetouch(2):
 
 
 
 
 
 
 
Net revenue(3)
$
261,911

 
$

 
$
261,911

 
$

Cost of net revenue(4)
91,148

 

 
91,148

 

Technology and development
7,109

 

 
7,109

 

Sales and marketing
86,960

 

 
86,960

 

Credit card fees
1,165

 

 
1,165

 

Margin(1)
$
75,529

 
$

 
$
75,529

 
$

Margin %
29
%
 
%
 
29
%
 
%

 
 
 
 

 
 
Shutterfly Business Solutions:
 
 
 
 
 
 
 
Net revenue
$
49,809

 
$
29,942

 
$
97,475

 
$
61,269

Cost of net revenue
41,610

 
23,900

 
81,519

 
47,738

Technology and development
3,049

 
4,182

 
6,994

 
8,511

Sales and marketing
1,619

 
931

 
3,069

 
1,839

Margin(1)
$
3,531

 
$
929

 
$
5,893

 
$
3,181

Margin %
7
%
 
3
%
 
6
%
 
5
%

 
 
 
 
 
 
 
Consolidated Segments:
 
 
 
 
 
 
 
Net revenue(3)
$
476,723

 
$
209,032

 
$
676,448

 
$
401,004

Cost of net revenue(4)
218,823

 
115,949

 
343,576

 
229,641

Technology and development
39,988

 
37,219

 
76,062

 
80,477

Sales and marketing
118,535

 
37,337

 
150,710

 
73,983

Credit card fees
5,514

 
4,654

 
9,713

 
8,943

Margin(1)
$
93,863

 
$
13,873

 
$
96,387

 
$
7,960

Margin %
20
%
 
7
%
 
14
%
 
2
%
 
(1) The margins reported reflect only costs that are directly attributable or allocable to a specific segment and exclude corporate expenses, amortization of intangible assets, stock-based compensation expense and other one-time charges.
(2) The Company acquired Lifetouch on April 2, 2018.
(3) Yearbook sales and collections for the Lifetouch segment are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter of the fiscal year. Business combination accounting principles require the Company to record the assumed deferred revenue at fair value on the acquisition date measured based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Segment reporting includes this purchase accounting adjustment which primarily relates to yearbook sales in net revenue for the Lifetouch segment.
(4) Business combination accounting principles require the Company to measure acquired inventory at fair value. The fair value of inventory reflects Lifetouch's cost of manufacturing plus a portion of the expected profit margin. Segment reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.

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Table of Contents
SHUTTERFLY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following table reconciles operating segment margin to total operating income (loss) and loss before income taxes, operating segment net revenue to total net revenue, and operating segment cost of net revenue to total cost of net revenue (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Total margin for operating segments
$
93,863

 
$
13,873

 
$
96,387

 
$
7,960

Purchase accounting deferred revenue adjustment (1)
(33,351
)
 

 
(33,351
)
 

Purchase accounting inventory adjustment (2)
(10,931
)
 

 
(10,931
)
 

Corporate expenses (3)
(37,012
)
 
(18,613
)
 
(55,036
)
 
(36,825
)
Amortization of intangible assets
(12,831
)
 
(3,860
)
 
(15,164
)
 
(8,200
)
Stock-based compensation expense for operating segments
(11,697
)
 
(10,469
)
 
(23,389
)
 
(22,788
)
Restructuring
(2,952
)
 
(4,673
)
 
(2,952
)
 
(13,649
)
Acquisition-related costs
(8,000
)
 

 
(12,585
)
 

Capital lease termination

 
(8,098
)
 

 
(8,098
)
Loss from operations
$
(22,911
)
 
$
(31,840
)
 
$
(57,021
)
 
$
(81,600
)
 
 
 
 
 
 
 
 
Loss from operations
$
(22,911
)
 
$
(31,840
)
 
$
(57,021
)
 
$
(81,600
)
Interest expense
(17,769
)
 
(5,955
)
 
(27,402
)
 
(11,919
)
Interest and other income, net
1,561

 
244

 
3,310

 
433

Loss before income taxes
$
(39,119
)
 
$
(37,551
)
 
$
(81,113
)
 
$
(93,086
)
 
 
 
 
 
 
 
 
Total net revenue for all operating segments
$
476,723

 
$
209,032

 
$
676,448

 
$
401,004

Purchase accounting deferred revenue adjustment (1)
(33,351
)
 

 
(33,351
)
 

Total net revenue
$
443,372

 
$
209,032

 
$
643,097

 
$
401,004

 
 
 
 
 
 
 
 
Total cost of net revenue for all operating segments
$
218,823

 
$
115,949

 
$
343,576

 
$
229,641

Purchase accounting inventory adjustment (2)
10,931

 

 
10,931

 

Stock-based compensation expense for cost of net revenue
943

 
1,074

 
1,942

 
2,243

Amortization of intangible assets for cost of net revenue
2,531

 
1,182

 
2,826

 
2,440

Total cost of net revenue
$
233,228

 
$
118,205

 
$
359,275

 
$
234,324