Company Quick10K Filing
Price50.40 EPS0
Shares34 P/E224
MCap1,733 P/FCF-9
Net Debt813 EBIT-20
TEV2,546 TEV/EBIT-130
TTM 2019-06-30, in MM, except price, ratios
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8-K 2018-01-30

SFLY 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - The Company and Summary of Significant Accounting Policies
Note 2 - Revenue
Note 3 - Acquisition
Note 4 - Stock - Based Compensation
Note 5 - Net Loss per Share
Note 6 - Investments
Note 7 - Fair Value Measurement
Note 8 - Balance Sheet Components
Note 9 - Debt
Note 10 - Segment Reporting
Note 11 - Leases
Note 12 - Commitments and Contingencies
Note 13 - Share Repurchase Program
Note 14 - Restructuring
Note 15 - Derivative Financial Instruments
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.01 ex3101q2-19.htm
EX-31.02 ex3102q2-19.htm
EX-32.01 ex3201q2-19.htm
EX-32.02 ex3202q2-19.htm

Shutterfly Earnings 2019-06-30

Balance SheetIncome StatementCash Flow
Assets, Equity
Rev, G Profit, Net Income
Ops, Inv, Fin


Washington, DC 20549
Form 10-Q
(Mark One)
For the quarterly period ended June 30, 2019
For the transition period from            to
Commission file number 001-33031

(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)

2800 Bridge Parkway
Redwood City, California94065
(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
Trading Symbol(s)
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 every Interactive Data File required to be submitted 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 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
Accelerated Filer
Non-accelerated Filer 
Smaller reporting company
Emerging growth company


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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding as of August 2, 2019 
Common stock, $0.0001 par value per share



Part I - Financial Information
Part II - Other Information



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 the timing of the expected closing of our pending acquisition by affiliates of the Apollo Funds, gaining access to Lifetouch customers after our acquisition; the value of integrating customers' photos onto Shutterfly Photos to drive engagement and purchases of our products; the expectation to realize revenue from Lifetouch customers; the expectations of realizing Lifetouch acquisition synergies centered on establishing a common manufacturing platform, achieving greater utilization and leveraging a combined purchasing power and scale; the plan to have Project Aspen serve all of our business segments and result in future benefits to operating expenses; the plan to open a production facility in Texas; the closing of four legacy Lifetouch facilities and related employee considerations; the plan to acquire customers through multiple marketing channels; the plan to attract, retain and grow our leadership team; our expected secured gross leverage ratio; any effect we would experience from a change in interest rates; the anticipation that our current cash balance and cash generated from operations will be sufficient to meet our strategic and other financial requirements; our intent to continue to expand our use of cloud services; our intent to pursue patent coverage in other countries; 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, the parties' inability to consummate the acquisition due to failure to satisfy conditions to the completion of the transaction, including the receipt of stockholder approval, which may not be obtained on the anticipated schedule or at all, the outcome of lawsuits that have been and may be brought by certain stockholders seeking to enjoin us and the Board from proceeding with a stockholder vote or enjoin proceeding with, consummating and closing the acquisition, decreased consumer discretionary spending as a result of general economic conditions; our ability to expand our customer base and increase sales to existing customers; failure to realize the anticipated benefits of the Lifetouch acquisition; recent and ongoing restructuring activities (including but not limited to those relating to manufacturing consolidation, Lifetouch field operations and our single platform migration); our ability to meet production requirements; our ability to attract and retain management and other personnel; 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; consumer acceptance of our products and services; our ability to develop additional adjacent lines of business; unforeseen changes in expense levels; a deterioration in the relationship with any of our business partners; refining our promotional strategies; competition and the pricing strategies of our competitors, which could lead to pricing pressure; failure to implement new technology systems; a decline in participation rate in the Lifetouch business; the retention of Lifetouch employees and our ability to successfully integrate the Lifetouch businesses; risks inherent in the achievement of anticipated synergies and the timing thereof; general economic conditions and changes in laws and regulations 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.


(In thousands, except par value amounts)
June 30, 2019December 31, 2018
Current assets: 
Cash and cash equivalents $105,338 $521,567 
Short-term investments 19,013 34,011 
Accounts receivable, net 60,433 87,023 
Inventories 20,916 18,015 
Assets held for sale9,142 1,000 
Prepaid expenses and other current assets 114,776 65,961 
Total current assets 329,618 727,577 
Long-term investments 4,872 10,808 
Property and equipment, net 336,655 381,018 
Intangible assets, net 291,459 316,154 
Goodwill 843,698 843,607 
Other assets 84,872 23,045 
Total assets $1,891,174 $2,302,209 
Current liabilities: 
Current portion of long-term debt $5,234 $14,203 
Accounts payable 45,129 105,407 
Accrued liabilities 142,836 226,445 
Operating lease liabilities, current portion21,045 — 
Deferred revenue, current portion 38,350 57,319 
Total current liabilities 252,594 403,374 
Long-term debt 897,985 1,090,442 
Operating lease liabilities59,301 — 
Other liabilities 84,707 134,027 
Total liabilities 1,294,587 1,627,843 
Commitments and contingencies (Note 12) 
Stockholders’ equity: 
Common stock, $0.0001 par value; 100,000 shares authorized; 34,382 and 33,673 shares issued and outstanding on June 30, 2019 and December 31, 2018, respectively
3 3 
Additional paid-in capital 1,090,694 1,065,531 
Accumulated other comprehensive (loss) income (1,027)1,592 
Accumulated deficit (493,083)(392,760)
Total stockholders' equity 596,587 674,366 
Total liabilities and stockholders' equity $1,891,174 $2,302,209 
The accompanying notes are an integral part of these condensed consolidated financial statements.

(In thousands, except per share amounts)

Three Months Ended Six Months Ended 
June 30, June 30, 
Net revenue $473,416 $443,372 $798,097 $643,097 
Cost of net revenue240,513 233,228 450,912 359,275 
Gross profit 232,903 210,144 347,185 283,822 
Operating expenses: 
Technology and development 49,606 44,420 97,939 82,924 
Sales and marketing 135,468 130,643 254,837 168,363 
General and administrative 52,491 55,040 100,878 86,604 
Restructuring 3,274 2,952 7,247 2,952 
Total operating expenses 240,839 233,055 460,901 340,843 
Loss from operations (7,936)(22,911)(113,716)(57,021)
Interest expense (13,312)(17,769)(31,566)(27,402)
Interest and other income, net 1,088 1,561 2,266 3,310 
Loss before income taxes (20,160)(39,119)(143,016)(81,113)
Benefit from income taxes 7,428 12,607 46,665 27,436 
Net loss $(12,732)$(26,512)$(96,351)$(53,677)
Net loss per share - basic and diluted $(0.37)$(0.80)$(2.83)$(1.63)
Weighted-average shares outstanding - basic and diluted 34,254 33,234 34,089 32,970 

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


(In thousands)

Three Months Ended Six Months Ended 
June 30, June 30, 
Net loss $(12,732)$(26,512)$(96,351)$(53,677)
Other comprehensive (loss) income, net of reclassification adjustments: 
Foreign currency translation gains (losses)435 (401)817 (401)
Unrealized net gains (losses) on investments 64 (16)164 (46)
Tax (expense) benefit on unrealized net gains (losses) on investments (15)4 (41)11 
Unrealized (losses) gains on cash flow hedges (3,317)1,000 (5,161)3,770 
Tax benefit (expense) on unrealized (losses) gains on cash flow hedges 753 (249)1,226 (948)
Impact of adoption of new accounting standard  376  
Other comprehensive (loss) income, net of tax (2,080)338 (2,619)2,386 
Comprehensive loss $(14,812)$(26,174)$(98,970)$(51,291)

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

(In thousands)

Three Months EndedSix Months Ended
June 30,June 30,
Common stock (par value)
Balance, beginning of period$3 $3 $3 $3 
Issuance of common stock upon exercise of options and vesting of restricted stock units    
Balance, end of period3 3 3 3 
Additional paid-in capital
Balance, beginning of period1,077,922 1,022,091 1,065,531 996,301 
Issuance of common stock upon exercise of options and vesting of restricted stock units946 2,802 1,007 16,577 
Stock-based compensation, net of forfeitures11,826 12,071 24,156 24,086 
Convertible notes settlement (2) (2)
Balance, end of period1,090,694 1,036,962 1,090,694 1,036,962 
Accumulated other comprehensive income
Balance, beginning of period1,053 3,826 1,592 1,778 
Foreign currency translation gains (losses)435 (401)817 (401)
Unrealized gain (loss) on investments, net of tax49 (12)123 (35)
Unrealized (loss) gain on cash flow hedges, net of tax(2,564)751 (3,935)2,822 
Impact of adoption of new accounting standard— — 376 — 
Balance, end of period(1,027)4,164 (1,027)4,164 
Accumulated deficit
Balance, beginning of period(480,351)(470,321)(392,760)(447,358)
Impact of adoption of new accounting standards— — (3,972)4,202 
Net loss(12,732)(26,512)(96,351)(53,677)
Balance, end of period(493,083)(496,833)(493,083)(496,833)
Total stockholders' equity$596,587 $544,296 $596,587 $544,296 
Number of shares
Common stock
Balance, beginning of period34,181 33,122 33,673 32,297 
Issuance of common stock upon exercise of options and vesting of restricted stock units201 259 709 1,084 
Balance, end of period34,382 33,381 34,382 33,381 

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

(In thousands)
Six Months Ended 
June 30, 
Cash flows from operating activities: 
Net loss $(96,351)$(53,677)
Adjustments to reconcile net loss to net cash used in operating activities: 
Depreciation and amortization 58,967 50,111 
Amortization of intangible assets 25,620 15,164 
Amortization of debt discount and issuance costs 5,533 7,009 
Amortization of operating lease assets 11,150  
Repayment of convertible senior notes attributable to debt discount (63,510)
Stock-based compensation23,545 23,389 
(Gain) loss on disposal of property and equipment (426)154 
Deferred income taxes 3,808 17,571 
Restructuring 2,301 752 
Other (57)(272)
Changes in operating assets and liabilities, net of acquisition: 
Accounts receivable 26,605 30,767 
Inventories (2,959)15,607 
Prepaid expenses and other assets (48,994)(42,795)
Accounts payable (60,267)(69,708)
Accrued and other liabilities (114,092)(130,127)
Net cash used in operating activities (165,617)(199,565)
Cash flows from investing activities: 
Acquisition of business, net of cash acquired  (890,052)
Purchases of property and equipment (27,129)(17,692)
Capitalization of software and website development costs (30,642)(21,392)
Purchases of investments  (9,523)
Proceeds from maturities of investments 21,184 174,329 
Proceeds from sales of investments 45,106 
Proceeds from sales of property and equipment 1,136 1,132 
Net cash used in investing activities (35,451)(718,092)
Cash flows from financing activities: 
Proceeds from issuance of common stock upon exercise of stock options 1,007 16,577 
Principal payments of borrowings (207,292)(239,098)
Principal payments of finance lease liabilities and financing obligations(9,587)(9,396)
Proceeds from borrowings, net of issuance costs  806,652 
Net cash (used in) provided by financing activities (215,872)574,735 
Effect of exchange rate changes on cash and cash equivalents 711 (271)
Net decrease in cash and cash equivalents (416,229)(343,193)
Cash and cash equivalents, beginning of period 521,567 489,894 
Cash and cash equivalents, end of period $105,338 $146,701 
Supplemental schedule of non-cash investing / financing activities: 
Net decrease in accrued purchases of property and equipment $(1,915)$(1,200)
Net increase in accrued capitalized software and website development costs 2,532 1,119 
Stock-based compensation capitalized with software and website development costs 612 697 
Leased assets obtained in exchange for finance lease liabilities 2,973 2,969 

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


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Note 1 — The Company and Summary of Significant Accounting Policies

Shutterfly, Inc., (the “Company” or Shutterfly”) is the leading retailer and manufacturing platform for personalized products and communications. Founded and incorporated in the state of Delaware in 1999, Shutterfly has three segments: Shutterfly Consumer, Lifetouch, and Shutterfly Business Solutions (SBS). Shutterfly Consumer and Lifetouch help consumers capture, preserve, and share life’s important moments through professional and personal photography, and personalized products. The Shutterfly brand brings photos to life in photo books, gifts, home décor, and cards and stationery. Lifetouch is the national leader in school photography, built on the enduring tradition of “Picture Day,” and also serves families through portrait studios and other partnerships. SBS delivers digital printing services that enable efficient and effective customer engagement through personalized communications. The Company is headquartered in Redwood City, California.

On April 2, 2018, the Company completed its acquisition of Lifetouch Inc. (“Lifetouch”).

Shutterfly announced in June 2019 that it has entered into a definitive agreement (the ''Merger Agreement'') with the affiliates of certain funds (the “Apollo Funds”), managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, “Apollo”), a leading global alternative investment manager, pursuant to which affiliates of Apollo Funds will acquire all the outstanding shares of Shutterfly for $51.00 per share in cash (the Transaction). The Transaction is expected to close by early fourth quarter of fiscal 2019, pending approval by Shutterfly stockholders and satisfaction of certain other closing conditions. Early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 was granted on July 17, 2019, effective immediately.
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 adjustments, 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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or for any other period.
The December 31, 2018 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, 2018 included in the Company’s Annual Report on Form 10-K.
The Company has evaluated subsequent events through the date that the financial statements were issued.
Revision of Prior Period Amounts
During the third quarter of fiscal year 2018, the Company identified certain amounts attributable to the repayment of accreted interest on its convertible senior notes that should have been classified as cash used in operating activities instead of cash used in financing activities in the condensed consolidated statement of cash flows for the six months ended June 30, 2018. Such error resulted in a $63.5 million understatement of net cash used in operating activities with a corresponding understatement of cash provided by financing activities. The condensed consolidated statement of cash flows for the six months ended June 30, 2018 has been revised to reflect the appropriate classification of such repayment between financing and operating activities.
Additionally, certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation.


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Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to the significant accounting policies during the six months ended June 30, 2019 other than those noted below.
Lease Accounting
The Company determines if an arrangement is or contains a lease at inception. Lease right-of-use ("ROU") assets and lease liabilities for operating and finance leases are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Operating leases are included in other assets, current operating lease liabilities and operating lease liabilities in the condensed consolidated balance sheets. Finance leases are included in property and equipment, accrued liabilities and other liabilities in the condensed consolidated balance sheets.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. ROU assets also include any lease payments made and initial direct costs, and exclude lease incentives. Variable lease payments are excluded from the ROU assets and lease liabilities and recognized in the period in which the obligation for those payments is incurred.

Most leases include one or more options to renew. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to terminate or purchase the leased asset. The Company’s lease agreements do not contain any material residual value guarantee or material restrictive covenants. Lease cost is recognized on a straight-line basis over the lease term.

The Company elected a short-term lease exception policy, permitting the Company not to apply the recognition requirements of Accounting Standard Codification 842, Leases, ("ASC 842") to short-term leases (i.e., leases with terms of 12 months or less). For all leases, the Company accounts for the lease and non-lease components as a single lease component.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires the recognition of ROU assets and corresponding lease liabilities on the balance sheet, measured at present value of the future lease payments. The most significant impact relates to the recognition of lease assets and liabilities for operating leases, while the accounting for finance leases remained unchanged except for recognition of lease assets and liabilities for fixed non-lease components. Accounting for leases by lessors is substantially unchanged from prior practice as lessors will continue to recognize lease revenue as earned.

The Company adopted ASC 842 as of January 1, 2019 (the effective date), using the alternative modified retrospective transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, the Company recorded a cumulative-effect adjustment as of the effective date and prior comparative periods were not retrospectively presented in the consolidated financial statements. This adoption approach results in a balance sheet presentation that is not comparable to the prior year period in the first year of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance, which among other things allows companies to carry forward their historical lease classification. The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining the lease term and impairment of ROU assets.

Adoption of ASC 842 resulted in the recording of additional net lease assets and lease liabilities of approximately $37.6 million and $42.4 million, respectively, as of January 1, 2019, for finance lease and operating leases including the impact of the reclassification of the Company's financing obligations related to build-to-suit arrangements to operating leases. The difference between the additional net lease assets and lease liabilities, net of deferred tax impact, was recorded as an adjustment to the opening balance of accumulated deficit. As of December 31, 2018, building assets of $48.4 million and financing obligations of $54.0 million related to build-to-suit arrangements. As of January 1, 2019, these balances were derecognized and these arrangements were accounted for as operating leases. The adoption of ASC 842 did not materially impact the Company’s consolidated net loss and had no impact on the consolidated statement of cash flows.

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

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reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings, as a result of the Tax Cuts and Jobs Act. The Company adopted ASU 2018-02 as of January 1, 2019 using the prospective transition method, which resulted in an immaterial reclassification from accumulated other comprehensive income to the opening balance of accumulated deficit.

The Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“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. The cumulative impact of the adoption of ASC 606 resulted in a decrease to the opening balance of 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. Refer to Note 3 in the Company's Form 10-K for the year ended December 31, 2018 for further details.
Recent Accounting Pronouncements Pending Adoption
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and earlier adoption is permitted including adoption in any interim period. 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.

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, with early adoption permitted beginning January 1, 2019. The Company is evaluating the impact of adopting this new accounting guidance on the consolidated financial statements.


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Note 2 — Revenue
Net Revenue by Brand
The following table disaggregates the Company’s net revenue by brand for the three and six months ended June 30, 2019 and 2018:
Three Months Ended Six Months Ended 
June 30, June 30, 
(in thousands)
Shutterfly Consumer net revenue:
Shutterfly Brand Core $115,583 $116,041 $220,660 $227,708 
Shutterfly Brand Personalized Gifts and Home Décor
44,171 38,163 78,756 69,129 
Tiny Prints Boutique 1,067 1,374 2,762 3,508 
Other 8,763 9,425 16,254 16,717 
Shutterfly Consumer net revenue 169,584 165,003 318,432 317,062 
Lifetouch net revenue(1)
254,174 228,560 383,481 228,560 
Shutterfly Business Solutions net revenue 49,658 49,809 96,184 97,475 
Net revenue $473,416 $443,372 $798,097 $643,097 
(1) The Company acquired Lifetouch on April 2, 2018.

Deferred Revenue
The Company records deferred revenue when cash payments are received in advance of the Company's performance and primarily relate to flash deal promotions, gift cards, and yearbooks as well as up-front fees received from SBS or Lifetouch customers. The amount of net revenue recognized during the three and six months ended June 30, 2019 that was included in the deferred revenue balances as of December 31, 2018 was approximately $19.4 million and $32.6 million, respectively.

Note 3 — Acquisition
On April 2, 2018, the Company completed the acquisition of Lifetouch, the leading professional photographer of children and families in the United States and Canada. Lifetouch provides the Company with a highly complementary business.

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 Stock Purchase Agreement. The total purchase consideration paid by the Company during the second quarter of 2018 was $982.0 million. The Company completed the purchase price allocation as of March 31, 2019 with no material adjustments from those disclosed in the Company's consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018. In allocating the purchase price based on estimated fair values, the Company recorded approximately $434.9 million of goodwill, $326.3 million of identifiable intangible assets and $220.8 million of net tangible assets. The goodwill recognized represents the assembled workforce of Lifetouch and the value of growth in revenue from future customers of Lifetouch and is deductible for U.S. income tax purposes.

Unaudited Pro Forma Financial Information

The following table summarizes the pro forma consolidated information for the Company for the three and six months ended June 30, 2018 assuming the acquisition of Lifetouch had occurred as of January 1, 2017. The unaudited pro forma information for the 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

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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 EndedSix Months Ended
June 30,June 30,
(in thousands, except per share data)20182018
Total net revenue$476,273 $810,917 
Net income (loss)$14,791 $(69,359)
Basic earnings per share$0.45 $(2.10)
Diluted earnings per share$0.41 $(2.10)

Note 4 — Stock-Based Compensation
Stock-based Compensation Expense
The Company's stock-based compensation expense is allocated as follows in its condensed consolidated statements of operations:

Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)
Cost of net revenue$844 $943 $1,736 $1,942 
Technology and development2,268 2,571 4,566 5,001 
Sales and marketing3,574 2,941 7,039 6,445 
General and administrative4,821 5,242 10,204 10,001 
Total stock-based compensation$11,507 $11,697 $23,545 $23,389 

Stock Option Activity
A summary of the Company’s stock option activity for the six months ended June 30, 2019 is as follows:
Number of
Outstanding (in thousands)
Weighted-Average Remaining
Term (years)
(in thousands)
Balance as of December 31, 20181,405 $53.44 
Granted  $ 
Exercised (25)$40.04 
Forfeited, cancelled or expired (63)$51.86 
Balance as of June 30, 2019 1,317 $53.77 3.0$3,122 
Options vested and expected to vest as of June 30, 2019 1,099 $54.09 3.1$2,671 
Options vested as of June 30, 2019 679 $50.91 1.9$1,791 
The total intrinsic value of options exercised during the three months ended June 30, 2019 and 2018 was $0.3 million and $2.8 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2019 and 2018 was $0.3 million and $10.7 million, respectively.


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Net cash proceeds from the exercise of stock options for the three months ended June 30, 2019 and 2018 were $0.9 million and $2.8 million, respectively. Net cash proceeds from the exercise of stock options for the six months ended June 30, 2019 and 2018 were $1.0 million and $16.6 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 Maturity at the time of grant. The assumptions used to value options granted during the six months ended June 30, 2018 are as follows (there were no option awards granted during the three and six months ended June 30, 2019 and the three months ended June 30, 2018):

Six Months Ended
June 30,
Dividend yield
Annual risk-free rate of return
2.6 %
Expected volatility
33.7 %
Expected term (years)

Restricted Stock Unit Activity

The Company grants restricted stock units (“RSUs”), including service-based restricted stock units, performance-based restricted stock units ("PBRSUs"), and market-based restricted stock units (MSUs) 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 service-based RSUs and PBRSUs is determined using the fair value of the Company’s common stock on the date of grant. The cost of MSUs is determined using a Monte Carlo simulation model on the date of grant. Service-based RSUs typically vest and are settled annually, based on a four-year total vesting term. Compensation cost associated with service-based RSUs is amortized on a straight-line basis over the requisite service period.

A summary of the Company’s RSU activity, including service-based awards, PBRSUs, and MSUs for the six months ended June 30, 2019, is as follows:

Number of
Outstanding (in thousands)
Grant Date
Fair Value
Awarded and unvested as of December 31, 20181,941 $56.91 
Granted 1,357 $45.84 
Vested (684)$52.84 
Forfeited (147)$54.02 
Awarded and unvested as of June 30, 2019 2,467 $52.11 
RSUs expected to vest as of June 30, 2019 1,965 

Included in the RSU grants for the six months ended June 30, 2019 are approximately 187,000 RSUs that have both performance criteria tied to the Company’s 2019 financial performance and a three-year service criteria. Compensation expense associated with these PBRSUs is recognized based on the estimated number of shares the Company ultimately expects will vest and amortized on an accelerated basis over the requisite service period as these PBRSUs consist of three tranches. If in the future, situations indicate that the performance criteria is not probable, then no further compensation expense will be recorded and any previous expenses will be reversed.


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Included in the RSU grants for the six months ended June 30, 2019, are approximately 187,000 RSUs that have both market criteria over a three-year period and a three-year service criteria (MSUs). The grant date fair value of these MSUs was determined using a Monte Carlo simulation model that incorporates the probability that market conditions may not be achieved. Provided that the requisite service is rendered, the total fair value of the MSUs at the date of grant must be recognized as compensation expense even if the market condition is not achieved; the number of shares that ultimately vest can vary depending on the ultimate achievement of the market criteria. Compensation expense associated with these MSUs is recognized on a straight-line basis over the requisite service period as these MSUs consist of one tranche.

Included in the RSU vested shares for the six months ended June 30, 2019, are approximately 58,000 shares related to PBRSUs granted in fiscal years 2015 and 2016. As of June 30, 2019, these PBRSUs are subject only to service vesting conditions as the performance condition has been met in previous years. As of June 30, 2019, approximately 303,000 PBRSUs and 187,000 MSUs remain outstanding (awarded and unvested).

Employee stock-based compensation expense recognized in the three and six months ended June 30, 2019 and 2018 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, 2019, the Company had $90.4 million of total unrecognized stock-based compensation cost, net of estimated forfeitures, related to stock options, service-based RSUs, PBRSUs, and MSUs that will be recognized over a weighted-average period of approximately 2.5 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, convertible senior notes and conversion of warrants.
A summary of the net loss per share for the three and six months ended June 30, 2019 and 2018 is as follows:

Three Months Ended Six Months Ended 
June 30, June 30, 
(in thousands, except per share data)
Net loss per share: