Net revenue

Cost of net revenue

Gross profit

Operating expenses:

Technology and development

Sales and marketing

General and administrative

Restructuring

Total operating expenses

Income (loss) from operations

Interest expense

Interest and other income, net

Income (loss) before income taxes

(Provision for) benefit from income taxes

Net income (loss)

Net income per share:

Basic

Diluted

Weighted average shares:

Basic

Diluted

the separate historical audited consolidated financial statements of Shutterfly as of and for the year ended December 31, 2018 included in Shutterfly’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019;

the separate historical unaudited consolidated financial statements of Lifetouch for the three and nine months ended March 31, 2018 and 2017 included in Exhibit 99.1 to this Current Report on Form 8-K;

the separate historical audited consolidated financial statements of Lifetouch as of and for the years ended June 30, 2017, 2016 and 2015 included in Exhibit 99.3 to the Current Report on Form 8-K filed with the SEC by Shutterfly on April 2, 2018; and

the separate historical unaudited consolidated financial statements of Lifetouch for the six months ended December 31, 2017 and 2016 included in Exhibit 99.4 to the Current Report on Form 8-K filed with the SEC by Shutterfly on April 2, 2018.

Net revenue

Cost of net revenue

Gross profit

Operating expenses:

Technology and development

Sales and marketing

General and administrative

Materials, labor and processing

Amortization of intangible assets

Restructuring and other charges

Total operating expenses

Operating loss before contributions to ESOP and retirement plans

Contributions to ESOP and retirement plans

Loss from operations

Other income (expenses):

Investment income

Interest expense

Interest and other income, net

Loss before income taxes

Income tax provision

Net loss

The classification of certain items presented by Lifetouch have been changed to align with the presentation used by Shutterfly. Specifically, the statement of operations has been changed to present costs on a functional basis rather than a single line item for operating expenses, in addition to other classification changes.

The entire amount reported in the materials, labor and processing line item in the Lifetouch historical statement of operations was reclassified to the cost of net revenues line item. The remaining reclassifications primarily relate to salaries and benefits for photographers and depreciation on camera equipment which were primarily presented in the sales and marketing line item in the Lifetouch historical statement of operations.

Cash consideration at closing

Less: Closing indebtedness⁽¹⁾

Less: Closing net working capital adjustment⁽¹⁾

Less: Transaction expenses⁽¹⁾⁽²⁾

Add: Closing cash and investments⁽¹⁾

Purchase price adjustments

Total purchase consideration

As defined in the Purchase Agreement.

Transaction expenses incurred by Lifetouch in connection with the transaction as defined by the Purchase Agreement.

Cash and cash equivalents

Investments

Accounts receivable

Inventories

Property and equipment

Intangible assets

Goodwill

Prepaid expenses and other assets

Accounts payable

Deferred revenue, current portion

Notes payable

Accrued and other liabilities

Total

Customer contracts and related relationships

Developed technology

Trade names / trademarks / domain name

Favorable/unfavorable leases

Total intangible assets

The adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), did not have a significant impact to the reported results of operations of Lifetouch for the three months ended March 31, 2018 (the period before the Transaction).

Represents the elimination of historical depreciation expense for the three months ended March 31, 2018 of $8.2 million ($6.0 million allocated to cost of net revenue, $1.0 million allocated to technology and development, $0.3 million to sales and marketing, and $0.9 million to general and administrative expenses, respectively) and recognition of $5.2 million of new depreciation expense for the three months ended March 31, 2018 ($3.8 million allocated to cost of net revenue, $0.5 million to technology and development, $0.4 million to sales and marketing, and $0.5 million to general and administrative expenses, respectively). Depreciation is based on the fair value of the acquired property and equipment and estimated remaining useful lives of the assets.

Reflects the elimination of the historical amortization expense of $1.0 million in sales and marketing expenses and recognition of $2.1 million, $1.2 million, and $8.1 million in new amortization expense for the three months ended March 31, 2018 allocated among cost of net sales, technology and development, and sales and marketing expenses, respectively. Amortization expense is based on the fair value of the acquired intangible assets and estimated useful lives of the assets.

Reflects the reversal of $15.5 million and $10.9 million of Shutterfly’s and Lifetouch’s incurred transaction costs, respectively, for the year ended December 31, 2018 and three months ended March 31, 2018, respectively.

The increase of $10.2 million in interest expense resulted from interest on the new debt to finance the Transaction for the three months ended March 31, 2018. The incremental term loan bears interest at LIBOR, subject to a floor of 0.0%, plus an applicable margin of 275 basis points and matures on August 17, 2024. A sensitivity analysis on interest expense for the year ended December 31, 2018 has been performed for the $825.0 million term loan, factoring in the mandatory quarterly principal payments of $5.7 million made during the first twelve months, to assess the effect that a change of 12.5 basis points of the hypothetical interest rates would have on the debt financing. The following table shows the change in interest expense for the debt financing (in thousands):

Twelve Months Ended

December 31, 2018

Increase of 0.125%

Decrease of 0.125%

A blended statutory tax rate of 25.6% has been assumed for the pro forma adjustments. The blended statutory tax rate is not necessarily indicative of the effective tax rate of the combined company or the amounts that would have resulted had Shutterfly and Lifetouch filed consolidated income tax returns during the period presented. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on repatriation decisions, cash needs, the geographical mix of income and changes in tax law in the post-acquisition period. Lifetouch operated as an S Corporation for income tax purposes prior to the Transaction and as such, pre-Transaction income and expenses flowed through directly to its shareholders and thus were not subject to entity-level tax except for certain state and foreign income taxes. Lifetouch reported a loss before income taxes of $54.3 million for the three months ended March 31, 2018 (pre-acquisition period) which was not subject to entity-level tax. Since the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2018 is presented as if the Transaction occurred on January 1, 2018, a pro forma adjustment has been included to reflect the entity-level tax effect on the Lifetouch’s historical reported loss during the pre-acquisition period using the blended statutory tax rate of 25.6%. For the year ended December 31, 2018, the combined pro forma income before income taxes is $14.2 million and the combined pro forma benefit from income taxes is $1.8 million. The benefit from income taxes is primarily attributable to tax deductions from stock-based compensation expense.