UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
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x
REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2017
Commission File Number 001-37400
SHOPIFY INC.
(Exact name of Registrant as specified in its charter)
Canada
(Province or other jurisdiction of incorporation or organization)
7372
(Primary Standard Industrial Classification Code Number (if applicable))
30-0830605
(I.R.S. Employer Identification Number (if applicable))
150 Elgin Street, 8th Floor Ottawa, Ontario, Canada K2P 1L4
Attention: Joseph A. Frasca, SVP, General Counsel and Corporate Secretary
613-241-2828
(Address and telephone number of Registrant's principal executive offices)
CT Corporation System
1209 Orange Street, Wilmington, DE 19801
(302) 658-7581
(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)
Copies of all correspondence should be sent to:
Joseph A. Frasca
SVP, General Counsel and Corporate Secretary
Shopify Inc.
150 Elgin Street, 8th Floor
Ottawa, ON K2P 1L4
Canada
Tel: (613) 241-2828
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Name of each exchange on which registered
Class A Subordinate Voting Shares
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Class B Multiple Voting Shares
(Title of Class)
For annual reports, indicate by check mark the information filed with this Form:
x
Annual Information Form x
Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
The Registrant had 87,067,604 Class A Subordinate Voting Shares and 12,810,084 Class B Multiple Voting Shares issued and
outstanding as of December 31, 2017.
Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “Yes” is marked, indicate the file number assigned to the
Registrant in connection with such Rule.
Yes ¨
82- _________ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 x
No ¨
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
Emerging growth company ¨
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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.
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† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards
Codification after April 5, 2012.
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PRIOR FILINGS MODIFIED AND SUPERSEDED
This annual report on Form 40-F of Shopify Inc. ("Shopify", "we", "our", the "Company" or the "Registrant") for the year ended
December 31, 2017, at the time of filing with the U.S. Securities and Exchange Commission (the "SEC" or the "Commission"),
modifies and supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of the U.S. Securities Exchange Act of 1934
(as amended, the "Exchange Act") for purposes of any offers or sales of any securities after the date of this filing pursuant to any
registration statement or prospectus filed pursuant to the U.S. Securities Act of 1933 (as amended, the "Securities Act") which
incorporates by reference this annual report on Form 40-F (or any of the documents filed as Exhibits to this annual report on Form
40-F).
FORWARD-LOOKING STATEMENTS
Shopify has made in this annual report on Form 40-F and the documents filed as Exhibits hereto, and from time to time may
otherwise make, forward-looking statements under the provisions of the United States Private Securities Litigation Reform Act of
1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act, and forward-looking information within the meaning
of applicable Canadian securities legislation.
The Company's actual future results may be materially different from any future results expressed or implied by these forward-
looking statements.
The forward-looking statements represent the Company's views as of the date of this annual report on Form 40-F. The Company
anticipates that subsequent events and developments may cause these views to change. However, while the Company may elect to
update these forward-looking statements at some point in the future, the Company has no current intention of doing so except to the
extent required by applicable law. Therefore, these forward-looking statements do not represent the Company's views as of any date
other than the date of this annual report on Form 40-F.
See Shopify's annual information form for the year ended December 31, 2017, attached as Exhibit 1.1 to this Annual Report on Form
40-F, under the heading "Forward-Looking Information" and Shopify's management’s discussion and analysis for the year ended
December 31, 2017, attached as Exhibit 1.3 to this Annual Report on Form 40-F (the "Shopify 2017 MD&A"), under the heading
"Forward-looking statements", for a discussion of forward-looking statements.
A. Disclosure Controls and Procedures and Internal Control Over Financial Reporting
All control systems, no matter how well designed, have inherent limitations. Accordingly, even disclosure controls and procedures
and internal controls over financial reporting determined to be effective can only provide reasonable assurance of achieving their
control objectives with respect to financial statement preparation and presentation.
Disclosure Controls and Procedures
Management of the Company, under the supervision of the Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining disclosure controls and procedures (as defined by the Commission in Rule 13a-15(e) under the
Exchange Act for the Company to ensure that material information relating to the Company, including its consolidated subsidiaries,
that is required to be made known to the Chief Executive Officer and Chief Financial Officer by others within the Company and
disclosed by the Company in reports filed or submitted by it under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms; and (ii) accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
We, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company's disclosure
controls and procedures as of December 31, 2017 and have concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2017. See “Disclosure Controls and Procedures and Internal Control Over Financial Reporting” in the
Shopify 2017 MD&A, filed as Exhibit No. 1.3 to this Annual Report on Form 40-F.
Management's Annual Report on Internal Control over Financial Reporting
Management of the Company, under the supervision of the Chief Executive Officer and the Chief Financial Officer, is responsible
for establishing and maintaining adequate internal control over the Company’s financial reporting. Internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements in accordance with United States generally accepted accounting principles.
We, including the Chief Executive Officer and Chief Financial Officer, have assessed the effectiveness of the Company’s internal
control over financial reporting in accordance with Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, we, including the Chief Executive
Officer and Chief Financial Officer, have determined that the Company’s internal control over financial reporting was effective as at
December 31, 2017. Additionally, based on our assessment, we determined that there were no material weaknesses in the
Company’s internal control over financial reporting as at December 31, 2017. See “Management's Annual Report on Internal
Control Over Financial Reporting” in Shopify's audited consolidated financial statements for the year ended December 31, 2017 (the
"Shopify 2017 Financial Statements"), filed as Exhibit 1.2 to this Annual Report on Form 40-F.
Auditors' Report on Internal Control over Financial Reporting
The effectiveness of the Company's internal control over financial reporting as at December 31, 2017 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which accompanies Shopify
2017 Financial Statements, and is incorporated herein by reference.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2017 , there were no significant changes in the Company’s internal control over financial
reporting, or any other factors that could significantly affect such internal control, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
B. Identification of the Audit Committee
The board of directors of the Company (the "Board") has a separately designated standing audit committee (the "Audit Committee")
established in accordance with section 3(a)(58)(A) of the Exchange Act. The Board has appointed three independent directors,
Steven Collins (Chair), Robert Ashe and Gail Goodman, to the Audit Committee.
C. Audit Committee Financial Expert
The Board has determined that Steven Collins, the Chair of the Audit Committee, is qualified as an "audit committee financial
expert" within the meaning of Item 407 of Regulation S-K. The Board has further determined that all members of the Audit
Committee are "independent" within the meaning of applicable Commission regulations and the listing standards of the New York
Stock Exchange (the "NYSE").
The Commission has indicated that the designation of a person as an audit committee financial expert does not make such person an
"expert" for any purpose, or impose any duties, obligations or liability on such person that are greater than those imposed on
members of the Audit Committee and the Board who do not carry this designation, or affect the duties, obligations or liability of any
other member of the Audit Committee or Board.
D. Code of Ethics
The Company’s code of ethics, the Shopify Code of Conduct, is applicable to all of its directors, officers and employees, including
the Chief Executive Officer, Chief Financial Officer, Controller, and persons performing similar functions. The Shopify Code of
Conduct is available on the Company’s website at https://investors.shopify.com/governance/governance-documents/default.aspx.
Except for the Shopify Code of Conduct, and notwithstanding any reference to Shopify's website or other websites in this annual
report on Form 40-F or in the documents incorporated by reference herein or attached as Exhibits hereto, no information contained
on the Company's website or any other site shall be incorporated by reference in this annual report on Form 40-F or in the documents
incorporated by reference herein or attached as Exhibits hereto.
E. Principal Accountant Fees and Services
The aggregate amounts paid or accrued by the Company with respect to fees payable to PricewaterhouseCoopers LLP, the auditors
of the Company, for audit (including separate audits of wholly-owned and non-wholly owned entities, financings, regulatory
reporting requirements and SOX related services), audit-related, tax and other services in the years ended December 31, 2017 and
2016 were as follows:
Audit Fees
Audit-related Fees
Tax Fees
All Other Fees
Total
Audit Fees
Fiscal 2017
US$
Fiscal 2016
US$
(in thousands)
600
—
—
2
602
542
—
—
2
544
Audit fees relate to the audit of our annual consolidated financial statements, the review of our quarterly condensed consolidated
financial statements and services in connection with our registration statement on Form F-10 (related to our May 2017 public
offering of Class A subordinate voting shares).
Audit-Related Fees
Audit-related fees consist of aggregate fees for accounting consultations and other services that were reasonably related to the
performance of audits or reviews of our consolidated financial statements and were not reported above under "Audit Fees."
Tax Fees
Tax fees relate to assistance with tax compliance, expatriate tax return preparation, tax planning and various tax advisory services.
All Other Fees
Other fees are any additional amounts for products and services provided by the principal accountants, other than the services
reported above under "Audit Fees,", "Audit-Related Fees" and "Tax Fees".
Audit Committee Pre-Approval Policies and Procedures
From time to time, management recommends to and requests approval from the Audit Committee for audit and non-audit services to
be provided by the Company's auditors. The Audit Committee considers such requests, if applicable, on a quarterly basis, and if
acceptable, pre-approves such audit and non-audit services. During such deliberations, the Audit Committee assesses, among other
factors, whether the services requested would be considered "prohibited services" as contemplated by the SEC, and whether the
services requested and the fees related to such services could impair the independence of the Company's auditors.
The Audit Committee considered and agreed that the fees paid to the Company's auditors in the years ended December 31, 2017 and
2016 are compatible with maintaining the independence of the Company's auditors. The Audit Committee determined that, in order
to ensure the continued independence of the auditors, only limited non-audit services will be provided to the Company by
PricewaterhouseCoopers LLP.
Since the implementation of the Audit Committee pre-approval process in November 2015, all audit and non-audit services rendered
by our auditors have been pre-approved by the Audit Committee.
F. Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than operating leases (which have been disclosed under "Contractual
Obligations and Contingencies" in the Shopify 2017 MD&A).
G. Tabular Disclosure of Contractual Obligations
See Shopify 2017 MD&A, under the heading "Contractual Obligations and Contingencies", which section is incorporated by
reference in this annual report on Form 40-F, for a tabular disclosure and discussion of contractual obligations.
H. NYSE Exemptions
Section 310.00 of the NYSE Listed Company Manual generally requires that a listed company’s by-laws provide for a quorum for
any meeting of the holders of the company’s common shares that is sufficiently high to ensure a representative vote. Pursuant to the
NYSE corporate governance rules we, as a foreign private issuer, have elected to comply with practices that are permitted under
Canadian law in lieu of the provisions of Section 310.00. Our by-laws provide that the holders of at least 25% of the shares entitled
to vote at the meeting, present in person or represented by proxy, and at least two persons entitled to vote at the meeting, present in
person or represented by proxy, constitutes a quorum.
Except as stated above, we are in compliance with the rules generally applicable to U.S. domestic companies listed on the NYSE.
We may in the future decide to use other foreign private issuer exemptions with respect to some of the other NYSE listing
requirements. Following our home country governance practices, as opposed to the requirements that would otherwise apply to a
company listed on the NYSE, may provide less protection than is accorded to investors under the NYSE listing requirements
applicable to U.S. domestic issuers.
I. Undertaking
Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission
staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered
pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions
in said securities.
The following documents are filed as exhibits to this annual report on Form 40-F:
EXHIBITS
Exhibit No.
1.1
1.2
1.3
23.1
31.1
32.1
Document
Annual Information Form for the year ended December 31, 2017
Audited Consolidated Financial Statements for the year ended December 31, 2017
Management’s Discussion and Analysis for the year ended December 31, 2017
Consent of PricewaterhouseCoopers LLP
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
____________________________________________________________________________________
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on
Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.
SIGNATURES
Date:
February 15, 2018
By:
Shopify Inc.
(Registrant)
/s/ Joseph A. Frasca
Name: Joseph A. Frasca
Title: SVP, General Counsel and Secretary
____________________________________________________________________________________
EXHIBIT INDEX
Exhibit No.
1.1
1.2
1.3
23.1
31.1
32.1
Document
Annual Information Form for the year ended December 31, 2017
Audited Consolidated Financial Statements for the year ended December 31, 2017
Management’s Discussion and Analysis for the year ended December 31, 2017
Consent of PricewaterhouseCoopers LLP
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
_________________________________________________________________________________ ____
EXHIBIT 1.1
SHOPIFY INC.
2017 ANNUAL INFORMATION FORM
February 15, 2018
ANNUAL INFORMATION FORM
SHOPIFY INC.
TABLE OF CONTENTS
Section
General Matters
Forward-Looking Information
Corporate Structure
Description of the Business
General Development of the Business
Risk Factors
Dividends and Distributions
Capital Structure
Market for Securities
Directors and Officers
Legal Proceedings and Regulatory Actions
Interest of Management and Others in Material Transactions
Transfer Agents and Registrars
Material Contracts
Interests of Experts
Additional Information
Exhibit A - Audit Committee Charter
Page Number
2
3
7
8
18
22
52
52
58
59
65
65
66
66
66
66
A-1
ANNUAL INFORMATION FORM
SHOPIFY INC.
GENERAL MATTERS
Information Contained in this Annual Information Form
In this Annual Information Form ("AIF") "we", "our", "Shopify", and the "Company" refer to Shopify Inc. and its consolidated
subsidiaries, unless the context requires otherwise. References to our "solutions" means the combination of products and services
that we offer to merchants, and references to "our merchants" as of a particular date means the total number of unique shops that are
paying for a subscription to our platform. Words importing the singular, where the context requires, include the plural and vice
versa and words importing any gender include all genders.
Unless otherwise indicated, all information in this AIF is presented as at February 9, 2018, and references to specific years are
references to the fiscal years of Shopify ended December 31.
This AIF should be read in conjunction with the Company's 2017 audited consolidated financial statements and notes ("2017
Financial Statements") and the Company's 2017 Management’s Discussion and Analysis ("2017 MD&A"), but which, for greater
certainty, are not incorporated by reference herein.
Shopify and the associated logo are registered trademarks of Shopify Inc. or its subsidiaries. All other marks used herein are
trademarks or registered trademarks belonging to their respective owners.
Presentation of Financial Information
We prepare and report our consolidated financial statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"). Our reporting currency is U.S. dollars, and we express all amounts in this AIF in U.S.
dollars, except where otherwise indicated. All references in this AIF to "dollars", "$" and "US$" refer to United States dollars, and
all references to "CAD$" refer to Canadian dollars, unless otherwise expressly stated. On February 9, 2018, the Bank of Canada
noon rate of exchange for the conversion of U.S. dollars into Canadian dollars was $1.00 = CAD$0.7931.
FORWARD-LOOKING INFORMATION
This AIF contains forward-looking statements under the provisions of the United States Private Securities Litigation Reform Act of
1995, Section 27A of the U.S. Securities Act of 1933 (as amended, the "Securities Act"), and Section 21E of the U.S. Securities
Exchange Act of 1934 (as amended, the "Exchange Act"), and forward-looking information within the meaning of applicable
Canadian securities legislation.
In some cases, you can identify forward-looking statements by terminology such as "may", "might", "will", "should", "could",
"expects", "intends", "plans", "anticipates", "believes", "estimates", "predicts", "projects", "potential", "continue", or the negative of
these terms or other similar words. In addition, any statements or information that refer to expectations, beliefs, plans, projections,
objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are
forward-looking. In particular, forward-looking statements in this AIF include, but are not limited to, statements about:
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our ability to predict future commerce trends and technology;
the size of our addressable markets and our ability to serve those markets;
our ability to expand our merchant base;
our ability to offer more sales channels that can connect to our platform;
our ability to develop new solutions to extend the functionality of our platform;
our ability to provide a high level of merchant service and support;
the intended growth of our business and making investments to drive future growth, and the impact of those investments;
our expectation that seasonality will continue to affect our quarterly results;
our expectation that our business may become more seasonal in the future;
our ability to growth our base of merchants by inspiring entrepreneurship through marketing programs;
the growth of our merchants’ revenues and our ability to retain merchants as they grow;
our expectation that we will continue to invest in data analytics;
our intention to continue strategically investing in marketing programs that enhance the awareness of our brand;
our belief in the importance of establishing relationships with merchants early in the business lifecycle;
our investment in additional sales capacity focused on larger merchants;
innovations in, improvements of and expansion of the capabilities of our platform, including the development of new
solutions;
the growth and strengthening of our third-party ecosystem and partner program, including formation of strategic
partnerships;
our ability to continue to build for the long-term;
our plan to focus our investment efforts in 2018 on international growth, Shopify Plus, and core platform growth and
product development;
our intention to increasingly leverage third-party providers of infrastructure to first augment and then supplant our own
hosted hardware;
our expectation that leveraging third-party providers of infrastructure will increase engineering velocity and better position
us for potential changes in data sovereignty regulations;
our current expectation that we will substantially migrate our computing to run on a cloud computing service in 2018;
our expectation of increased competition;
the expansion of our platform internationally;
potential selective acquisitions and investments;
expansion of our lease commitments;
our expectation that we will incur additional general and administrative expenses as a result of our growth;
our intention to continue our use and development of open source software;
changes in our pricing models; and
our expectation that we will not pay any cash dividends in the foreseeable future.
The forward-looking statements contained in this AIF are based on our management’s perception of historic trends, current
conditions and expected future developments, as well as other assumptions that management believes are appropriate in the
circumstances, which include, but are not limited to:
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our belief in the increasing importance of a multi-channel platform that is both fully integrated and easy to use ;
our belief that commerce transacted over mobile will continue to grow more rapidly than desktop transactions;
our ability to expand our merchant base, retain revenue from existing merchants as they grow their businesses, and increase
sales to both new and existing merchants;
our ability to manage our growth effectively;
our ability to protect our intellectual property rights;
our belief that our merchant solutions make it easier for merchants to start a business and grow on our platform;
our ability to develop new solutions to extend the functionality of our platform, provide a high level of merchant service
and support;
our ability to hire, retain and motivate qualified personnel;
our ability to enhance our ecosystem and partner programs, and the assumption that this will drive growth in our merchant
base, further accelerating growth of the ecosystem;
our belief that our investments and acquisitions will increase our revenue base, improve the retention of this base and
strengthen our ability to increase sales to our merchants and help drive our growth;
our ability to achieve our revenue growth objectives while controlling costs and expenses, and our ability to achieve or
maintain profitability;
our belief that monthly recurring revenue ("MRR") is most closely correlated with the long-term value of our merchant
relationships;
our assumptions regarding the principal competitive factors in our markets;
our ability to predict future commerce trends and technology;
our assumptions that higher-margin solutions such as Shopify Capital and Shopify Shipping will continue to grow through
increased adoption and international expansion;
our expectation that Shopify Payments will continue to expand internationally;
our belief that our investments in sales and marketing initiatives will continue to be effective in growing the number of
merchants using our platform, in retaining revenue from existing merchants and increasing revenues from both;
our ability to develop processes, systems and controls to enable our internal support functions to scale with the growth of
our business;
our ability to increase the functionality of our platform;
our ability to obtain sufficient space for our growing employee base;
our ability to retain key personnel;
our ability to protect against currency, interest rate, concentration of credit and inflation risks;
our assumptions as to our future expenses and financing requirements;
our assumptions as to our critical accounting policies and estimates; and
our assumptions as to the effects of accounting pronouncements to be adopted.
Factors that may cause actual results to differ materially from current expectations may include, but are not limited to, risks and
uncertainties that are discussed in greater detail in the "Risk Factors" section of this AIF, including but not limited to risks relating
to:
sustaining our rapid growth;
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our limited operating history in new and developing markets and new geographic regions;
our ability to innovate;
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a denial of service attack or security breach;
payments processed through Shopify Payments;
our reliance on a single supplier to provide the technology we offer through Shopify Payments;
the security of personal information we store relating to merchants and their customers, and consumers with whom we have
a direct relationship;
evolving privacy laws and regulations, cross-border data transfer restrictions, data localization requirements and other
domestic or foreign regulations may limit the use and adoption of our services;
our potential inability to hire, retain and motivate qualified personnel;
serious software errors or defects;
exchange rate fluctuations that may negatively affect our results of operations;
our potential inability to achieve or maintain data transmission capacity;
the reliance of our growth in part on the success of our strategic relationships with third parties;
our potential failure to maintain a consistently high level of customer service;
our use of a limited number of data centers and a cloud-based platform to deliver our services;
ineffective operations of our solutions when accessed through mobile devices;
changes to technologies used in our platform or new versions or upgrades of operating systems and internet browsers;
the impact of worldwide economic conditions, including the resulting effect on spending by small and medium-sized
businesses ("SMBs") or their customers;
potential claims by third parties of intellectual property infringement;
our potential inability to obtain, maintain and protect our intellectual property rights and proprietary information or prevent
third parties from making unauthorized use of our technology;
our use of "open source" software;
our potential inability to generate traffic to our website through search engines and social networking sites;
our potential failure to effectively maintain, promote and enhance our brand;
our dependence on the continued services and performance of our senior management and other key employees;
activities of merchants or partners or the content of merchants' shops;
seasonal fluctuations;
international sales and the use of our platform in various countries;
our reliance on computer hardware, purchased or leased, software licensed from and services rendered by third parties, in
order to provide our solutions and run our business, sometimes by a single-source supplier;
our potential inability to compete successfully against current and future competitors;
Shopify Capital and offering merchant cash advances;
our pricing decisions for our solutions;
acquisitions and investments;
provisions of our financial instruments;
our potential inability to raise additional funds as may be needed to pursue our growth strategy or continue our operations,
on favorable terms or at all;
unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax
returns;
new tax laws could be enacted or existing laws could be applied to us or our merchants;
being required to collect federal, state and local business taxes and sales and use taxes in additional jurisdictions or for past
sales;
our tax loss carryforwards;
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our dependence upon consumers’ and merchants’ access to, and willingness to use, the internet for commerce;
ownership of our shares;
our sensitivity to interest rate fluctuations;
our concentration of credit risk, and the ability to mitigate that risk using third parties; and
the risk of inflation.
Although we believe that the plans, intentions, expectations, assumptions and strategies reflected in our forward-looking statements
are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond our control. If one or more of these risks or uncertainties occur, or if
our underlying assumptions prove to be incorrect, actual results may vary significantly from those implied or projected by the
forward-looking statements. No forward-looking statement is a guarantee of future results. You should read this AIF and the
documents that we reference in this AIF completely and with the understanding that our actual future results may be materially
different from any future results expressed or implied by these forward-looking statements.
The forward-looking statements in this AIF represent our views as of the date of this AIF. We anticipate that subsequent events and
developments may cause our views to change. However, while we may elect to update these forward-looking statements at some
point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these
forward-looking statements do not represent our views as of any date other than the date of this AIF.
CORPORATE STRUCTURE
Name, Address and Incorporation
The Company was incorporated under the Canada Business Corporations Act (the "CBCA") on September 28, 2004 under the name
4261607 Canada Ltd. We filed articles of amendment on January 19, 2006 to change our name to Jaded Pixel Technologies Inc., and
again on November 30, 2011 to change our name to Shopify Inc. On April 12, 2013, we filed articles of amendment to split all of
our issued and outstanding common shares and all of our issued and outstanding Series A and Series B preferred shares on a 5-for-1
basis. On May 22, 2015, we filed articles of amendment to amend and re-designate our authorized and issued share capital in
connection with our initial public offering. See “Capital Structure” for more information about our current share capital. On May 27,
2015, we restated our amended articles of incorporation.
Our head and registered office is located at 150 Elgin Street, 8th floor, Ottawa, Ontario, Canada K2P 1L4, and our telephone number
is (613) 241-2828. We also have offices in Montreal, Toronto, Waterloo, San Francisco, Berlin, Germany and Vilnius, Lithuania.
Our website address is www.shopify.com. Information contained on, or accessible through, our website is not a part of this AIF.
7
Intercorporate Relationships
The following chart shows our current material subsidiaries. All of our subsidiaries are wholly owned.
DESCRIPTION OF THE BUSINESS
Overview
Shopify is the leading cloud-based, multi-channel commerce platform designed for small and medium-sized businesses ("SMBs").
Shopify builds web- and mobile-based software that lets merchants easily set up beautiful online storefronts that are rich with retail
functionality. Merchants use our software to run their business across all of their sales channels, including web and mobile
storefronts, physical retail locations, social media storefronts, and marketplaces. The Shopify platform provides merchants with a
single view of their business and customers across all of their sales channels and enables them to manage products and inventory,
process orders and payments, ship orders, build customer relationships, and leverage analytics and reporting all from one integrated
back office.
In an era where social media, cloud computing, mobile devices and data analytics are creating new possibilities for commerce,
Shopify provides differentiated value by offering merchants:
A multi-channel front end . Our software enables merchants to easily display, manage and sell their products across over a dozen
different sales channels, including web and mobile storefronts, physical retail locations, pop-up shops, social media storefronts, such
as Facebook and Pinterest, apps, buy buttons, and marketplaces, such as Amazon and eBay. The Shopify API has been developed to
support custom storefronts that let merchants sell anywhere, in any language.
A single integrated back end . Our software provides one single integrated, easy-to-use back end that merchants use to manage their
business and customers across these multiple sales channels. Merchants use their Shopify dashboard to manage products and
inventory, process orders and payments, ship orders, build customer relationships, leverage analytics and reporting, and access
financing.
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A data advantage . Our software is delivered to merchants as a service, and operates on a shared infrastructure, and as a result we
have amassed tens of billions of data points to date. With each new transaction processed, we grow our data proficiency for SMBs.
This cloud-based infrastructure not only relieves merchants from running and securing their own hardware, it also consolidates all
the data generated by the billions of interactions between consumers and merchants’ shops, as well as those of our merchants on the
Shopify platform, providing rich data to inform both our own decisions as well as those of our merchants.
Shopify also enables merchants to build their own brand, leverage mobile technology, and handle massive traffic spikes with flexible
infrastructure.
Brand ownership . Unlike an online marketplace, Shopify is designed to help our merchants own their brand and make their
consumer experience memorable and distinctive. We recognize that in a world where consumers have more choices than ever before,
a merchant’s brand is increasingly important. If a consumer searches a third-party marketplace or ecommerce site and selects a
merchant’s product from among thousands of search results, the consumer is more likely to remember the brand of the third-party
site than the brand of the merchant. The Shopify platform is designed to allow a merchant to keep their brand present in every
interaction to help build customer loyalty and competitive advantage against traditional retailers.
Mobile . As ecommerce expands as a percentage of overall retail transactions, today’s consumers expect to be able to transact
anywhere, anytime, on any device through an experience that is simple, seamless, and secure. As transactions over mobile devices
now represent the majority of transactions across online stores powered by Shopify, the mobile experience is a merchant’s primary
and most important interaction with online consumers. For several years Shopify has focused on enabling mobile commerce, and the
Shopify platform now includes a mobile-optimized checkout system, designed to enable merchants’ consumers to more easily buy
products over mobile websites. Our merchants are now able to offer their customers the ability to quickly and securely check out by
using Shopify Pay and Apple Pay on the web, and we continue to explore other new ways to accelerate checkout. Shopify’s mobile
capabilities are not limited to the front end: merchants who are often on-the-go find themselves managing their storefronts via their
mobile devices, as Shopify continues to strive to make it ever-easier to do so.
Infrastructure . We build our platform to address the growing challenges facing merchants with the aim of making complex tasks
simple. The Shopify platform is engineered to enterprise-level standards and functionality while being designed for simplicity and
ease of use. We also design our platform with a robust technical infrastructure able to manage large spikes in traffic that accompany
events such as new product releases, holiday shopping seasons, and flash sales. We are constantly innovating and enhancing our
platform, with our continuously deployed, multi-tenant architecture ensuring all of our merchants are always using the latest
technology.
This combination of ease of use with enterprise-level functionality allows merchants to start with a Shopify store and grow with our
platform to almost any size. Using Shopify, merchants may never need to re-platform. Our Shopify Plus subscription plan was
created to accommodate larger merchants, with additional functionality, scalability and support requirements. Shopify Plus is also
designed for larger merchants not already on Shopify who want to migrate from their expensive and complex legacy solutions and
get more functionality.
Our Merchants
Our mission is to make commerce better for everyone, and we believe we can help merchants of nearly all sizes and retail verticals
realize their potential. While our platform can scale to meet the needs of large
9
merchants, we focus on selling to SMBs and entrepreneurs. Most of our merchants are on subscription plans that cost less than $50
per month, which is in line with our focus of providing cost-effective solutions for early stage businesses.
As of December 31, 2017, we had over 609,000 merchants from approximately 175 countries using our platform, geographically
dispersed as follows: United States of America, 56%; United Kingdom, 8%; Canada, 7%; Australia, 7%; and 21% in the rest of the
world.
Our merchants represent a wide array of retail verticals and business sizes and no single merchant has ever represented more than
five percent of our total revenues in a single reporting period. We believe that our future success is dependent on many factors,
including our ability to expand our merchant base, retain merchants as they grow their businesses on our platform, offer more sales
channels that can connect to the platform, develop new solutions to extend the functionality of our platform, enhance our ecosystem
and partner programs, provide a high level of merchant service and support, and hire, retain and motivate qualified personnel.
Merchant Acquisition
Our merchant acquisition strategy is primarily focused on marketing that builds awareness of our offerings. Our approach includes a
strong emphasis on the use of data and analytics while continuously innovating and testing new ideas to drive growth.
We actively grow our audience through online channels, including organic search, paid search and social media. Our offline channel
strategy includes participating in trade shows and local events to generate awareness of our platform. We also invest in content
marketing, authoring various Shopify blogs, podcasts, video content, eBooks and other free tools, and provide thought leadership to
help our merchants succeed and to build their own brand. Our Build A Business competitions similarly help increase our brand
awareness and merchant acquisition. We employ outbound sales representatives to help drive adoption of our Shopify Plus offering.
In addition to direct channels, we leverage relationships with third-party design agencies, developers, influencers, and freelancers
around the world who actively refer merchants to us.
Partner Ecosystem
A rich ecosystem of app developers, theme designers and other partners, such as digital and service professionals, marketers,
photographers, and affiliates has evolved around the Shopify platform. Approximately 15,000 of these partners have referred
merchants to Shopify over the last year, and this strong, symbiotic relationship continues to grow. We believe this ecosystem has
grown in part due to the platform’s functionality, which is highly extensible and can be expanded through our application program
interface ("API") and the approximately 2,300 apps available in the Shopify App Store. The partner ecosystem helps drive the
growth of our merchant base, which in turn further accelerates growth of the ecosystem.
Our Offerings
Our business model has two revenue streams: a recurring subscription component we call subscription solutions, and a merchant
success-based component we call merchant solutions.
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Subscription Solutions
We principally generate subscription solutions revenues through the sale of subscriptions to our platform. We also generate
associated subscription solutions revenues from the sale of custom themes, apps and registration of domain names.
We offer pricing plans designed to meet the needs of our current and prospective merchants. Offering different service and pricing
levels allows entrepreneurs to scale without leaving the Shopify platform: as a merchant upgrades to the higher-priced options, they
receive more powerful tools. We believe this ability to retain merchants as they grow is an important factor for our success in
serving the SMB market. While most merchants subscribe to our Basic and Shopify plans, the majority of our GMV comes from
merchants subscribing to our Advanced and Shopify Plus plans. Merchant retention rates are also higher among merchants on
higher-priced plans. Offered at a starting rate that is several times that of our Advanced plan, Shopify Plus caters to merchants with
higher-volume sales and offers additional functionality, scalability, and support requirements, including a dedicated Merchant
Success Manager. Nestle, Red Bull, Rebecca Minkoff, and Kylie Cosmetics are among the approximately 3,600 Shopify Plus
merchants seeking a reliable, cost-effective, and scalable commerce solution.
Our subscription plans typically have a one-month term, however those who sign on to Shopify Plus initially have annual or multi-
year subscription terms. Subscription terms automatically renew unless notice of cancellation is provided in advance. Merchants
purchase subscription plans directly from us. Subscription fees are paid to us at the start of the applicable subscription period,
regardless of the length of the subscription period, with the exception of Shopify Plus subscription contracts, which are paid in
arrears on a monthly basis. Subscription fees are non-refundable.
Merchant Solutions
We offer a variety of merchant solutions to augment those provided through a subscription to address the broad array of functionality
merchants commonly require, including accepting payments, shipping, and securing working capital. We believe that offering
merchant solutions creates additional value for merchants, saving them time and money by making additional functionality available
within a single centralized commerce platform, and creates additional value for Shopify by increasing merchants’ use of our
platform.
We principally generate merchant solutions revenues from payment processing fees from Shopify Payments. In addition to payment
processing fees from Shopify Payments, we also generate merchant solutions revenue from transaction fees, Shopify Shipping,
Shopify Capital, referral fees from partners, and sales of point-of-sale ("POS") hardware.
Shopify Payments is a fully integrated payment processing service that allows our merchants to accept and process payment cards
online and offline, and is also designed to drive higher retention among merchant subscribers. We introduced Shopify Payments in
the United States and Canada in 2013, and have added the United Kingdom, Australia, Ireland, New Zealand and Singapore in
subsequent years. As a result of introducing Shopify Payments, our revenues from merchant solutions and associated costs have
increased significantly.
Transaction fees are charged based on a percentage of Gross Merchandise Volume ("GMV") processed on subscription plans where
the merchant has not signed up for Shopify Payments.
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Shopify Shipping was launched in the United States in September 2015 and in Canada in September 2016, and allows merchants to
select from a variety of shipping partners to buy and print shipping labels and track orders directly within the Shopify platform.
Shopify Capital, a merchant cash advance ("MCA") program, was launched in the United States in April 2016 to help eligible
merchants secure financing and accelerate the growth of their business by providing access to simple, fast, and convenient working
capital. We apply underwriting criteria prior to purchasing the eligible merchant’s future receivables to help ensure collectibility.
Under Shopify Capital, we purchase a designated amount of future receivables at a discount. The purchase price is paid to the
merchant at the time the MCA is entered into, and the Merchant remits a fixed percentage of their daily sales until the outstanding
balance has been remitted. We have mitigated some of the risks associated with Shopify Capital by entering into an agreement with a
third party to insure merchant cash advances offered by Shopify Capital.
We also generate merchant solutions revenues in the form of referral fees from partners to whom we direct business and with whom
we have an arrangement in place. Pursuant to terms of the agreements with our partners, these revenues can be recurring or non-
recurring. Where the agreement provides for recurring payments to us, we typically earn revenues so long as the merchant that we
have referred to the partner continues to use the services of the partner. Non-recurring revenues generally take the form of one-time
payments that we receive when we initially refer the merchant to the partner.
Shopify POS is our mobile application that lets merchants sell their products in a physical or retail setting. While the majority of the
POS-compatible hardware we sell has been designed and manufactured by third-party vendors, in 2017 we designed our own POS
card reader to better meet the needs of our merchant base and increase the visibility of the Shopify brand.
Seasonality
Seasonality has affected and will continue to affect our quarterly results. While our rapid growth has largely masked seasonal trends
to date in subscription solutions revenues, our merchant solutions revenues are directionally correlated with the level of GMV that
merchants process through our platform. As a result of the additional GMV our merchants typically process during the holiday
season, we have historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. As a result of
the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future and
that historical patterns in our business may not be a reliable indicator of our future performance.
Research and Development
Research and development is currently focused on product management, product development, and product design. We believe that
by deepening the capabilities of our current solution set to meet the needs of more merchants in more geographies, and by expanding
the range of solutions we offer, we will be able to grow our addressable market and meet the needs of merchants in years ahead.
Data analytics and machine learning are increasingly informing our product development efforts and we expect to continue investing
in this area.
Growth Strategy
We have focused on rapidly growing our business and plan to continue making investments to drive future growth. We believe that
our investments will increase our revenue base, improve the retention of this base, and strengthen our ability to increase sales to our
merchants. Our growth strategy is driven by our mission: make commerce better for everyone. Key elements of our strategy include:
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• Grow our Base of Merchants. We believe that we have a significant opportunity to increase the size of our current merchant
base. As such we have a dedicated focus on product and brand marketing paired with ongoing content marketing efforts to
continue growing this base. We intend to continue to strategically invest in marketing programs that enhance the awareness
of our brand and solutions among businesses at different stages of their lifecycle, from entrepreneurs just starting a business
to larger, well-established businesses. While we believe it is important to establish relationships early in the business
lifecycle and grow along with our merchants, we also see the opportunity from larger businesses looking for faster time-to-
market and better value as they innovate to meet rapidly evolving consumer demands. We intend to grow our base of
merchants primarily by inspiring entrepreneurship through marketing programs. In the past these have included competitions
designed to catalyse business creation and Shopify blogs. Additionally, we are investing in additional sales capacity focused
on larger merchants, as we continue to hire and train outbound sales representatives for Shopify Plus.
• Grow our Merchants’ Revenue. Our goals are closely aligned with the goals of our merchants. The more a merchant sells on
our platform, the more revenue we generate as they process more transactions, upgrade plans, add new sales channels, ship
more products, and use additional solutions. We intend to continue to improve our platform to help our merchants sell more
and expect to continue to use initiatives such as our retail tour roadshows, Shopify blogs and Shop Class programs to educate
our merchant base on how they can be even more successful using our platform. Last year, the Shopify blogs, which appear
in eight different languages, had over 210 million browsing sessions, which we believe places us among the internet’s top
ecommerce and entrepreneurial blogs.
• Continuous Innovation and Expansion of our Platform . Our platform is built to support innovation and the rapid technology
changes in commerce. We foresaw the rise of mobile and launched our Shopify Mobile application in 2010. Shopify Mobile
gives merchants the ability to set-up, track, and manage their business from anywhere. We intend to continue to build more
sales channels and additional functionality to make our merchants more effective and further differentiate our platform. We
have done this with Shopify Payments, which eliminates the need for merchants to set up and maintain a direct relationship
with a third-party payment gateway, gives merchants access to low credit card processing rates, and allows us to cross-sell
additional solutions to our merchant base. We added functionality with Shopify Shipping, which allows merchants to print
postage labels and ship products at discounted rates directly through Shopify. We introduced Shopify Capital, which offers
growing merchants working capital directly through the Shopify platform. We intend to continue expanding the capabilities
of our platform so merchants can not only keep pace with the rapid changes in commerce, but be among the earliest adopters
of commerce innovation.
• Continue to Grow and Develop our Ecosystem . We have a thriving third-party ecosystem that includes app developers,
theme designers, and other partners that bolster the functionality of our platform. Our annual Unite conference demonstrates
to partners the opportunities that exist to collaborate in building the future of commerce technology. This ecosystem has
grown in part due to the platform’s functionality, which is highly extensible and can be expanded through our API. There are
currently approximately 2,300 apps available in the Shopify App Store. We believe that growing our ecosystem makes the
Shopify platform more attractive and stickier, which further expands our merchant base, and in turn drives additional growth
of our ecosystem.
• Continue to Expand our Referral Partner Programs . We have strong relationships with thousands of design and marketing
agencies throughout the world. These agencies build merchant web and
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mobile shops on our platform. Approximately 15,000 active partners referred merchants to us in the past 12 months, and we
refer work to them using our Shopify Experts directory. We intend to strengthen our existing relationships with referral
partners and create new ones with the goal of expanding our overall merchant base.
• Continue to Build for the Long-term . We have a culture of iteration and experimentation with a focus on maximizing long-
term value, and many of our investments are made with an eye toward what we believe merchants will require several years
from now. Such longer-term initiatives include international expansion, strategic partnerships, new solutions, and selective
acquisitions.
We plan to focus our investment efforts in 2018 on international growth, Shopify Plus, and core platform growth and product
development.
Technology
The Shopify platform is a multi-tenant cloud-based system that is engineered for high scalability, reliability, and performance. Open
source has played a major role at Shopify from the beginning when our founder was active on the core team that built Ruby on Rails,
the technology that powers much of the Shopify platform. We host the Shopify platform using a mix of co-located and cloud-based
servers. Maintaining the integrity and security of our technology infrastructure is critical to our business, and we plan to invest
further in our infrastructure to meet our merchants’ needs and maintain their trust. Our investment plans include increasingly
leveraging third-party providers of infrastructure to first augment and then supplant our own hosted hardware, which we expect will
enable us to increase engineering velocity by redirecting time spent focusing on infrastructure hardware to more value-added
software; and better position us for potential changes in data sovereignty regulations globally. The key attributes of the Shopify
platform are:
•
•
Security. Credit card processing on the Shopify platform is performed by a dedicated, highly scalable, geographically
redundant, high-security environment with specialized policies and procedures in place. The environment is designed to be
highly isolated and secure and exceeds the requirements of PCI DSS. We have been certified as a PCI DSS Level 1-
compliant service provider, which is the highest level of compliance available. We use firewalls, advanced encryption,
intrusion detection systems, two-factor authentication, and other technology to keep our merchants’ data secure.
Scalability. The cloud-based architecture of our platform has been designed to support sudden traffic and order spikes from
our merchants. We use a technology called "containerization" to efficiently scale our computing resources across our
platform. We have benchmarked the Shopify platform to handle at least 80,000 requests per second and 12,000 orders per
minute based on platform load testing.
• Reliability. Our platform includes servers in geographically dispersed, co-located data centers and, increasingly, cloud-based
servers, that are fault-tolerant and ensure that our platform is highly reliable. Because Shopify is at the heart of our
merchants’ businesses, we employ a highly redundant, horizontally scalable, shared architecture to ensure resiliency and high
availability.
• Performance. We believe that the faster and more accessible our merchants’ shops appear to their customers, the more our
merchants will sell. We have a dedicated team that is constantly profiling and optimizing the performance of the Shopify
platform. We leverage content delivery networks with global points of presence to ensure that content and data is delivered
quickly to users across the globe. In 2017, online shops hosted on our platform had sub-100 millisecond median response
times; our
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merchants’ shops averaged 218 million unique monthly visitors and 1.4 billion monthly browsing sessions, most of which
were from mobile devices; and we processed an average of 29.9 million orders per month.
• Deployment. The Shopify platform is "single branch" software, which means that all of our merchants use the latest version
of Shopify at all times. The result is that we have no overhead in maintaining older versions of our platform. Our software
deployment process enables us to quickly distribute new software as soon as it is ready. This is made possible by our ongoing
investment in end-to-end automation and comprehensive test suites.
Competition
Our market is transforming, competitive, and highly fragmented, and we expect competition to increase in the future. We believe the
principal competitive factors in our market are:
•
•
•
•
•
•
•
•
•
•
•
vision for commerce and product strategy;
simplicity and ease of use;
integration of multiple channels;
cost-effective solution;
breadth and depth of functionality;
pace of innovation;
powerful data analytics;
ability to scale;
security and reliability;
support for a merchant’s brand development; and
brand recognition and reputation.
With respect to each of these factors, we believe that we compare favorably to our competitors.
We believe no competitor offers an integrated, multi-channel, cloud-based commerce platform with comparable functionality to
ours. However, some merchants may elect to piece together technology from other companies that overlaps with certain functions
and features that we provide, including:
ecommerce software vendors;
content management systems;
payment processors;
POS software providers;
domain registrars;
shipping label providers;
alternative lenders; and
•
•
•
•
•
•
•
• marketplaces.
Intellectual Property
Our intellectual property and proprietary rights are important to our business. In our efforts to safeguard them, we rely on a
combination of copyright, trade secret, trade dress, domain names, trademarks, and other rights in Canada, the United States, and
other jurisdictions in which we conduct our business. We also have confidentiality agreements, assignment agreements, and license
agreements with employees, contractors, merchants, distributors, and other third parties, which limit access to and use of our
proprietary intellectual
15
property. Though we rely, in part, upon these legal and contractual protections, we believe that factors such as the skills and
ingenuity of our employees, as well as the functionality and frequent enhancements to our platform, make our intellectual property
difficult to replicate.
We have been issued the following trademark registrations: “Shopify” in Australia, Canada, the European Union, Germany, Mexico,
New Zealand, Norway, Russia, Switzerland and the United States; “S & Design” in Australia, Canada, China, the European Union,
Mexico, New Zealand, Norway and the United States; “S Shopify & Design” in Australia, Canada, Mexico, New Zealand, Norway,
Russia and the United States; “A shop in minutes, a business for life” in Canada and the United States; “Do what you do best” in
Canada; and “Shopify” in Chinese characters in China.
We are subject to certain risks related to our intellectual property. For more information, see "Risk Factors - Risks Related to our
Business and Industry."
Property
We are headquartered in Ottawa, Canada. We do not own any real property. The following table outlines significant properties that
we currently lease, all of which are used for office space:
Location
Square Feet
Date Lease Ends
Ottawa, Ontario
Ottawa, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Kitchener-Waterloo, Ontario
Kitchener-Waterloo, Ontario
Montreal, Quebec
San Francisco, California
June 30, 2032
449,852
170,119 December 31, 2026
178,387 December 31, 2028
36,771 August 31, 2021
33,813 December 31, 2018
61,160
39,173
61,110
5,450
July 31, 2028
September 30, 2022
June 30, 2027
February 15, 2018
We also currently lease space in two data centers in the United States.
We believe that our current facilities are adequate to meet our ongoing needs and that, if we require additional space, we will be able
to obtain additional facilities on commercially reasonable terms.
Culture and Employees
If you have ambitious goals, you need an equally ambitious team. Shopify is composed of highly talented, deeply caring individuals
all working on making commerce better for everyone. Our culture is continuously being redefined with every person that joins our
company, but, at our core, we value people who:
•
•
•
•
•
get shit done;
build for the long-term;
focus on simple solutions;
act like owners; and
thrive on change.
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In those values, there is a focus on continuous learning and personal development. We are a fast-growing company that is constantly
trying to get better. We expect to see similar growth from everyone in our team.
We deeply value innovation and experimentation. Every few months we take a break from our regular work and for two full days
every employee has free reign to work on whatever project they want as long as it adds value to Shopify. We call these two days
"Hack Days". There is no limit to the creativity or scope of the projects. The only rule is that employees must complete their projects
no later than 4 p.m. at the end of the second day, at which point teams pitch their finished projects.
We believe that being headquartered in Ottawa, Canada gives us access to a large talent pool. Ottawa is currently home to
approximately 1,700 technology companies and has the highest concentration per capita of scientists and engineers in Canada. We
recruit our employees through multiple avenues including internships, campus recruiting and global outreach.
As of December 31, 2017, we had approximately 3,000 employees and contractors worldwide. None of our employees is represented
by a labor organization or is a party to a collective bargaining arrangement. We consider our relationship with our employees to be
excellent.
Government Regulation
We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the internet,
many of which are still evolving and could be interpreted in ways that could harm our business. Concern about the use of software as
a service ("SaaS") platforms for illegal conduct, such as money laundering or supporting terrorist activities, may in the future result
in legislation or other governmental action that could require changes to our platform.
We are subject to U.S. and Canadian laws and regulations that govern or restrict our business and activities in certain countries and
with certain persons, including the economic sanctions regulations administered by the U.S. Treasury Department’s Office of
Foreign Assets Control, the sanctions regulations administered or enforced by the Office of the Superintendent of Financial
Institutions in Canada, and the export control laws administered by the U.S. Commerce Department’s Bureau of Industry and
Security, the U.S. State Department’s Directorate of Defense Trade Controls and the Canadian Export and Import Controls Bureau.
We are currently subject to a variety of laws and regulations in Canada, the United States, the United Kingdom and elsewhere
related to payment processing, including those governing cross-border and domestic money transmission, gift cards and other
prepaid access instruments, electronic funds transfers, foreign exchange, anti-money laundering, counter-terrorist financing, banking
and import and export restrictions. Depending on how Shopify Payments and our other merchant solutions evolve, we may be
subject to additional laws in Canada, the United States, the United Kingdom, Australia, Ireland, New Zealand, Singapore and
elsewhere.
We are also subject to federal, state, provincial and foreign laws regarding cybersecurity, privacy and the protection of data. Some
jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of
personal information data and our agreements with certain merchants require us to notify them in the event of a security incident.
Additionally, some jurisdictions as well as our contracts with certain merchants require us to use industry-standard or reasonable
measures to safeguard personal information or confidential information, and thereby mitigate the risk of a security incident.
In addition, our reputation and brand may be negatively affected by the actions of merchants or their users or partners that are
deemed to be hostile, offensive, inappropriate or unlawful. We do not monitor or review
17
the appropriateness of the content accessible through merchants’ shops in connection with our services, and we do not have control
over the activities in which merchants’ customers engage. While we have adopted policies regarding illegal or offensive use of our
platform, merchants or their customers could nonetheless engage in these activities. The safeguards we have in place may not be
sufficient to avoid harm to our reputation and brand, especially if such hostile, offensive or inappropriate use was high profile, which
could adversely affect our ability to expand our merchant subscription base and could harm our business and financial results. It is
possible that we could also be subject to liability. In many jurisdictions, laws relating to the liability of providers of online services
for activities of their customers and other third parties are currently being tested by a number of claims, including actions based on
defamation, invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based
on the nature of the relevant content. Any court ruling or other governmental regulation or action that imposes liability on providers
of online services in connection with the activities of their customers or their customers’ users could harm our business. In such
circumstances we may also be subject to liability under applicable law, which may not be fully mitigated by our terms of service.
Any liability attributed to us could adversely affect our brand, reputation, ability to expand our subscriber base, and financial results.
GENERAL DEVELOPMENT OF THE BUSINESS
As of December 31, 2017, the Company operated in only a single operating and reportable segment.
Three-Year History
In the fourth quarter of 2017:
Shopify added both DHL and UPS, in October and November, respectively, as new shipping partners to offer U.S. merchants greater
choice for competitive shipping rates.
In the third quarter of 2017:
Shopify’s Instagram channel was made available in a limited release to tens of thousands of merchants in October 2017. Merchants
in categories like fashion, jewelry, beauty, furniture, and home decor, are able to tag posts with products in Instagram’s apps to
showcase to over 800 million monthly active Instagram users.
Shopify announced the addition of the largest global fashion search engine, Lyst, enabling merchants to reach new audiences in the
U.S., U.K., Germany, Sweden, Finland, and Austria they may not have been able to capture before.
Shopify expanded shipping capabilities beyond single label printing in September 2017, adding bulk label printing to Shopify
Shipping and integrated DHL Express as an international shipping option at discounted rates for merchants based in the U.S.
Shopify announced in August 2017 that it powers more than 500,000 businesses in approximately 175 countries around the world.
Shopify began shipping pre-orders of its Chip and Swipe Reader to merchants in July 2017, enhancing our point-of-sale channel, the
second-largest channel for GMV.
In the second quarter of 2017:
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Shopify announced the integration of eBay as a channel for merchants in July 2017. The channel, which went live in October 2017,
enables Shopify merchants to surface their brand and products to more than 168 million active eBay buyers, while managing eBay
orders, inventory and messages from within Shopify.
Shopify announced the integration of BuzzFeed as a channel for merchants in June 2017, paving a new way for media and publishers
to drive revenue. The new channel allows merchants to easily tag products for BuzzFeed editors to search, find, and feature in its
campaigns, product lists and onsite content for its audience of more than 200 million.
Shopify Pay, a feature designed to increase conversion at checkout by streamlining the checkout process, especially on mobile
devices, went live to all merchants using Shopify Payments.
Shopify completed a public offering in May 2017 of 6,325,000 Class A subordinate voting shares. The aggregate net proceeds to the
Company of US$575,575,000 strengthened Shopify's balance sheet and provided flexibility to fund growth strategies. The offering
was made pursuant to a previously filed short form base shelf prospectus and registration statement on Form F-10 which allows
Shopify to offer up to US$2,500,000,000 of Class A subordinate voting shares, preferred shares, debt securities, warrants,
subscription receipts, units, or any combination thereof, from time to time during the 25-month period that the shelf prospectus is
effective.
Shopify acquired Oberlo UAB (“Oberlo”), a company that allows merchants to find products to sell, import them directly into their
Shopify store, and ship those products directly to customers.
In the first quarter of 2017:
Shopify announced the Wholesale Channel for Shopify Plus, which enables Shopify Plus merchants to create a separate, password-
protected storefront, managed within their existing store. Merchants can invite buyers to purchase products at assigned wholesale
prices, creating a more efficient way to manage customer bulk ordering in one place, without two systems or workarounds.
Over one thousand Shopify Partners and Developers from around the world gathered in San Francisco in April 2017 to discuss the
future of Shopify, commerce, and technology at our partner conference, Shopify Unite.
In the fourth quarter of 2016:
Shopify’s Sell on Amazon integration was made generally available to merchants in December. Designed to seamlessly connect
Shopify store owners to the millions of customers searching for products to buy on Amazon, merchants using this integration are
able to conveniently manage their product catalog for their ecommerce website, retail store, Amazon store, and other sales channels
all in one place.
Shopify completed the acquisition of Boltmade in October 2016, a product design and development consultancy based in Waterloo,
Ontario. The acquisition of Boltmade was intended to help accelerate the development of the Shopify Plus product offering by
adding deep software design and engineering talent to the Shopify Plus product development team.
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Shopify expanded on its Facebook Messenger integration by enabling merchants to sell within Facebook Messenger. In the second
quarter, Shopify made it possible for merchants to leverage Facebook Messenger as a means to engage in conversational commerce
directly with their customers, and already, over 30,000 merchants have installed Facebook Messenger for their shops.
In the third quarter of 2016:
Shopify completed a follow-on public offering in August 2016 of 8,625,000 Class A subordinate voting shares, of which 6,125,000
were sold by the Company and 2,500,000 were sold by certain of our shareholders. The aggregate net proceeds to the Company of
US$224,000,000 strengthened Shopify's balance sheet and provided flexibility to fund growth strategies. The offering was made
pursuant to a previously filed short form base shelf prospectus and registration statement on Form F-10 which allows Shopify to
offer up to US$500,000,000 of Class A subordinate voting shares, preferred shares, debt securities, warrants, subscription receipts,
units, or any combination thereof, from time to time during the 25-month period that the shelf prospectus is effective.
Shopify announced that our merchants would be among the first to be able to accept Apple Pay and Android Pay for web orders on
mobile. These mobile wallets will allow our merchants’ customers to quickly and securely check out by simply tapping the Pay
button and scanning their fingerprint.
Shopify released its new mobile Shopify app which introduced a number of new features merchants can use to manage their stores,
including the ability to sign up, launch and run a store entirely on mobile.
Shopify entered into an agreement with Export Development Canada to help insure merchant cash advances offered by Shopify
Capital. This agreement supports the continued growth of Shopify Capital, which was launched earlier in 2016 to help merchants
secure financing and accelerate their business growth.
Shopify expanded Shopify Shipping beyond USPS by integrating Canada Post, allowing Canada-based Shopify merchants to
quickly buy and print discounted Canada Post shipping labels at rates up to 40% off retail Canada Post rates.
In the second quarter of 2016:
In April 2016 Shopify acquired Kit CRM Inc. ("Kit"), a virtual marketing assistant that uniquely interfaces with business owners via
messaging to help manage marketing, reporting and other back-office tasks. The acquisition was intended to strengthen our
capabilities in messaging and conversational commerce. A top-rated app in the Shopify app store, Kit helps merchants grow their
business by placing targeted ads, posting updates to merchants’ Facebook Pages, and making recommendations based on shop or
business activity.
Shopify announced that it was the first commerce platform to integrate with Facebook’s new Messenger Platform, making it easier
for merchants to engage in conversational commerce with their customers. The integration allows merchants to provide live
customer support, and to automatically send order confirmations, shipping updates, and push notifications all within Facebook
Messenger.
Shopify announced the launch of Shopify Capital, offering merchant cash advances to select merchants, which provide them timely
access to funds to respond quickly to capital needs for their business.
Shopify expanded same-day shipping options with its integration with Postmates. Available in over 200 cities
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across the United States and serviced by over 25,000 couriers, Postmates allows merchants and customers to track purchases from
checkout to delivery.
Shopify launched the Shopify Plus Partner Program, partnering with award-winning, global, digital, marketing and design agencies
to develop a partner ecosystem specifically for Shopify Plus merchants.
In the first quarter of 2016:
Orders on mobile surpassed those on desktop for the first time ever, with just over 51% of orders at the end of the first quarter of
2016 coming from mobile devices.
Shopify’s partner ecosystem, a critical component to Shopify’s success, was well represented at Shopify's first-ever partner
conference, Unite, in San Francisco. More than 650 partners participated in Unite, where we unveiled a number of platform
enhancements, including the Sales Channel SDK, which enables partners to use Shopify’s APIs to build out new channels for
Shopify merchants. Houzz, Wanelo and Ebates have already built channels through which Shopify merchants can list and sell.
In 2015:
On October 14, 2015, Shopify announced a partnership with Uber to offer same-day delivery with UberRUSH delivery service to
Shopify merchants in select cities.
On September 30, 2015, Shopify introduced a partnership with Twitter to allow Shopify merchants to sell products directly on
Twitter with Twitter’s "Buy Now" buttons.
On September 25, 2015, Shopify announced the launch of its EMV credit card reader that allows Shopify merchants in the U.S. to
securely accept chip and pin, tap and swipe credit and debit cards as well as contactless payment technologies like Apple Pay.
On September 24, 2015, Shopify announced the launch of Shopify Shipping, which allows merchants to easily buy and print
discounted shipping labels directly within the Shopify platform.
On September 17, 2015, Shopify announced that it had been selected as the preferred migration provider for Amazon Webstore
merchants, and that Shopify would be providing its merchants with tools and services to help customers grow their online business
and easily integrate Amazon offerings such as Login and Pay with Amazon, Fulfillment by Amazon and Selling on Amazon.
On September 16, 2015, Shopify introduced the Shop Section on Facebook Pages, to enable Shopify merchants to showcase and sell
their products in the Shop section on Facebook Pages.
On June 2, 2015, Shopify introduced selling on Pinterest using buyable pins.
On May 27, 2015, Shopify announced the closing of its initial public offering of 8,855,000 Class A subordinate voting shares, for a
total of US$150,535,000 in aggregate gross proceeds.
On April 14, 2015, Shopify announced that it had filed a registration statement on Form F-1 with the U.S. Securities and Exchange
Commission (the "SEC") and a preliminary prospectus with the securities regulatory authorities in each of the provinces and
territories of Canada for a proposed initial public offering of its Class A subordinate voting shares.
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On March 31, 2015, Shopify announced the release of multi-channel Shopify, which made it easier for merchants to manage and sell
their products across all sales channels, and updates to Shopify POS.
RISK FACTORS
In addition to any other risks contained in this AIF, as well as our "Management’s Discussion and Analysis" and our audited
financial statements and related notes, the risks described below are the principal risks that could have a material and adverse effect
on our business, financial condition, results of operations, cash flows, future prospects or the trading price of our Class A
subordinate voting shares. This AIF also contains forward-looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks
described below. See "Forward-Looking Information."
Risks Related to Our Business and Industry
Our rapid growth may not be sustainable and depends on our ability to attract new merchants, retain revenue from existing
merchants and increase sales to both new and existing merchants.
We principally generate revenues through the sale of subscriptions to our platform and the sale of additional solutions to our
merchants. Our subscription plans typically have a one-month term, although a small percentage of our merchants have annual or
multi-year subscription terms. Our merchants have no obligation to renew their subscriptions after their subscription term expires.
As a result, even though the number of merchants using our platform has grown rapidly in recent years, there can be no assurance
that we will be able to retain these merchants. We have historically experienced merchant turnover as a result of many of our
merchants being SMBs that are more susceptible than larger businesses to general economic conditions and other risks affecting
their businesses. Many of these SMBs are in the entrepreneurial stage of their development and there is no guarantee that their
businesses will succeed. Our costs associated with subscription renewals are substantially lower than costs associated with
generating revenue from new merchants or costs associated with generating sales of additional solution to existing merchants.
Therefore, if we are unable to retain revenue from existing merchants or if we are unable to increase revenues from existing
merchants, even if such losses are offset by an increase in new merchants or an increase in other revenues, our operating results
could be adversely impacted.
We may also fail to attract new merchants, retain revenue from existing merchants or increase sales to both new and existing
merchants as a result of a number of other factors, including: reductions in our current or potential merchants’ spending levels;
competitive factors affecting the software as a service ("SaaS") business software applications market, including the introduction of
competing platforms, discount pricing and other strategies that may be implemented by our competitors; our ability to execute on our
growth strategy and operating plans; a decline in the number of entrepreneurs; a decline in our merchants’ level of satisfaction with
our platform and merchants’ usage of our platform; the difficulty and cost to switch to a competitor may not be significant for many
of our merchants; changes in our relationships with third parties, including our partners, app developers, theme designers, referral
sources and payment processors; the timeliness and success of new products and services we may offer in the future; concerns
relating to actual or perceived security breaches; the frequency and severity of any system outages; technological changes or
problems; and our focus on long-term value over short-term results, meaning that we may make strategic decisions that may not
maximize our short-term revenue or profitability if we believe that the decisions are consistent with our mission and will improve
our financial performance over the long-term.
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Additionally, we anticipate that our growth rate will decline over time to the extent that the number of merchants using our platform
increases and we achieve higher market penetration rates. As our growth rate declines, investors' perception of our business may be
adversely affected and the trading price of our Class A subordinate voting shares could decline as a result. To the extent our growth
rate slows, our business performance will become increasingly dependent on our ability to retain revenue from existing merchants
and increase sales to existing merchants.
Our business could be harmed if we fail to manage our growth effectively.
The rapid growth we have experienced in our business places significant demands on our operational infrastructure. The scalability
and flexibility of our platform depends on the functionality of our technology and network infrastructure and its ability to handle
increased traffic and demand for bandwidth. The growth in the number of merchants using our platform and the number of orders
processed through our platform has increased the amount of data and requests that we process. Any problems with the transmission
of increased data and requests could result in harm to our brand or reputation. Moreover, as our business grows, we will need to
devote additional resources to improving our operational infrastructure and continuing to enhance its scalability in order to maintain
the performance of our platform.
Our growth has placed, and will likely continue to place, a significant strain on our managerial, administrative, operational, financial
and other resources. We have grown from over 1,900 employees and contractors at December 31, 2016 to approximately 3,000
employees and contractors at December 31, 2017 . We intend to further expand our overall business, including headcount, with no
assurance that our revenues will continue to grow. As we grow, we will be required to continue to improve our operational and
financial controls and reporting procedures and we may not be able to do so effectively. In addition, as we have grown, we have
significantly expanded our lease commitments and we plan to further expand such commitments. Furthermore, some members of our
management do not have significant experience managing a large global business operation, so our management may not be able to
manage such growth effectively. As such, we may be unable to manage our expenses effectively in the future, which may negatively
impact our gross profit or operating expenses. We are also subject to the risks of over-hiring and/or over-compensating our
employees and over-expanding our operating infrastructure.
In addition, we believe that an important contributor to our success has been our corporate culture, which we believe fosters
innovation, teamwork and passion for our merchants and a focus on attractive design and technologically advanced and well-crafted
software. Most of our employees have been with us for fewer than two years as a result of our rapid growth. As we continue to grow,
we must effectively integrate, develop and motivate a growing number of new employees, some of whom are based in various
countries around the world, and we must effectively preserve our ability to execute quickly on new features and initiatives. As a
result, we may find it difficult to maintain our corporate culture, which could limit our ability to innovate and operate effectively.
Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, to continue to perform at
current levels or to execute on our business strategy effectively and efficiently.
We have a history of losses and we may be unable to achieve profitability.
We incurred net losses of $34.7 million in 2017 , $37.2 million in 2016 , and $18.8 million in 2015 . At December 31, 2017 , we had
an accumulated deficit of $123.2 million . These losses and accumulated deficit are a result of the substantial investments we made
to grow our business and we expect to make significant expenditures to expand our business in the future. We expect to increase our
investment in sales and marketing
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as we continue to spend on marketing activities and expand our partner referral programs. We plan to increase our investment in
research and development as we continue to introduce new products and services to extend the functionality of our platform. We
also intend to invest in maintaining our high level of merchant service and support, which we consider critical for our continued
success. In order to support the continued growth of our business and to comply with continuously changing security and operational
requirements, we plan to continue investing in our data center and network infrastructure. These increased expenditures will make it
harder for us to achieve profitability and we cannot predict if we will achieve profitability in the near term or at all. Historically, our
costs have increased each year due to these factors and we expect to continue to incur increasing costs to support our anticipated
future growth. We also expect to incur additional general and administrative expenses as a result of both our growth. If the costs
associated with acquiring new merchants materially rise in the future, including the fees we pay to third parties to market our
platform, our expenses may rise significantly. If we are unable to generate adequate revenue growth and manage our expenses, we
may continue to incur significant losses and may not achieve or maintain profitability.
We may make decisions that would reduce our short-term operating results if we believe those decisions will improve the
experiences of our merchants and their customers and if we believe such decisions will improve our operating results over the long
term. These decisions may not be consistent with the expectations of investors and may not produce the long-term benefits that we
expect, in which case our business may be materially and adversely affected.
Our limited operating history in new and developing markets and new geographic regions makes it difficult to evaluate our
current business and future prospects and may increase the risk that we will not be successful.
We launched the Shopify platform in 2006 and the majority of our revenue growth has occurred in the past few years. This short
history makes it difficult to accurately assess our future prospects. We also operate in new and developing markets that may not
develop as we expect. You should consider our future prospects in light of the challenges and uncertainties that we face, including
the fact that our business has grown rapidly and it may not be possible to discern fully the trends that we are subject to, that we
operate in new and developing markets and that elements of our business strategy are new and subject to ongoing development. We
have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly
changing industries, including increasing and unforeseen expenses as we continue to grow our business. If we do not manage these
risks successfully, our business, results of operations and prospects will be harmed.
Our future success will depend in part upon our ability to expand into new geographic regions, and we will face risks entering
markets in which we have limited or no experience and in which we do not have any brand recognition. It is costly to establish,
develop and maintain international operations, and to promote our brand internationally. In addition, expanding into new geographic
regions where the main language is not English will require substantial expenditures and take considerable time and attention, and
we may not be successful enough in these new markets to recoup our investments in a timely manner, or at all. Our efforts to expand
into new geographic regions may not be successful, which could limit our ability to grow our business.
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If we fail to improve and enhance the functionality, performance, reliability, design, security and scalability of our platform in a
manner that responds to our merchants’ evolving needs, our business may be adversely affected.
The markets in which we compete are characterized by constant change and innovation and we expect them to continue to evolve
rapidly. Our success has been based on our ability to identify and anticipate the needs of our merchants and design a platform that
provides them with the tools they need to operate their businesses. Our ability to attract new merchants, retain revenue from existing
merchants and increase sales to both new and existing merchants will depend in large part on our ability to continue to improve and
enhance the functionality, performance, reliability, design, security and scalability of our platform.
Furthermore, as we expand Shopify Plus, and as the number of our merchants with higher volume sales increases, so does the need
for us to offer increased functionality, scalability and support, which requires us to devote additional resources to such efforts. To the
extent we are not able to enhance our platform’s functionality in order to maintain its utility, enhance our platform’s scalability in
order to maintain its performance and availability, or improve our support function in order to meet increased demands, our business,
operating results and financial condition could be adversely affected.
We may experience difficulties with software development that could delay or prevent the development, introduction or
implementation of new solutions and enhancements. Software development involves a significant amount of time for our research
and development team, as it can take our developers months to update, code and test new and upgraded solutions and integrate them
into our platform. We must also continually update, test and enhance our software platform. For example, our design team spends a
significant amount of time and resources incorporating various design enhancements, such as customized colors, fonts, content and
other features, into our platform. The continual improvement and enhancement of our platform requires significant investment and
we may not have the resources to make such investment. Our improvements and enhancements may not result in our ability to
recoup our investments in a timely manner, or at all. We may make significant investments in new solutions or enhancements that
may not achieve expected returns. The improvement and enhancement of the functionality, performance, reliability, design, security
and scalability of our platform is expensive and complex, and to the extent we are not able to perform it in a manner that responds to
our merchants’ evolving needs, our business, operating results and financial condition will be adversely affected.
Security breaches, denial of service attacks, or other hacking and phishing attacks on our systems or other security breaches
could delay or interrupt service to our merchants and their customers, harm our reputation or subject us to significant liability,
and adversely affect our business and financial results.
We operate in an industry that is prone to cyber attacks. Failure to prevent or mitigate security breaches and improper access to or
disclosure of our data, merchant data, or their customer data, could result in the loss or misuse of such data, which could harm our
business and reputation. The security measures we have integrated into our internal networks and platform, which are designed to
prevent or minimize security breaches, may not function as expected or may not be sufficient to protect our internal networks and
platform against certain attacks. In addition, techniques used to sabotage or to obtain unauthorized access to networks in which data
is stored or through which data is transmitted change frequently. As a result, we may be unable to anticipate these techniques or
implement adequate preventative measures to prevent an electronic intrusion into our networks.
Our merchants’ storage and use of data concerning their shops and their customers is essential to their use of our platform, which
stores, transmits and processes our merchants’ proprietary information and personal
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information relating to them and their customers. If a security breach were to occur, as a result of third-party action, employee error,
malfeasance or otherwise, and the confidentiality, integrity or availability of our merchants’ data was disrupted, we could incur
significant liability to our merchants and to individuals whose information was being stored by our merchants, and our platform may
be perceived as less desirable, which could negatively affect our business and damage our reputation.
In the past, we have been subject to distributed denial of service, or DDoS attacks, a technique used by hackers to take an internet
service offline by overloading its servers. A DDoS attack or security breach could delay or interrupt service to our merchants and
their customers and may deter consumers from visiting our merchants’ shops. Our platform and our third-party apps may be subject
to DDoS attacks in the future and we cannot guarantee that applicable recovery systems, security protocols, network protection
mechanisms and other procedures are or will be adequate to prevent network and service interruption, system failure or data loss. In
addition, computer malware, viruses, and hacking and phishing attacks by third parties are prevalent in our industry. We have
experienced such attacks in the past and may experience such attacks in the future. As a result of our increased visibility, we believe
that we are increasingly a target for such breaches and attacks.
Moreover, our platform and third-party apps available on our platform could be breached if vulnerabilities in our platform or our
third-party apps are exploited by unauthorized third parties or due to employee error, malfeasance, or otherwise. Further, third
parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names,
passwords or other information or otherwise compromise the security of our internal networks, electronic systems and/or physical
facilities in order to gain access to our data or our customers’ data. Since techniques used to obtain unauthorized access change
frequently and the size and severity of DDoS attacks and security breaches are increasing, we may be unable to implement adequate
preventative measures or stop DDoS attacks or security breaches while they are occurring. In addition to our own platform and apps,
some of the third parties we work with may receive information provided by us, by our merchants, or by our merchants' customers
through web or mobile applications integrated with Shopify. If these third parties fail to adhere to adequate data security practices, or
in the event of a breach of their networks, our own and our merchants' data may be improperly accessed, used or disclosed.
Any actual or perceived DDoS attack or security breach could damage our reputation and brand, expose us to a risk of litigation and
possible liability and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by
the DDoS attack or security breach. Some jurisdictions have enacted laws requiring companies to notify individuals of data security
breaches involving certain types of personal data and our agreements with certain merchants and partners require us to notify them in
the event of a security incident. Such mandatory disclosures are costly, could lead to negative publicity, and may cause our
merchants to lose confidence in the effectiveness of our data security measures. Moreover, if a high profile security breach occurs
with respect to another SaaS provider, merchants may lose trust in the security of the SaaS business model generally, which could
adversely impact our ability to retain revenue from existing merchants or attract new ones. Similarly, if a high profile security breach
occurs with respect to a retailer or ecommerce platform, customers may lose trust in ecommerce more generally, which could
adversely impact our merchants’ businesses.Any of these events could harm our reputation or subject us to significant liability, and
materially and adversely affect our business and financial results.
26
Payment transactions on Shopify Payments may subject us to regulatory requirements, additional fees, and other risks that could
be costly and difficult to comply with or that could harm our business.
More than two-thirds of our merchants have enabled Shopify Payments, an integrated payment processing solution that allows them
to accept payments on major payment card s. We are subject to a number of risks related to payments processed through Shopify
Payments, including:
• we pay interchange and other fees, which may increase our operating expenses;
•
if we are unable to maintain our chargeback rate at acceptable levels, our credit card fees may increase or credit card
issuers may terminate their relationship with us;
increased costs and diversion of management time and effort and other resources to deal with fraudulent transactions or
chargeback disputes;
potential fraudulent or otherwise illegal activity by merchants, their customers, developers, employees or third parties
which could lead to increased liabilities;
restrictions on funds or required reserves related to payments; and
additional disclosure and other requirements, including new reporting regulations and new credit card association rules.
•
•
•
•
We are required by our payment processors to comply with payment card network operating rules and we have agreed to reimburse
our payment processors for any fees or fines they are assessed by payment card networks as a result of any rule violations by us or
our merchants. The payment card networks set and interpret the card rules. In addition, we face the risk that one or more payment
card networks or other processors may, at any time, assess penalties against us or terminate our ability to accept credit card payments
or other forms of online payments from customers, which would have an adverse effect on our business, financial condition and
operating results.
If we fail to comply with the rules and regulations adopted by the payment card networks, including the PCI DSS, we would be in
breach of our contractual obligations to our payment processors, financial institutions, partners and merchants. Such failure to
comply may subject us to fines, penalties, damages, higher transaction fees and civil liability, and could eventually prevent us from
processing or accepting payment cards or could lead to a loss of payment processor partners, even if there is no compromise of
customer information.
We are currently subject to a variety of laws and regulations in Canada, the United States, the United Kingdom, Ireland, Australia,
New Zealand, Singapore and elsewhere related to payment processing, including those governing cross-border and domestic money
transmission, gift cards and other prepaid access instruments, electronic funds transfers, foreign exchange, anti-money laundering,
counter-terrorist financing, banking and import and export restrictions. Depending on how Shopify Payments and our other merchant
solutions evolve, we may be subject to additional laws, either in existing or new jurisdictions. In some jurisdictions, the application
or interpretation of these laws and regulations is not clear. Our efforts to comply with these laws and regulations could be costly and
result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in
violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and
desist order, or we may be required to make changes to our platform, any of which could have an adverse effect on our business,
financial condition and results of operations.
We rely on a single supplier to provide the technology we offer through Shopify Payments.
In order to provide Shopify Payments, we have entered into payment service provider agreements with Stripe Inc. ("Stripe"). These
payment service provider agreements renew every 12 months, unless either party
27
terminates the agreement earlier upon 180 days' notice. These agreements are integral to Shopify Payments and any disruption or
problems with Stripe or its services could have an adverse effect on our reputation, results of operations and financial results. If
Stripe were to terminate its relationship with us, we could incur substantial delays and expense in finding and integrating an
alternative payment service provider into Shopify Payments, and the quality and reliability of such alternative payment service
provider may not be comparable. Any long-term or permanent disruption in Shopify Payments would decrease our revenues from
merchant solutions, since our merchants would be required to use one of the alternative payment gateways offered through our
platform.
We store personal information of our merchants and their customers. If the security of this information is compromised or is
otherwise accessed without authorization, our reputation may be harmed and we may be exposed to liability and loss of business.
We store personal information, credit card information and other confidential information of our partners, our merchants and their
customers, and consumers with whom we have a direct relationship. Mobile applications integrated with Shopify and the third-party
apps available on our platform may also store personal information, credit card information and/or other confidential information.
We do not regularly monitor or review the content that our merchants upload and store, or the information provided to us through the
applications integrated with Shopify, and, therefore, we do not control the substance of the content on our servers, which may
include personal information. Additionally, we use dozens of third party service providers and subprocessors to help us deliver
services to merchants and their customers. These service providers and subprocessors may store personal information, credit card
information and/or other confidential information. We have in the past and may in the future experience successful attempts by third
parties to obtain unauthorized access to the personal information of our partners, our merchants, our merchants’ customers, and
consumers with whom we have a direct relationship. This information could also be otherwise exposed through human error,
malfeasance or otherwise. The unauthorized release, unauthorized access or compromise of this information could have a material
adverse effect on our business, financial condition and results of operations. Even if such a data breach were to affect one or more of
our competitors or our merchants’ competitors, rather than Shopify itself, the resulting consumer concern could negatively affect our
merchants and/or our business.
We are also subject to federal, state, provincial and foreign laws regarding cybersecurity and the protection of data. Some
jurisdictions have enacted laws requiring companies to notify individuals of security breaches involving certain types of personal
information and our agreements with certain merchants and partners require us to notify them in the event of a security incident.
Additionally, some jurisdictions. as well as our contracts with certain merchants, require us to use industry-standard or reasonable
measures to safeguard personal information or confidential information, and thereby mitigate the risk of a security incident. These
laws, which tend to focus around individuals’ financial and payment related information, are increasingly relevant to us, as we have
started to collect and store more payment information from our merchants’ customers through services such as Shopify Pay.
Our failure to comply with legal or contractual requirements around the security of personal information could lead to significant
fines and penalties imposed by regulators, as well as claims by our merchants, their customers, or other relevant stakeholders. These
proceedings or violations could force us to spend money in defense or settlement of these proceedings, result in the imposition of
monetary liability or injunctive relief, diversion of management’s time and attention, increase our costs of doing business, and
materially adversely affect our reputation and the demand for our solutions. In addition, if our security measures fail to protect credit
card information adequately, we could be liable to our partners, our merchants and their customers, and consumers with whom we
have a direct relationship for their losses, as well as our payments processing
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partners under our agreements with them. As a result, we could be subject to fines and higher transaction fees, we could face
regulatory or other legal action, and our merchants could end their relationships with us. There can be no assurance that the
limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or
damages with respect to any particular claim. We also cannot be sure that our existing insurance coverage and coverage for errors
and omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large
claims, or that our insurers will not deny coverage as to any future claim. The successful assertion of one or more large claims
against us that exceeds our available insurance coverage, or changes in our insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition and
results of operations.
Evolving privacy laws and regulations, cross-border data transfer restrictions, data localization requirements, and other domestic
or foreign laws or regulations may limit the use and adoption of our services, expose us to liability, or otherwise adversely affect
our business.
Laws and regulations related to data privacy and the collection, processing, and disclosure of consumer personal information are
constantly evolving. Many of these laws and regulations, including Canada’s Personal Information Protection and Electronic
Documents Act, and the European Union’s General Data Protection Regulation contain detailed requirements regarding collecting
and processing personal information, and impose certain limitations on how such information may be used, the length for which it
may be stored, and the effectiveness of consumer consent. Such laws and regulations could restrict our ability to store and process
personal data (in particular, our ability to use certain data for purposes such as risk or fraud avoidance, marketing, or advertising),
our ability to control our costs by using certain vendors or service providers, or impact our ability to offer certain services in certain
jurisdictions. Moreover, such laws could restrict our merchants’ ability to run their businesses, for example by limiting their ability
to effectively market or advertise to interested consumers. This could reduce our revenues and the general demand for our services.
Additionally, such laws and regulations are often inconsistent and may be subject to amendment or re-interpretation, which may
cause us to incur significant costs and expend significant effort to ensure compliance. Given that requirements may be inconsistent
and evolving, how we choose to respond to these requirements globally may not meet the expectations of individual merchants,
customers, or other stakeholders, which could thereby reduce the demand for our services. Finally, some merchants or other service
providers may respond to these evolving laws and regulations by asking us to make certain privacy or data related contractual
commitments that we are unable or unwilling to make. This could lead to the loss of current or prospective merchants or other
business relationships.
Certain laws and regulations, like the European Union’s General Data Protection Regulation, also include restrictions on the transfer
of personal information across state borders. Because our services are accessible worldwide, certain foreign jurisdictions may claim
that we are required to comply with such laws even in jurisdictions where we have no local entity, employees or infrastructure. Some
of these laws include strict localization provisions that require certain data to be stored within a particular region or jurisdiction. For
example, in 2015 Russia passed a data localization law that requires certain data to be stored within Russia. We rely on a globally
distributed infrastructure in order to be able to provide our services efficiently, and consequently may not be able to meet the
expectations of merchants who are located in or otherwise subject to such localization requirements, which may reduce the demand
for our services.
Other laws and regulations, like the European Union’s General Data Protection Regulation, presumptively prohibit cross-border data
transfers absent an “adequacy mechanism” that provides some assurances as to the treatment and protection of such data. We rely on
a variety of these adequacy mechanisms, including the EU-U.S. Privacy Shield, European Commission Decision 2002/2/EC
regarding the adequacy of Canadian
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law, and eventually Binding Corporate Rules, to enable us to provide our services across the globe at scale. If we are no longer able
to rely on a particular adequacy mechanism or are otherwise unable to transfer personal information across borders, we may not be
able to operate in certain jurisdictions, which may reduce the demand for our services and limit our opportunities for international
growth.
Beyond impacting the demand for our services, our failure to comply with these laws or regulations could expose us to significant
fines and penalties imposed by regulators, as well as legal claims by our merchants, or their customers, or other relevant
stakeholders. Similarly, many of these laws require us to maintain an online privacy policy and terms of service that disclose our
practices regarding the collection, processing, and disclosure of personal information. If these disclosures contain any information
that a court or regulator finds to be inaccurate, we could also be exposed to legal or regulatory liability. Any such proceedings or
violations could force us to spend money in defense or settlement of these proceedings, result in the imposition of monetary liability
or demanding injunctive relief, diversion of management’s time and attention, increase our costs of doing business, and materially
adversely affect our reputation.
If we are unable to hire, retain and motivate qualified personnel, our business will suffer.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. Our ability to identify,
hire, develop, motivate and retain qualified personnel will directly affect our ability to maintain and grow our business, and such
efforts will require significant time, expense and attention. The inability to attract or retain qualified personnel or delays in hiring
required personnel may seriously harm our business, financial condition and operating results. Our ability to continue to attract and
retain highly skilled personnel, specifically employees with technical and engineering skills and employees with high levels of
experience in designing and developing software and internet-related services, will be critical to our future success. Competition for
highly skilled personnel in the Ottawa area, Greater Toronto area, Montreal area, Kitchener-Waterloo area, San Francisco Bay area,
Ireland, Germany, Lithuania and elsewhere can be intense due in part to the more limited pool of qualified personnel as compared to
other places in the world, and we have experienced difficulties hiring employees from foreign jurisdictions to work in our offices.
Further, decreases in the Canadian dollar relative to the U.S. dollar and other currencies could make it more difficult for us to offer
compensation packages to new employees that are competitive with packages in the United States or elsewhere and could increase
our costs of acquiring qualified personnel. In addition, to the extent we hire personnel from competitors, we may be subject to
allegations that they have been improperly solicited or divulged proprietary or other confidential information. While we intend to
issue stock options or other equity awards as key components of our overall compensation and employee attraction and retention
efforts, we are required under U.S. GAAP to recognize compensation expense in our operating results for employee stock-based
compensation under our equity grant programs which may increase the pressure to limit stock- based compensation.
If our software contains serious errors or defects, we may lose revenue and market acceptance and may incur costs to defend or
settle claims with our merchants.
Software such as ours often contains errors, defects, security vulnerabilities or software bugs that are difficult to detect and correct,
particularly when first introduced or when new versions or enhancements are released. Despite internal testing, our platform may
contain serious errors or defects, security vulnerabilities or software bugs that we may be unable to successfully correct in a timely
manner or at all, which could result in lost revenue, significant expenditures of capital, a delay or loss in market acceptance and
damage to our reputation and brand, any of which could have an adverse effect on our business, financial condition and results of
operations. Furthermore, our platform is a multi-tenant cloud based system that allows us to deploy new versions and enhancements
to all of our merchants simultaneously. To the extent we deploy new versions or
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enhancements that contain errors, defects, security vulnerabilities or software bugs to all of our merchants simultaneously, the
consequences would be more severe than if such versions or enhancements were only deployed to a smaller number of our
merchants.
Since our merchants use our services for processes that are critical to their businesses, errors, defects, security vulnerabilities, service
interruptions or software bugs in our platform could result in losses to our merchants. Our merchants may seek significant
compensation from us for any losses they suffer or cease conducting business with us altogether. Further, a merchant could share
information about bad experiences on social media, which could result in damage to our reputation and loss of future sales. There
can be no assurance that provisions typically included in our agreements with our merchants that attempt to limit our exposure to
claims would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to any particular
claim. Even if not successful, a claim brought against us by any of our merchants would likely be time-consuming and costly to
defend and could seriously damage our reputation and brand, making it harder for us to sell our solutions.
Exchange rate fluctuations may negatively affect our results of operations.
While most of our revenues are denominated in U.S. dollars, a significant portion of our operating expenses are incurred in Canadian
dollars. As a result, our results of operations will be adversely impacted by an increase in the value of the Canadian dollar relative to
the U.S. dollar. Exchange rate fluctuations may also affect our merchant solutions. For example, we generate revenue through
Shopify Payments in the local currency of the country in which the applicable merchant is located. As a result, we will be further
exposed to currency fluctuations to the extent non-U.S. dollar revenues from Shopify Payments increase. The value of the Canadian
dollar relative to the U.S. dollar has varied significantly and investors are cautioned that past and current exchange rates are not
indicative of future exchange rates.
We may be unable to achieve or maintain data transmission capacity.
Our merchants often draw significant numbers of consumers to their shops over short periods of time, including from events such as
new product releases, holiday shopping seasons and flash sales, which significantly increases the traffic on our servers and the
volume of transactions processed on our platform. Our servers may be unable to achieve or maintain data transmission capacity high
enough to handle increased traffic or process orders in a timely manner. Our failure to achieve or maintain high data transmission
capacity could significantly reduce demand for our solutions. Further, as we continue to attract larger merchants, the volume of
transactions processed on our platform will increase, especially if such merchants draw significant numbers of consumers over short
periods of time. In the future, we may be required to allocate resources, including spending substantial amounts of money, to build,
purchase or lease additional data centers and equipment and upgrade our technology and network infrastructure in order to handle
the increased load. Our ability to deliver our solutions also depends on the development and maintenance of internet infrastructure
by third parties, including the maintenance of reliable networks with the necessary speed, data capacity and bandwidth. If one of
these third parties suffers from capacity constraints, our business may be adversely affected. In addition, because we and our
merchants generate a disproportionate amount of revenue in the fourth quarter, any disruption in our merchants’ ability to process
and fulfill customer orders in the fourth quarter could have a disproportionately negative effect on our operating results.
Our growth depends in part on the success of our strategic relationships with third parties.
We anticipate that the growth of our business will continue to depend on third-party relationships, including relationships with our
app developers, theme designers, referral sources, resellers, payment processors,
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providers of online sales channels and other partners. In addition to growing our third-party partner ecosystem, we have entered into
agreements with, and intend to pursue additional relationships with, other third parties, such as technology and content providers and
implementation consultants. Identifying, negotiating and documenting relationships with third parties requires significant time and
resources as does integrating third-party content and technology. Some of the third parties that sell our services have the direct
contractual relationships with the merchants, and therefore we risk the loss of such merchants if the third parties fail to perform their
obligations. Our agreements with providers of cloud hosting, technology, content and consulting services are typically non-exclusive
and do not prohibit such service providers from working with our competitors or from offering competing services. These third-party
providers may choose to terminate their relationship with us or to make material changes to their businesses, products or services.
The success of our platform depends, in part, on our ability to integrate third-party apps, themes and other offerings into our third-
party ecosystem. Third-party developers may also change the features of their offering of apps and themes or alter the terms
governing the use of their offerings in a manner that is adverse to us. If third-party apps and themes change such that we do not or
cannot maintain the compatibility of our platform with these apps and themes, or if we fail to provide third-party apps and themes
that our merchants desire to add to their shops, demand for our platform could decline. If we are unable to maintain technical inter-
operation, our merchants may not be able to effectively integrate our platform with other systems and services they use. We may
also be unable to maintain our relationships with certain third-party vendors if we are unable to integrate our platform with their
offerings. In addition, third-party developers may refuse to partner with us or limit or restrict our access to their offerings. Such
changes could functionally limit or terminate our ability to use these third-party offerings with our platform, which could negatively
impact our solution offerings and harm our business. If we fail to integrate our platform with new third- party offerings that our
merchants need for their shops, or to adapt to the data transfer requirements of such third-party offerings, we may not be able to offer
the functionality that our merchants and their customers expect, which would negatively impact our offerings and, as a result, harm
our business.
Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce
subscriptions to our platform. In addition, these providers may not perform as expected under our agreements or under their
agreements with our merchants, and we or our merchants may in the future have disagreements or disputes with such providers. If
we lose access to products or services from a particular supplier, or experience a significant disruption in the supply of products or
services from a current supplier, especially a single-source supplier, it could have an adverse effect on our business and operating
results.
If we fail to maintain a consistently high level of customer service or if we fail to manage our reputation, our brand, business and
financial results may be harmed.
We believe our focus on customer service and support is critical to onboarding new merchants and retaining our existing merchants
and growing our business. As a result, we have invested heavily in the quality and training of our support team along with the tools
they use to provide this service. If we are unable to maintain a consistently high level of customer service, we may lose existing
merchants. In addition, our ability to attract new merchants is highly dependent on our reputation and on positive recommendations
from our existing merchants. Any failure to maintain a consistently high level of customer service, or a market perception that we do
not maintain high-quality customer service, could adversely affect our reputation and the number of positive merchant referrals that
we receive.
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We use a limited number of data centers and a cloud service provider to deliver our services. Any disruption of service at these
facilities or of the cloud service provider could harm our business.
We currently manage our services and serve all of our merchants from two third-party data center facilities and through a third-party
cloud computing service. We are currently migrating our computing to run on a cloud computing service, and currently expect to
substantially migrate in 2018. We may incur additional costs and need to allocate additional resources in connection with this
process. As we migrate our computing to the cloud, we will continue to use our third-party data center facilities and may continue to
use these data center facilities in certain capacities going forward. If, for any reason, we are required to migrate our computing to
another cloud service provider, such a transition could incur significant time and expense and our business could be adversely
impacted.
Our agreements with our third-party data facility providers terminate on May 31, 2018 and September 15, 2018, respectively. The
agreements do not provide for early termination without cause. Upon expiration of the current term, both agreements will
automatically renew for successive 12-month periods unless appropriate notice is provided. However, when our agreements with the
third-party data facilities terminate, the owners of the data facilities have no obligation to re-enter into agreements with us on
commercially reasonable terms, or at all. While we own the hardware that is deployed at the data center facilities, we do not control
the operation of these facilities. We have experienced, and may in the future experience, failures at the third-party data centers where
our hardware is deployed from time to time. Data centers are vulnerable to damage or interruption from human error, intentional bad
systems failures,
acts,
telecommunications failures and similar events. Any of these events could result in lengthy interruptions in our services and/or loss
of data. Changes in law or regulations applicable to data centers in various jurisdictions could also cause a disruption in service.
hardware failures,
power losses,
earthquakes,
hurricanes,
terrorist
attacks,
floods,
fires,
war,
Our cloud service provider and the owners and operators of the data center facilities do not guarantee that access to our platform will
be uninterrupted or error-free. Interruptions in our services would reduce our revenue, subject us to potential liability and adversely
affect our ability to retain our merchants or attract new merchants. The performance, reliability and availability of our platform is
critical to our reputation and our ability to attract and retain merchants. Merchants could share information about bad experiences on
social media, which could result in damage to our reputation and loss of future sales. The property and business interruption
insurance coverage we carry may not be adequate to compensate us fully for losses that may occur.
Mobile devices are increasingly being used to conduct commerce, and if our solutions do not operate as effectively when accessed
through these devices, our merchants and their customers may not be satisfied with our services, which could harm our business.
Commerce transacted over mobile devices continues to grow more rapidly than desktop transactions. In 2017, 60% of the orders on
our merchants' shops were from mobile devices. We are dependent on the interoperability of our platform with third-party mobile
devices and mobile operating systems as well as web browsers that we do not control. Any changes in such devices, systems or web
browsers that degrade the functionality of our platform or give preferential treatment to competitive services could adversely affect
usage of our platform. Mobile commerce is a key element in Shopify's strategy and effective mobile functionality is integral to our
long-term development and growth strategy. In the event that our merchants and their customers have difficulty accessing and using
our platform on mobile devices, our business and operating results could be adversely affected.
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Our business and prospects would be harmed if changes to technologies used in our platform or new versions or upgrades of
operating systems and internet browsers adversely impact the process by which merchants and consumers interface with our
platform.
We believe the simple and straightforward interface for our platform has helped us to expand and offer our solutions to merchants
with limited technical expertise. In the future, providers of internet browsers could introduce new features that would make it
difficult for merchants to use our platform. In addition, internet browsers for desktop or mobile devices could introduce new
features, change existing browser specifications such that they would be incompatible with our platform, or prevent consumers from
accessing our merchants’ shops. Any changes to technologies used in our platform, to existing features that we rely on, or to
operating systems or internet browsers that make it difficult for merchants to access our platform or consumers to access our
merchants’ shops, may make it more difficult for us to maintain or increase our revenues and could adversely impact our business
and prospects.
The impact of worldwide economic conditions, including the resulting effect on spending by SMBs or their customers, may
adversely affect our business, operating results and financial condition.
A majority of the merchants that use our platform are SMBs and many of our merchants are in the entrepreneurial stage of their
development. Our performance is subject to worldwide economic conditions and their impact on levels of spending by SMBs and
their customers. SMBs and entrepreneurs may be disproportionately affected by economic downturns. SMBs and entrepreneurs
frequently have limited budgets and may choose to allocate their spending to items other than our platform, especially in times of
economic uncertainty or recessions.
Economic downturns may also adversely impact retail sales, which could result in merchants who use our platform going out of
business or deciding to stop using our services in order to conserve cash. Weakening economic conditions may also adversely affect
third parties with whom we have entered into relationships and upon which we depend in order to grow our business. Uncertain and
adverse economic conditions may also lead to increased refunds and chargebacks, any of which could adversely affect our business.
We may be subject to claims by third parties of intellectual property infringement.
The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation
regarding patents and other intellectual property rights. Third parties have in the past asserted, and may in the future assert, that our
platform, solutions, technology, methods or practices infringe, misappropriate or otherwise violate their intellectual property or other
proprietary rights. Such claims may be made by our competitors seeking to obtain a competitive advantage or by other parties.
Additionally, in recent years, non-practicing entities have begun purchasing intellectual property assets for the purpose of making
claims of infringement and attempting to extract settlements from companies like ours. The risk of claims may increase as the
number of solutions that we offer and competitors in our market increases and overlaps occur. In addition, to the extent that we gain
greater visibility and market exposure, we face a higher risk of being the subject of intellectual property infringement claims.
Any such claims, regardless of merit, that result in litigation could result in substantial expenses, divert the attention of management,
cause significant delays in introducing new or enhanced services or technology, materially disrupt the conduct of our business and
have a material and adverse effect on our brand, business, financial condition and results of operations. Although we do not believe
that our proprietary technology, processes and methods have been patented by any third party, it is possible that patents have been
issued to
34
third parties that cover all or a portion of our business. As a consequence of any patent or other intellectual property claims, we
could be required to pay substantial damages, develop non-infringing technology, enter into royalty-bearing licensing agreements,
stop selling or marketing some or all of our solutions or re-brand our solutions. We may also be obligated to indemnify our
merchants or partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation
and to obtain licenses, modify applications or refund fees, which could be costly. If it appears necessary, we may seek to secure
license rights to intellectual property that we are alleged to infringe at a significant cost, potentially even if we believe such claims to
be without merit. If required licenses cannot be obtained, or if existing licenses are not renewed, litigation could result. Litigation is
inherently uncertain and can cause us to expend significant money, time and attention to it, even if we are ultimately successful. Any
adverse decision could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses for
alternative technologies from third parties, prevent us from offering all or a portion of our solutions and otherwise negatively affect
our business and operating results.
We may be unable to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third
parties from making unauthorized use of our technology.
Our trade secrets, trademarks, trade dress, domain names, copyrights and other intellectual property rights are important to our
business. We rely on a combination of confidentiality clauses, assignment agreements and license agreements with employees and
third parties, trade secrets, copyrights and trademarks to protect our intellectual property and competitive advantage, all of which
offer only limited protection. The steps we take to protect our intellectual property require significant resources and may be
inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect
unauthorized use of our intellectual property. We may be required to use significant resources to monitor and protect these rights.
Despite our precautions, it may be possible for unauthorized third parties to copy our platform and use information that we regard as
proprietary to create services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer
and disclosure of our proprietary information may be unenforceable under the laws of certain jurisdictions and foreign countries.
Further, we hold no issued patents and thus would not be entitled to exclude or prevent our competitors from using our proprietary
technology, methods and processes to the extent independently developed by our competitors. In addition, we may not be able to
acquire or maintain appropriate domain names in all countries in which we do business, or prevent third parties from acquiring
domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights. Furthermore,
regulations governing domain names may not protect our trademarks or similar proprietary rights.
We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality
agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these
agreements will be effective in controlling access to our proprietary information and trade secrets. The confidentiality agreements on
which we rely to protect certain technologies may be breached, may not be adequate to protect our confidential information, trade
secrets and proprietary technologies and may not provide an adequate remedy in the event of unauthorized use or disclosure of our
confidential information, trade secrets or proprietary technology. Further, these agreements do not prevent our competitors or others
from independently developing software that is substantially equivalent or superior to our software. In addition, others may
independently discover our trade secrets and confidential information, and in such cases, we likely would not be able to assert any
trade secret rights against such parties. Additionally, we may from time to time be subject to opposition or similar proceedings with
respect to applications for registrations of our intellectual property, including our trademarks. While we aim to acquire adequate
protection of our brand through trademark registrations in key markets, occasionally third parties may have already registered or
otherwise acquired rights to identical or similar
35
marks for services that also address our market. We rely on our brand and trademarks to identify our platform and to differentiate
our platform and services from those of our competitors, and if we are unable to adequately protect our trademarks third parties may
use our brand names or trademarks similar to ours in a manner that may cause confusion in the market, which could decrease the
value of our brand and adversely affect our business and competitive advantages.
Policing unauthorized use of our intellectual property and misappropriation of our technology and trade secrets is difficult and we
may not always be aware of such unauthorized use or misappropriation. Despite our efforts to protect our intellectual property rights,
unauthorized third parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or
technology or otherwise develop services with the same or similar functionality as our platform. If our competitors infringe,
misappropriate or otherwise misuse our intellectual property rights and we are not adequately protected, or if our competitors are
able to develop a platform with the same or similar functionality as ours without infringing our intellectual property, our competitive
advantage and results of operations could be harmed. Litigation brought to protect and enforce our intellectual property rights could
be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual
property. As a result, we may be aware of infringement by our competitors but may choose not to bring litigation to enforce our
intellectual property rights due to the cost, time and distraction of bringing such litigation. Furthermore, if we do decide to bring
litigation, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits
challenging or opposing our right to use and otherwise exploit particular intellectual property, services and technology or the
enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or
use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the
implementation of our solutions, impair the functionality of our platform, prevent or delay introductions of new or enhanced
solutions, result in our substituting inferior or more costly technologies into our platform or injure our reputation. Furthermore, many
of our current and potential competitors have the ability to dedicate substantially greater resources to developing and protecting their
technology or intellectual property rights than we do.
Our use of "open source" software could negatively affect our ability to sell our solutions and subject us to possible litigation.
Our solutions incorporate and are dependent to a significant extent on the use and development of "open source" software and we
intend to continue our use and development of open source software in the future. Such open source software is generally licensed
by its authors or other third parties under open source licenses and is typically freely accessible, usable and modifiable. Pursuant to
such open source licenses, we may be subject to certain conditions, including requirements that we offer our proprietary software
that incorporates the open source software for no cost, that we make available source code for modifications or derivative works we
create based upon, incorporating or using the open source software and that we license such modifications or derivative works under
the terms of the particular open source license. If an author or other third party that uses or distributes such open source software
were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur
significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of
our solutions that contained or are dependent upon the open source software and required to comply with the foregoing conditions,
which could disrupt the distribution and sale of some of our solutions. Litigation could be costly for us to defend, have a negative
effect on our operating results and financial condition or require us to devote additional research and development resources to
change our platform. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign
courts. As there is little or no legal precedent governing the interpretation of many of the terms of certain of these
36
licenses, the potential impact of these terms on our business is uncertain and may result in unanticipated obligations regarding our
solutions and technologies. It is our view that we do not distribute our software, since no installation of our software is necessary and
our platform is accessible solely through the "cloud." Nevertheless, this position could be challenged. Any requirement to disclose
our proprietary source code, termination of open source license rights or payments of damages for breach of contract could be
harmful to our business, results of operations or financial condition, and could help our competitors develop products and services
that are similar to or better than ours.
In addition to risks related to license requirements, usage of open source software can lead to greater risks than the use of third-party
commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the
software, or remedies against the licensors. Many of the risks associated with usage of open source software cannot be eliminated
and could adversely affect our business.
Although we believe that we have complied with our obligations under the various applicable licenses for open source software, it is
possible that we may not be aware of all instances where open source software has been incorporated into our proprietary software
or used in connection with our solutions or our corresponding obligations under open source licenses. We do not have robust open
source software usage policies or monitoring procedures in place. We rely on multiple software programmers to design our
proprietary software and we cannot be certain that our programmers have not incorporated open source software into our proprietary
software that we intend to maintain as confidential or that they will not do so in the future. To the extent that we are required to
disclose the source code of certain of our proprietary software developments to third parties, including our competitors, in order to
comply with applicable open source license terms, such disclosure could harm our intellectual property position, competitive
advantage, results of operations and financial condition. In addition, to the extent that we have failed to comply with our obligations
under particular licenses for open source software, we may lose the right to continue to use and exploit such open source software in
connection with our operations and solutions, which could disrupt and adversely affect our business.
We rely on search engines and social networking sites to attract a meaningful portion of our merchants. If we are not able to
generate traffic to our website through search engines and social networking sites, our ability to attract new merchants may be
impaired. In addition, if our merchants are not able to generate traffic to their shops through search engines and social
networking sites, their ability to attract consumers may be impaired.
Many of our merchants locate our website through internet search engines, such as Google, and advertisements on social networking
sites, such as Facebook. The prominence of our website in response to internet searches is a critical factor in attracting potential
merchants to our platform. If we are listed less prominently or fail to appear in search results for any reason, visits to our website
could decline significantly, and we may not be able to replace this traffic.
Similarly, many consumers locate our merchants’ shops through internet search engines and advertisements on social networking
sites. If our merchants’ shops are listed less prominently or fail to appear in search results for any reason, visits to our merchants’
shops could decline significantly. As a result, our merchants’ businesses may suffer, which would affect the GMV that they process
through our platform and could affect the ability of such merchants to pay for our solutions.
Search engines revise their algorithms from time to time in an attempt to optimize their search results. If search engines modify their
algorithms, our website and our merchants’ shops may appear less prominently or not at all in search results, which could result in
reduced traffic to our website and to our merchants’ shops.
37
Additionally, if the price of marketing our solutions over search engines or social networking sites increases, we may incur
additional marketing expenses or may be required to allocate a larger portion of our marketing spend to search engine marketing and
our business and operating results could be adversely affected. Furthermore, competitors may in the future bid on the search terms
that we use to drive traffic to our website. Such actions could increase our marketing costs and result in decreased traffic to our
website. In addition, search engines or social networking sites may change their advertising policies from time to time. If any change
to these policies delays or prevents us from advertising through these channels, it could result in reduced traffic to our website and
sales of our solutions. As well, new search engines or social networking sites may develop, particularly in specific jurisdictions, that
reduce traffic on existing search engines and social networking sites. and if we are not able to achieve awareness through advertising
or otherwise, we may not achieve significant traffic to our website through these new platforms. If we are unable to continue to
successfully promote and maintain our websites, or if we incur excessive expenses to do so, our business and operating results could
be adversely affected.
Our brand is integral to our success. If we fail to effectively maintain, promote and enhance our brand, our business and
competitive advantage may be harmed.
We believe that maintaining, promoting and enhancing the Shopify brand is critical to expanding our business. Maintaining and
enhancing our brand will depend largely on our ability to continue to provide high-quality, well-designed, useful, reliable and
innovative solutions, which we may not do successfully.
Errors, defects, disruptions or other performance problems with our platform, including with third-party apps, may harm our
reputation and brand. We may introduce new solutions or terms of service that our merchants and their customers do not like, which
may negatively affect our brand. Additionally, if our merchants or their customers have a negative experience using our solutions or
third-party solutions integrated with Shopify, such an experience may affect our brand, especially as we continue attract larger
merchants to our platform. Our Shopify Experts directory enables independent designers, developers and marketers to offer their
services to merchants who engage them directly. Our reputation may be harmed if any of the services provided by these third parties
does not meet our merchants’ expectations.
We receive media coverage globally. Any unfavorable media coverage or negative publicity about our industry or our company, for
example, the quality and reliability of our platform, our privacy and security practices, our product changes, litigation, or regulatory
activity, or regarding the actions of our partners or our merchants, could seriously harm our reputation. Such negative publicity could
also adversely affect the size, demographics, engagement, and loyalty of our merchants and result in decreased revenue, which could
seriously harm our business. Critics of our industry, and others who may want to pursue an agenda have in the past and may in the
future utilize the internet, the press and other means to publish criticisms of our industry, our company and our competitors, or make
allegations regarding our business and operations, or the business and operations of our competitors. We or others in our industry
may receive similar negative publicity or allegations in the future, and it could be costly, time consuming, distracting to
management, cause fluctuations in the market price of our Class A subordinate voting shares and harm our business and reputation.
We believe that the importance of brand recognition will increase as competition in our market increases. In addition to our ability to
provide reliable and useful solutions at competitive prices, successful promotion of our brand will depend on the effectiveness of our
marketing efforts. While we market our platform primarily through advertisements on search engines and social networking and
media sites, and paid banner advertisements on other websites, our platform is also marketed through our partner and reseller
channels
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and through a number of free traffic sources, including customer referrals, word-of-mouth and search engines. We also hire sales
personnel to market Shopify Plus, a subscription plan for merchants with higher volume sales and additional functionality
requirements, introducing additional costs with no assurance of success. Our efforts to market our brand have involved significant
expenses, which we intend to increase. Our marketing spend may not yield increased revenue, and even if it does, any increased
revenue may not offset the expenses we incur in building and maintaining our brand.
We are dependent on the continued services and performance of our senior management and other key employees, the loss of any
of whom could adversely affect our business, operating results and financial condition.
Our future performance depends on the continued services and contributions of our senior management, including our Chief
Executive Officer, Tobias Lütke, and other key employees to execute on our business plan and to identify and pursue new
opportunities and product innovations. The failure to properly manage succession plans and/or the loss of services of senior
management or other key employees could significantly delay or prevent the achievement of our strategic objectives. From time to
time, there may be changes in our senior management team resulting from the hiring or departure of executives, which could disrupt
our business. We do not maintain key person life insurance policies on any of our employees. The loss of the services of one or more
of our senior management or other key employees for any reason could adversely affect our business, financial condition and
operating results and require significant amounts of time, training and resources to find suitable replacements and integrate them
within our business, and could affect our corporate culture.
Activities of merchants or partners or the content of our merchants' shops could damage our brand, subject us to liability and
harm our business and financial results.
Our terms of service and acceptable use policy prohibit our merchants and our partners from using our platform to engage in illegal
activities and our terms of service and acceptable use policy permit us to take down a merchant’s shop or terminate a partner's
account if we become aware of such illegal use. Merchants or partners may nonetheless engage in prohibited or illegal activities or
upload store content in violation of applicable laws, which could subject us to liability. Furthermore, our brand may be negatively
impacted by the actions of merchants or partners that are deemed to be hostile, offensive, inappropriate or illegal. We do not
proactively monitor or review the appropriateness of the content of our merchants’ shops and we do not have control over merchant
activities. The safeguards we have in place may not be sufficient for us to avoid liability or avoid harm to our brand, especially if
such hostile, offensive, inappropriate or illegal use is high profile, which could adversely affect our business and financial results. In
addition, due to our international expansion, we may be subject to international actions alleging that merchants’ store content violate
laws in foreign jurisdictions.
Our operating results are subject to seasonal fluctuations.
Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our
platform. Our merchants historically have processed additional GMV during the holiday season. As a result, we have historically
generated higher merchant solutions revenues in our fourth quarter than in other quarters. While we believe that this seasonality has
affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date. As a result of
the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future and
that historical patterns in our business may not be a reliable indicator of our future sales activity
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or performance. Fluctuations in quarterly results may materially and adversely affect the predictability of our business and the price
of our Class A subordinate voting shares.
Our business is susceptible to risks associated with international sales and the use of our platform in various countries.
We currently have merchants in approximately 175 countries and we expect to continue to expand our international operations in the
future. However, our international sales and the use of our platform in various countries subject us to risks that we do not generally
face with respect to domestic sales within North America. These risks include, but are not limited to:
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greater difficulty in enforcing contracts, including our universal terms of service and other agreements;
lack of familiarity and burdens and complexity involved with complying with multiple, conflicting and changing foreign
laws, standards, regulatory requirements, tariffs, export controls and other barriers;
difficulties in ensuring compliance with countries’ multiple, conflicting and changing international trade, customs and
sanctions laws;
data privacy laws which may require that merchant and customer data be stored and processed in a designated territory;
difficulties in managing systems integrators and technology partners;
differing technology standards;
potentially adverse tax consequences, including the complexities of foreign value-added tax (or other tax) systems and
restrictions on the repatriation of earnings;
uncertain political and economic climates;
difficulties in ensuring compliance with government regulations of ecommerce and other services, which could lead to
lower adoption rates, and potentially restrictive governmental actions, and restrictions on foreign ownership;
lower levels of credit card usage and increased payment risks;
currency exchange rates;
reduced or uncertain protection for intellectual property rights in some countries;
new and different sources of competition;
lower levels of consumer spending; and
restricted access to and/or lower levels of use of the internet.
These factors may cause our international costs of doing business to exceed our comparable domestic costs and may also require
significant management attention and financial resources. Any negative impact from our international business efforts could
adversely affect our business, results of operations and financial condition.
We rely on computer hardware, purchased or leased, and software licensed from and services rendered by third parties in order
to provide our solutions and run our business, sometimes by a single-source supplier.
We rely on computer hardware, purchased or leased, and software licensed from and services rendered by third parties in order to
provide our solutions and run our business, sometimes by a single-source supplier. Third-party hardware, software and services may
not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use or any failures of third-party
hardware, software or services could result in delays in our ability to provide our solutions or run our business until equivalent
hardware, software
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or services are developed by us or, if available, identified, obtained and integrated, which could be costly and time-consuming and
may not result in an equivalent solution, any of which could cause an adverse effect on our business and operating results. Further,
merchants could assert claims against us in connection with such service disruption or cease conducting business with us altogether.
Even if not successful, a claim brought against us by any of our merchants would likely be time-consuming and costly to defend and
could seriously damage our reputation and brand, making it harder for us to sell our solutions.
Our business is highly competitive. We may not be able to compete successfully against current and future competitors.
We face competition in various aspects of our business and we expect such competition to intensify in the future, as existing and
new competitors introduce new services or enhance existing services. We have competitors with longer operating histories, larger
customer bases, greater brand recognition, greater experience and more extensive commercial relationships in certain jurisdictions,
and greater financial, technical, marketing and other resources than we do. Our potential new or existing competitors may be able to
develop products and services better received by merchants or may be able to respond more quickly and effectively than we can to
new or changing opportunities, technologies, regulations or merchant requirements. In addition, some of our larger competitors may
be able to leverage a larger installed customer base and distribution network to adopt more aggressive pricing policies and offer
more attractive sales terms, which could cause us to lose potential sales or to sell our solutions at lower prices.
Competition may intensify as our competitors enter into business combinations or alliances or raise additional capital, or as
established companies in other market segments or geographic markets expand into our market segments or geographic markets. For
instance, certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage against
us in areas where we operate including: by integrating competing platforms or features into products they control such as search
engines, web browsers, mobile device operating systems or social networks; by making acquisitions; or by making access to our
platform more difficult. Further, current and future competitors could choose to offer a different pricing model or to undercut prices
in an effort to increase their market share. We also expect new entrants to offer competitive services. If we cannot compete
successfully against current and future competitors, our business, results of operations and financial condition could be negatively
impacted.
Shopify Capital is subject to additional risks relating to the availability of capital to fund merchants, the ability of our merchants
to generate sales to remit receivables, general macroeconomic conditions and the risk of fraud.
The merchant cash advance ("MCA") program offered by Shopify Capital is subject to additional risks. If we cannot source capital
to fund MCAs for our merchants, we might have to reduce the availability of this service, or cease offering it altogether. A decline in
macroeconomic conditions could lead to a decrease in the number of merchants eligible for an MCA, and/or increase the risk of
fraud or non-payment. If more of our merchants cease operations, experience a decline in their sales, or engage in fraudulent
behavior, it would make it more difficult for us to obtain the receivables we have purchased, as we do not have any other economic
recourse to the seller in the event that they are unable to deliver a portion of their receivables to us. If we are unable to properly
manage the risks of offering MCAs to merchants our business may be materially and adversely affected. If we are unable to maintain
third party insurance our exposure to losses increases, which could have an adverse impact on our results.
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Our pricing decisions may adversely affect our ability to attract new merchants and retain existing merchants.
We have limited experience determining the optimal prices for our solutions. We have changed our pricing model from time to time
and expect to do so in the future. However, given our limited experience with selling new solutions, it may turn out that the new
pricing model, or the pricing for any of our other solutions, is not optimal, which may result in our solutions not being profitable or
not gaining market share. Therefore, we expect to change our pricing models again in the future. As competitors introduce new
solutions that compete with ours, especially in the payments space where we face significant competition, we may be unable to
attract new merchants at the same price or based on the same pricing models as we have used historically. Pricing decisions may also
impact the mix of adoption among our plans and negatively impact our overall revenue. Moreover, SMBs, which comprise the
majority of merchants using our platform, may be quite sensitive to price increases or prices offered by competitors. As a result, in
the future we may be required to reduce our prices, which could adversely affect our revenue, gross profit, profitability, financial
position and cash flows.
We have in the past made and in the future may make acquisitions and investments, which could divert management’s attention,
result in operating difficulties and dilution to our shareholders and otherwise disrupt our operations and adversely affect our
business, operating results or financial position.
From time to time, we evaluate potential strategic acquisition or investment opportunities. Any transactions that we enter into could
be material to our financial condition and results of operations. The process of acquiring and integrating another company or
technology could create unforeseen operating difficulties and expenditures. Acquisitions and investments involve a number of risks,
such as:
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diversion of management time and focus from operating our business;
use of resources that are needed in other areas of our business;
in the case of an acquisition, implementation or remediation of controls, procedures and policies of the acquired company;
in the case of an acquisition, difficulty integrating the accounting systems and operations of the acquired company,
including potential risks to our corporate culture;
in the case of an acquisition, coordination of product, engineering and selling and marketing functions, including
difficulties and additional expenses associated with supporting legacy services and products and hosting infrastructure of
the acquired company and difficulty converting the customers of the acquired company onto our platform and contract
terms, including disparities in the revenues, licensing, support or professional services model of the acquired company;
in the case of an acquisition, retention and integration of employees from the acquired company;
unforeseen costs or liabilities;
adverse effects to our existing business relationships with partners and merchants as a result of the acquisition or
investment;
the possibility of adverse tax consequences;
litigation or other claims arising in connection with the acquired company or investment; and
in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address
the particular economic, currency, political and regulatory risks associated with specific countries.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other
intangible assets, which must be assessed for impairment at least annually. In the future,
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if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this
impairment assessment process, which could adversely affect our results of operations.
Acquisitions and investments may also result in dilutive issuances of equity securities, which could adversely affect our share price,
or result in issuances of securities with superior rights and preferences to the Class A subordinate voting shares or the incurrence of
debt with restrictive covenants that limit our future uses of capital in pursuit of business opportunities.
We may not be able to identify acquisition or investment opportunities that meet our strategic objectives, or to the extent such
opportunities are identified, we may not be able to negotiate terms with respect to the acquisition or investment that are acceptable to
us. At this time we have made no commitments or agreements with respect to any such material transactions.
Provisions of our financial instruments may restrict our ability to pursue our business strategies.
Any debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to,
among other things:
dispose of assets;
complete mergers or acquisitions;
incur indebtedness;
encumber assets;
pay dividends or make other distributions to holders of our shares;
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change certain key management personnel;
engage in any business other than the businesses we currently engage in; and
engage in transactions with our affiliates.
These restrictions could inhibit our ability to pursue our business strategies. If we default under a credit facility, and such event of
default is not cured or waived, the lenders could terminate commitments to lend and cause all amounts outstanding with respect to
the debt to be due and payable immediately, which in turn could result in cross-defaults under our other debt instruments. Our assets
and cash flow may not be sufficient to fully repay borrowings under all of our outstanding debt instruments if some or all of these
instruments are accelerated upon a default.
We may also incur additional indebtedness in the future. The instruments governing such indebtedness could contain provisions that
are as, or more, restrictive than our existing debt instruments. If we are unable to repay, refinance or restructure our indebtedness
when payment is due, the lenders could proceed against the collateral granted to them to secure such indebtedness, as applicable, or
force us into bankruptcy or liquidation.
We may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise
capital when needed or on acceptable terms.
From time to time, we may seek additional equity or debt financing to fund our growth, enhance our platform, respond to
competitive pressures or make acquisitions or other investments. Our business plans may change, general economic, financial or
political conditions in our markets may deteriorate or other circumstances may arise, in each case that have a material adverse effect
on our cash flows and the anticipated cash needs of our business. Any of these events or circumstances could result in significant
additional funding needs,
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requiring us to raise additional capital. We cannot predict the timing or amount of any such capital requirements at this time. If
financing is not available on satisfactory terms, or at all, we may be unable to expand our business at the rate desired and our results
of operations may suffer. Financing through issuances of equity securities would be dilutive to holders of our shares.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns
could adversely affect our operating results and financial condition.
With sales in various countries, we are subject to taxation in several jurisdictions around the world with increasingly complex tax
laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a
result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax
laws and precedents, which could have an adverse impact on our liquidity and results of operations.
In addition, the authorities in several jurisdictions could review our tax returns and impose additional tax, interest and penalties,
which could have an impact on us and on our results of operations. We previously have participated in government programs with
both the Canadian federal government and the Government of Ontario that provide investment tax credits based upon qualifying
research and development expenditures. If Canadian taxation authorities successfully challenge such expenses or the correctness of
such income tax credits claimed, our historical operating results could be adversely affected. As a public company, we are no longer
eligible for refundable tax credits under the Canadian federal Scientific Research and Experimental Development Program, or
SR&ED credits. However, we are still eligible for non-refundable SR&ED credits under this program, which are eligible to reduce
future income taxes payable.
Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
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expected timing and amount of the release of any tax valuation allowances;
tax effects of stock-based compensation;
costs related to intercompany restructurings;
changes in tax laws, regulations or interpretations thereof; or
future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than
anticipated earnings in countries where we have higher statutory tax rates.
We currently conduct activities in the United States and other jurisdictions through our subsidiaries pursuant to transfer pricing
arrangements and may in the future conduct operations in other jurisdictions pursuant to similar arrangements. If two or more
affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer
prices be the same as those between unrelated companies dealing at arms’ length. While we believe that we operate in compliance
with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable
tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s
length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised
transfer prices, which could result in a higher tax liability to us.
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New tax laws could be enacted or existing laws could be applied to us or our merchants, which could increase the costs of our
solutions and adversely impact our business.
The application of federal, state, provincial, local and foreign tax laws to solutions provided over the internet is evolving. New
income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, possibly with retroactive
effect, and could be applied solely or disproportionately to solutions provided over the internet. These enactments could adversely
affect our sales activity due to the inherent cost increase the taxes would represent, and could ultimately result in a negative impact
on our results of operations and cash flows.
Federal, state and local tax authorities may seek to assess state and local business taxes and sales and use taxes. If we are
required to collect sales and use taxes in additional jurisdictions, we might be subject to tax liability for past sales.
There is a risk that U.S. jurisdictions could assert that we are liable for U.S. federal, state and local business activity taxes, which are
levied upon income or gross receipts, or for the collection of U.S. local sales and use taxes. This risk exists regardless of whether we
are subject to U.S. federal or city income tax. States are becoming increasingly active in asserting nexus for business activity tax
purposes and imposing sales and use taxes on products and services provided over the internet. We may be subject to U.S. state and
local business activity taxes if a state tax authority asserts that our activities or the activities of our non-U.S. subsidiaries are
sufficient to establish nexus. We could also be liable for the collection of U.S. state and local sales and use taxes if a state tax
authority asserts that distribution of our solutions over the internet is subject to sales and use taxes. Each state has different rules and
regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that change over
time. We review these rules and regulations periodically and, when we believe we are subject to sales and use taxes in a particular
state, voluntarily engage state and city tax authorities in order to determine how to comply with their rules and regulations. If a state
tax authority asserts that distribution of our solutions is subject to such sales and use taxes, the additional cost may decrease the
likelihood that such merchants would purchase our solutions or continue to renew their subscriptions.
A successful assertion by one or more jurisdictions requiring us to collect sales or other taxes on subscription service revenue could
result in substantial tax liabilities for past transactions and otherwise harm our business. We cannot assure you that we will not be
subject to sales and use taxes or related penalties for past sales in jurisdictions where we currently believe no such taxes are required.
New obligations to collect or pay taxes of any kind could increase our cost of doing business.
We may not be able to utilize a significant portion of our non-capital loss carryforwards, net operating loss carryforwards and
other tax credits, which could adversely affect our profitability.
As of December 31, 2017, we had Canadian non-capital loss carryforwards of $96.5 million due to prior period losses, as well as
non-refundable SR&ED credits due to current and prior year SR&ED claims, which, if not utilized will begin to expire in 2032.
These non-capital loss carryforwards and non-refundable tax credits could expire unused and be unavailable to offset future income
tax liabilities, which could adversely affect our profitability.
Additionally, as of December 31, 2017, we had U.S. state net operating loss carryforwards, due to prior period losses, which, if not
utilized, will begin to expire in 2029. These net operating loss carryforwards could expire unused and be unavailable to offset future
income tax liabilities, which could adversely affect our profitability
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We are dependent upon consumers’ and merchants’ continued and unimpeded access to the internet, and upon their willingness
to use the internet for commerce.
Our success depends upon the general public’s ability to access the internet and its continued willingness to use the internet as a
means to pay for purchases, communicate, access social media, research and conduct commercial transactions, including through
mobile devices. The adoption of any laws or regulations that adversely affect the growth, popularity or use of the internet, including
changes to laws or regulations impacting internet neutrality, could decrease the demand for our products, increase our operating
costs, or otherwise adversely affect our business. Given uncertainty around these rules, we could experience discriminatory or anti-
competitive practices that could impede both our and our merchants’ growth, increase our costs or adversely affect our business. If
consumers or merchants become unable, unwilling or less willing to use the internet for commerce for any reason, including lack of
access to high- speed communications equipment, congestion of traffic on the internet, internet outages or delays, disruptions or
other damage to merchants’ and consumers’ computers, increases in the cost of accessing the internet and security and privacy risks
or the perception of such risks, our business could be adversely affected.
Risks Related to Ownership of our Shares
Our dual class structure has the effect of concentrating voting control and the ability to influence corporate matters with those
shareholders who held our shares prior to our initial public offering, including our executive officers, employees and directors
and their affiliates.
Our Class B multiple voting shares have 10 votes per share and our Class A subordinate voting shares have one vote per share. As of
February 9, 2018, shareholders who hold Class B multiple voting shares, including our executive officers, directors and their
affiliates, together hold approximately 59.50% of the voting power of our outstanding voting shares and therefore have significant
influence over our management and affairs and over all matters requiring shareholder approval, including the election of directors
and significant corporate transactions.
In addition, because of the 10-to-1 voting ratio between our Class B multiple voting shares and Class A subordinate voting shares,
the holders of our Class B multiple voting shares collectively continue to control a majority of the combined voting power of our
voting shares even where the Class B multiple voting shares represent a substantially reduced percentage of our total outstanding
shares. The concentrated voting control of holders of our Class B multiple voting shares limits the ability of our Class A subordinate
voting shareholders to influence corporate matters for the foreseeable future, including the election of directors as well as with
respect to decisions regarding amendment of our share capital, creating and issuing additional classes of shares, making significant
acquisitions, selling significant assets or parts of our business, merging with other companies and undertaking other significant
transactions. As a result, holders of Class B multiple voting shares have the ability to influence many matters affecting us and
actions may be taken that our Class A subordinate voting shareholders may not view as beneficial. The market price of our Class A
subordinate voting shares could be adversely affected due to the significant influence and voting power of the holders of Class B
multiple voting shares. Additionally, the significant voting interest of holders of Class B multiple voting shares may discourage
transactions involving a change of control, including transactions in which an investor, as a holder of the Class A subordinate voting
shares, might otherwise receive a premium for the Class A subordinate voting shares over the then-current market price, or
discourage competing proposals if a going private transaction is proposed by one or more holders of Class B multiple voting shares.
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Future transfers by holders of Class B multiple voting shares will generally result in those shares converting to Class A subordinate
voting shares, which will have the effect, over time, of increasing the relative voting power of those holders of Class B multiple
voting shares who retain their shares. If, for example, our Chief Executive Officer, Tobias Lütke, who as of February 9, 2018 holds
approximately 62.89% of our outstanding Class B multiple voting shares, retains a significant portion of his holdings of Class B
multiple voting shares for an extended period of time, he could, in the future, control a significant percentage of the combined voting
power of our Class A subordinate voting shares and Class B multiple voting shares. Each of our directors and officers owes a
fiduciary duty to Shopify and must act honestly and in good faith with a view to the best interests of Shopify. However, any director
and/or officer that is a shareholder, even a controlling shareholder, is entitled to vote his or her shares in his or her own interests,
which may not always be in the interests of our shareholders generally.
Our restated articles of incorporation amend certain default rights provided for under the CBCA for holders of Class B multiple
voting shares and Class A subordinate voting shares to vote separately as a class for certain types of amendments to our restated
articles of incorporation. Specifically, neither the holders of the Class B multiple voting shares nor Class A subordinate voting shares
shall be entitled to vote separately as a class upon a proposal to amend our restated articles of incorporation to (1) increase or
decrease any maximum number of authorized shares of such class, or increase any maximum number of authorized shares of a class
having rights or privileges equal or superior to the shares of such class; or (2) create a new class of shares equal or superior to the
shares of such class, which rights are otherwise provided for in paragraphs (a) and (e) of subsection 176(1) of the CBCA. Pursuant to
our restated articles of incorporation, neither holders of our Class A subordinate voting shares nor holders of our Class B multiple
voting shares are entitled to vote separately as a class on a proposal to amend our restated articles of incorporation to effect an
exchange, reclassification or cancellation of all or part of the shares of such class pursuant to Section 176(1)(b) of the CBCA unless
such exchange, reclassification or cancellation: (a) affects only the holders of that class; or (b) affects the holders of Class A
subordinate voting shares and Class B multiple voting shares differently, on a per share basis, and such holders are not already
otherwise entitled to vote separately as a class under applicable law or our restated articles of incorporation in respect of such
exchange, reclassification or cancellation.
Pursuant to our restated articles of incorporation, holders of Class A subordinate voting shares and Class B multiple voting shares
are treated equally and identically, on a per share basis, in certain change of control transactions that require approval of our
shareholders under the CBCA, unless different treatment of the shares of each such class is approved by a majority of the votes cast
by the holders of our Class A subordinate voting shares and Class B multiple voting shares, each voting separately as a class.
The market price of our Class A subordinate voting shares may be volatile.
The market price of our Class A subordinate voting shares has fluctuated in the past and we expect it to fluctuate in the future, and it
may decline. For example, from January 1, 2017 to February 9, 2018, our share price on the New York Stock Exchange, or NYSE,
has ranged from $42.14 to $131.16. We cannot assure you that an active trading market for our Class A subordinate voting shares
will be sustained, and we therefore cannot assure you that you will be able to sell your Class A subordinate voting shares when you
would like to do so, or that you will obtain your desired price for your shares, and you could lose all or part of your investment.
Some of the factors that may cause the market price of our Class A subordinate voting shares to fluctuate include:
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actual or anticipated changes or fluctuations in our operating results or in the expectations of market analysts;
adverse market reaction to any indebtedness we may incur or securities we may issue in the future;
short sales, hedging and other derivative transactions in our shares;
announcements of technological innovations, new products, strategic alliances or significant agreements by us or by our
competitors;
changes in the prices of our solutions or the prices of our competitors’ solutions;
litigation or regulatory action against us;
breaches of security or privacy, and the costs associated with any such breaches and remediation;
investors’ general perception of us and the public’s reaction to our press releases, our other public announcements and our
filings with the SEC and Canadian securities regulators;
fluctuations in quarterly results;
publication of research reports or news stories about us, our competitors or our industry, or positive or negative
recommendations or withdrawal of research coverage by securities analysts;
changes in general political, economic, industry and market conditions and trends;
sales of our Class A subordinate voting shares and Class B multiple voting shares by our directors, executive officers and
existing shareholders;
recruitment or departure of key personnel; and
the other risk factors described in this section of our AIF.
In addition, the stock markets have historically experienced substantial price and volume fluctuations, particularly in the case of
shares of technology companies, and such fluctuations and other broad market and industry factors may harm the market price of our
Class A subordinate voting shares. Hence, the price of our Class A subordinate voting shares could fluctuate based upon factors that
have little or nothing to do with us, and these fluctuations could materially reduce the share price of our Class A subordinate voting
shares regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has been instituted against that company. If we were involved in any similar litigation, we
could incur substantial costs, our management’s attention and resources could be diverted and it could harm our business, operating
results and financial condition.
Sales of substantial amounts of our common shares in the public market, or the perception that these sales may occur, could
cause the market price of our shares to decline.
Certain of our shareholders have certain rights to require us to file registration statements in the United States or prospectuses in
Canada covering their shares or to include their shares in registration statements or prospectuses that we may file for ourselves or on
behalf of other shareholders.
Further, we cannot predict the size of future issuances of our Class A subordinate voting shares or the effect, if any, that future
issuances and sales of our Class A subordinate voting shares will have on the market price of our Class A subordinate voting shares.
Sales of substantial amounts of our shares, or the perception that such sales could occur, may adversely affect prevailing market
prices for our Class A subordinate voting shares.
Risks associated with our internal controls over financial reporting.
Any failure of our internal controls could have an adverse effect on our stated results of operations and harm our reputation. As a
result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the
implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial
reporting effectively or
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efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and results of
operations. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability
to produce timely and accurate financial statements or comply with applicable regulations could be adversely impacted.
Because we do not expect to pay any dividends on our Class A subordinate voting shares for the foreseeable future, investors may
never receive a return on their investment.
We have never declared or paid any dividends on our securities. We do not have any present intention to pay cash dividends on our
Class A subordinate voting shares and we do not anticipate paying any cash dividends on our Class A subordinate voting shares in
the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Any future determination as to
the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on our financial
condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors
may deem relevant.
As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit
the information publicly available to our shareholders.
We are a "foreign private issuer," as such term is defined in Rule 405 under the Securities Act, and are not subject to the same
requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we are subject to reporting
obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result,
we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we are required to file or furnish to the
SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our
officers, directors, and principal shareholders are exempt from the reporting and "short swing" profit recovery provisions of Section
16 of the Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal
shareholders purchase or sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are
longer.
As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and
content of proxy statements. We are also exempt from Regulation FD, which prohibits issuers from making selective disclosures of
material non-public information. While we will comply with the corresponding requirements relating to proxy statements and
disclosure of material non-public information under Canadian securities laws, these requirements differ from those under the
Exchange Act and Regulation FD and shareholders should not expect to receive the same information at the same time as such
information is provided by U.S. domestic companies. In addition, we are not required under the Exchange Act to file annual and
quarterly reports with the SEC as promptly as U.S. domestic companies whose securities are registered under the Exchange Act.
In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices, except to the
extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following
and describe the Canadian practices we follow instead. We currently rely on this exemption with respect to requirements regarding
the quorum for any meeting of our shareholders. We may in the future elect to follow home country practices in Canada with regard
to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of U.S. domestic
companies that are subject to all corporate governance requirements.
49
We may lose foreign private issuer status in the future, which could result in significant additional costs and expenses to us.
We may in the future lose our foreign private issuer status if a majority of our shares are held in the United States and we fail to meet
the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (1) a majority of our directors or
executive officers are U.S. citizens or residents; (2) a majority of our assets are located in the United States; or (3) our business is
administered principally in the United States. Although we have elected to comply with certain U.S. regulatory provisions, our loss
of foreign private issuer status would make such compliance mandatory. The regulatory and compliance costs to us under securities
laws as a U.S. domestic issuer will be significantly more than the costs incurred as a Canadian foreign private issuer. If we were not
a foreign private issuer, we would not be eligible to use foreign issuer forms and would be required to file periodic and current
reports and registration statements on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive
than the forms available to a foreign private issuer. In addition, we may lose our ability to rely upon exemptions from certain
corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
Provisions of Canadian law may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or
assets.
The Investment Canada Act (Canada) subjects an acquisition of control of us by a non-Canadian to government review if the value
of our assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless
the relevant Minister is satisfied that the investment is likely to be of net benefit to Canada. This could prevent or delay a change of
control and may eliminate or limit strategic opportunities for shareholders to sell their Class A subordinate voting shares.
It may be difficult to enforce civil liabilities in Canada under U.S. securities laws.
We were incorporated in Canada, and our corporate headquarters are located in Canada. A majority of our directors and executive
officers and certain of the experts named in our Annual Report reside or are based principally in Canada and the majority of our
assets and all or a substantial portion of the assets of these persons is located outside the United States. It may be difficult for
investors who reside in the United States to effect service of process upon these persons in the United States, or to enforce a U.S.
court judgment predicated upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons.
There is substantial doubt whether an action could be brought in Canada in the first instance predicated solely upon U.S. federal
securities laws. Canadian courts may refuse to hear a claim based on an alleged violation of U.S. securities laws against us or these
persons on the grounds that Canada is not the most appropriate forum in which to bring such a claim. Even if a Canadian court
agrees to hear a claim, it may determine that Canadian law and not U.S. law is applicable to the claim. If U.S. law is found to be
applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain
matters of procedure will also be governed by Canadian law.
Our by-laws provide that any derivative actions, actions relating to breach of fiduciary duties and other matters relating to our
internal affairs will be required to be litigated in Canada, which could limit investors’ ability to obtain a favorable judicial forum
for disputes with us.
We have adopted a forum selection by-law that provides that, unless we consent in writing to the selection of an alternative forum,
the Superior Court of Justice of the Province of Ontario, Canada and appellate Courts therefrom (or, failing such Court, any other
"court" as defined in the CBCA having jurisdiction, and
50
the appellate Courts therefrom), will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our
behalf; (2) any action or proceeding asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to
us; (3) any action or proceeding asserting a claim arising pursuant to any provision of the CBCA or our restated articles or by-laws;
or (4) any action or proceeding asserting a claim otherwise related to our "affairs" (as defined in the CBCA). Our forum selection
by-law also provides that our securityholders are deemed to have consented to personal jurisdiction in the Province of Ontario and to
service of process on their counsel in any foreign action initiated in violation of our by-law. Therefore, it may not be possible for
securityholders to litigate any action relating to the foregoing matters outside of the Province of Ontario.
Our forum selection by-law seeks to reduce litigation costs and increase outcome predictability by requiring derivative actions and
other matters relating to our affairs to be litigated in a single forum. While forum selection clauses in corporate charters and by-laws
are becoming more commonplace for public companies in the United States and have been upheld by courts in certain states, they
are untested in Canada. It is possible that the validity of our forum selection by-law could be challenged and that a court could rule
that such by-law is inapplicable or unenforceable. If a court were to find our forum selection by-law inapplicable to, or
unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated
with resolving such matters in other jurisdictions and we may not obtain the benefits of limiting jurisdiction to the courts selected.
Provisions of our charter documents and certain Canadian legislation could delay or deter a change of control, limit attempts by
our shareholders to replace or remove our current senior management and affect the market price of our Class A subordinate
voting shares.
Our restated articles of incorporation authorize our board of directors to issue an unlimited number of preferred shares without
shareholder approval and to determine the rights, privileges, restrictions and conditions granted to or imposed on any unissued series
of preferred shares. Those rights may be superior to those of our Class A subordinate voting shares and Class B multiple voting
shares. For example, preferred shares may rank prior to Class A subordinate voting shares and Class B multiple voting shares as to
dividend rights, liquidation preferences or both, may have full or limited voting rights and may be convertible into Class A
subordinate voting shares or Class B multiple voting shares. If we were to issue a significant number of preferred shares, these
issuances could deter or delay an attempted acquisition of us or make the removal of management more difficult, particularly in the
event that we issue preferred shares with special voting rights. Issuances of preferred shares, or the perception that such issuances
may occur, could cause the trading price of our Class A subordinate voting shares to drop.
In addition, provisions in the CBCA and in our restated articles of incorporation and by-laws may have the effect of delaying or
preventing changes in our senior management, including provisions that:
•
•
•
require that any action to be taken by our shareholders be effected at a duly called annual or special meeting and not by
written consent;
establish an advance notice procedure for shareholder proposals to be brought before an annual meeting, including
proposed nominations of persons for election to our board of directors; and
require the approval of a two-thirds majority of the votes cast by shareholders present in person or by proxy in order to
amend certain provisions of our restated articles of incorporation, including, in some circumstances, by separate class votes
of holders of our Class A subordinate voting shares and Class B multiple voting shares.
51
These provisions may frustrate or prevent any attempts by our shareholders to launch a proxy contest or replace or remove our
current senior management by making it more difficult for shareholders to replace members of our board of directors, which is
responsible for appointing the members of our senior management. Any of these provisions could have the effect of delaying,
preventing or deferring a change in control which could limit the opportunity for our Class A subordinate voting shareholders to
receive a premium for their Class A subordinate voting shares, and could also affect the price that investors are willing to pay for
Class A subordinate voting shares.
Our constating documents permit us to issue an unlimited number of Class A subordinate voting shares and Class B multiple
voting shares.
Our restated articles of incorporation permit us to issue an unlimited number of Class A subordinate voting shares and Class B
multiple voting shares. We anticipate that we will, from time to time, issue additional Class A subordinate voting shares in the
future. Subject to the requirements of the NYSE and the TSX, we will not be required to obtain the approval of shareholders for the
issuance of additional Class A subordinate voting shares. Although the rules of the TSX generally prohibit us from issuing additional
Class B multiple voting shares, there may be certain circumstances where additional Class B multiple voting shares may be issued,
including upon receiving shareholder approval and pursuant to the exercise of stock options under our fourth amended and restated
option plan (the "Legacy Option Plan") that were granted prior to our initial public offering. Any further issuances of Class A
subordinate voting shares or Class B multiple voting shares will result in immediate dilution to existing shareholders and may have
an adverse effect on the value of their shareholdings. Additionally, any further issuances of Class B multiple voting shares may
significantly lessen the combined voting power of our Class A subordinate voting shares due to the 10-to-1 voting ratio between our
Class B multiple voting shares and Class A subordinate voting shares.
DIVIDENDS AND DISTRIBUTIONS
We have, to date, not declared or paid any dividends or distributions on our securities. We currently intend to retain any future
earnings to fund the development and growth of our business and we do not currently anticipate paying dividends. Any
determination to pay dividends to holders of shares in the future will be at the discretion of our board of directors and will depend on
many factors, including our financial condition, earnings, legal requirements and other factors as the board of directors deems
relevant. In addition, our outstanding credit agreement limits our ability to pay dividends and we may in the future become subject to
debt instruments or other agreements that further limit our ability to pay dividends.
CAPITAL STRUCTURE
General
The following is a description of the material terms of our Class A subordinate voting shares, our Class B multiple voting shares,
and our preferred shares, as set forth in our restated articles of incorporation.
Our authorized share capital consists of an unlimited number of Class A subordinate voting shares of which 87,291,228 were issued
and outstanding as of February 9, 2018, an unlimited number of Class B multiple voting shares of which 12,821,800 were issued
and outstanding as of February 9, 2018, and an unlimited number of preferred shares, issuable in series, none of which are issued
and outstanding. Although the rules of the TSX generally prohibit us from issuing additional Class B multiple voting shares, there
may be certain circumstances where additional Class B multiple voting shares may be issued, including upon
52
receiving shareholder approval and pursuant to the exercise of stock options under our legacy stock option plan that were granted
prior to our initial public offering.
The Class A subordinate voting shares are "restricted securities" within the meaning of such term under applicable Canadian
securities laws.
Shares
Except as described herein, the Class A subordinate voting shares and the Class B multiple voting shares have the same rights, are
equal in all respects and are treated by Shopify as if they were one class of shares.
Rank
The Class A subordinate voting shares and Class B multiple voting shares rank pari passu with respect to the payment of dividends,
return of capital and distribution of assets in the event of the liquidation, dissolution or winding up of the Company. In the event of
the liquidation, dissolution or winding-up of the Company or any other distribution of its assets among its shareholders for the
purpose of winding-up its affairs, whether voluntarily or involuntarily, the holders of Class A subordinate voting shares and the
holders of Class B multiple voting shares are entitled to participate equally in the remaining property and assets of the Company
available for distribution to the holders of shares, without preference or distinction among or between the Class A subordinate
voting shares and the Class B multiple voting shares, subject to the rights of the holders of any preferred shares.
Dividends
The holders of outstanding Class A subordinate voting shares and Class B multiple voting shares are entitled to receive dividends
on a share for share basis at such times and in such amounts and form as our board of directors may from time to time determine,
but subject to the rights of the holders of any preferred shares, without preference or distinction among or between the Class A
subordinate voting shares and the Class B multiple voting shares. We are permitted to pay dividends unless there are reasonable
grounds for believing that: (i) we are, or would after such payment be, unable to pay our liabilities as they become due; or (ii) the
realizable value of our assets would, as a result of such payment, be less than the aggregate of our liabilities and stated capital of all
classes of shares. In the event of a payment of a dividend in the form of shares, Class A subordinate voting shares shall be
distributed with respect to outstanding Class A subordinate voting shares and Class B multiple voting shares shall be distributed
with respect to outstanding Class B multiple voting shares, unless otherwise determined by our board.
Voting Rights
Under our restated articles of incorporation, each Class A subordinate voting share is entitled to one vote per share and each Class
B multiple voting share is entitled to 10 votes per share. Our Class A subordinate voting shares currently collectively represent
87.2% of our total issued and outstanding shares and 40.5% of the voting power attached to all of our issued and outstanding shares
and the Class B multiple voting shares currently collectively represent 12.8% of our total issued and outstanding shares and 59.5%
of the voting power attached to all of our issued and outstanding shares.
Conversion
The Class A subordinate voting shares are not convertible into any other class of shares. Each outstanding Class B multiple voting
share may at any time, at the option of the holder, be converted into one Class A subordinate voting share. Upon the first date that a
Class B multiple voting share is Transferred (as defined below) by a holder of Class B multiple voting shares, other than to a
Permitted Holder (as defined below)
53
or from any such Permitted Holder back to such holder of Class B multiple voting shares and/or any other Permitted Holder of such
holder of Class B multiple voting shares, the holder thereof, without any further action, shall automatically be deemed to have
exercised his, her or its rights to convert such Class B multiple voting share into a fully paid and non-assessable Class A
subordinate voting share, on a share for share basis.
In addition, all Class B multiple voting shares will convert automatically into Class A subordinate voting shares on the date on
which the outstanding Class B multiple voting shares represent less than 5% of the aggregate number of outstanding Class A
subordinate voting shares and Class B multiple voting shares as a group.
For the purposes of the foregoing:
"Affiliate" means, with respect to any specified Person, any other Person which directly or indirectly through one or more
intermediaries controls, is controlled by, or is under common control with such specified Person;
"Members of the Immediate Family" means with respect to any individual, each parent (whether by birth or adoption), spouse, or
child or other descendants (whether by birth or adoption) of such individual, each spouse of any of the aforementioned Persons,
each trust created solely for the benefit of such individual and/or one or more of the aforementioned Persons, and each legal
representative of such individual or of any aforementioned Persons (including without limitation a tutor, curator, mandatary due to
incapacity, custodian, guardian or testamentary executor), acting in such capacity under the authority of the law, an order from a
competent tribunal, a will or a mandate in case of incapacity or similar instrument. For the purposes of this definition, a Person shall
be considered the spouse of an individual if such Person is legally married to such individual, lives in a civil union with such
individual or is the common law partner (as defined in the Income Tax Act (Canada) as amended from time to time) of such
individual. A Person who was the spouse of an individual within the meaning of this paragraph immediately before the death of
such individual shall continue to be considered a spouse of such individual after the death of such individual;
"Permitted Holders" means, in respect of a holder of Class B multiple voting shares that is an individual, the Members of the
Immediate Family of such individual and any Person controlled, directly or indirectly, by any such holder, and in respect of a holder
of Class B multiple voting shares that is not an individual, an Affiliate of that holder;
"Person" means any individual, partnership, corporation, company, association, trust, joint venture or limited liability company;
"Transfer" of a Class B multiple voting share shall mean any sale, assignment, transfer, conveyance, hypothecation or other transfer
or disposition of such share or any legal or beneficial interest in such share, whether or not for value and whether voluntary or
involuntary or by operation of law. A "Transfer" shall also include, without limitation, (1) a transfer of a Class B multiple voting
share to a broker or other nominee (regardless of whether or not there is a corresponding change in beneficial ownership) or (2) the
transfer of, or entering into a binding agreement with respect to, Voting Control over a Class B multiple voting share by proxy or
otherwise, provided, however, that the following shall not be considered a "Transfer": (a) the grant of a proxy to our officers or
directors at the request of our board of directors in connection with actions to be taken at an annual or special meeting of
shareholders; or (b) the pledge of a Class B multiple voting share that creates a mere security interest in such share pursuant to a
bona fide loan or indebtedness transaction so long as the holder of the Class B multiple voting share continues to exercise
54
Voting Control over such pledged shares; provided, however, that a foreclosure on such Class B multiple voting share or other
similar action by the pledgee shall constitute a "Transfer";
"Voting Control" with respect to a Class B multiple voting share means the exclusive power (whether directly or indirectly) to vote
or direct the voting of such Class B multiple voting share by proxy, voting agreement or otherwise.
A Person is "controlled" by another Person or other Persons if: (1) in the case of a company or other body corporate wherever or
however incorporated: (A) securities entitled to vote in the election of directors carrying in the aggregate at least a majority of the
votes for the election of directors and representing in the aggregate at least a majority of the participating (equity) securities are
held, other than by way of security only, directly or indirectly, by or solely for the benefit of the other Person or Persons; and (B)
the votes carried in the aggregate by such securities are entitled, if exercised, to elect a majority of the board of directors of such
company or other body corporate; or (2) in the case of a Person that is not a company or other body corporate, at least a majority of
the participating (equity) and voting interests of such Person are held, directly or indirectly, by or solely for the benefit of the other
Person or Persons; and "controls", "controlling" and "under common control with" shall be interpreted accordingly.
Subdivision or Consolidation
No subdivision or consolidation of the Class A subordinate voting shares or the Class B multiple voting shares may be carried out
unless, at the same time, the Class B multiple voting shares or the Class A subordinate voting shares, as the case may be, are
subdivided or consolidated in the same manner and on the same basis.
Certain Class Votes
Except as required by the CBCA, applicable securities laws or our restated articles of incorporation, holders of Class A subordinate
voting shares and Class B multiple voting shares will vote together on all matters subject to a vote of holders of both those classes of
shares as if they were one class of shares. Under the CBCA, certain types of amendments to our restated articles of incorporation are
subject to approval by special resolution of the holders of our classes of shares voting separately as a class, including amendments
to:
•
•
change the rights, privileges, restrictions or conditions attached to the shares of that class;
increase the rights or privileges of any class of shares having rights or privileges equal or superior to the shares of that
class; and
• make any class of shares having rights or privileges inferior to the shares of such class equal or superior to the shares of
that class.
Without limiting other rights at law of any holders of Class A subordinate voting shares or Class B multiple voting shares to vote
separately as a class, neither the holders of the Class A subordinate voting shares nor the holders of the Class B multiple voting
shares shall be entitled to vote separately as a class upon a proposal to amend our restated articles of incorporation in the case of an
amendment to (1) increase or decrease any maximum number of authorized shares of such class, or increase any maximum number
of authorized shares of a class having rights or privileges equal or superior to the shares of such class; or (2) create a new class of
shares equal or superior to the shares of such class, which rights are otherwise provided for in paragraphs (a) and (e) of subsection
176(1) of the CBCA. Pursuant to our restated articles of incorporation, neither holders of our Class A subordinate voting shares nor
holders of our Class B multiple voting shares will be entitled to vote separately as a class on a proposal to amend our restated
articles of incorporation to effect an exchange, reclassification or cancellation of all or part of the shares of such class
55
pursuant to Section 176(1)(b) of the CBCA unless such exchange, reclassification or cancellation: (a) affects only the holders of
that class; or (b) affects the holders of Class A subordinate voting shares and Class B multiple voting shares differently, on a per
share basis, and such holders are not already otherwise entitled to vote separately as a class under applicable law or our restated
articles of incorporation in respect of such exchange, reclassification or cancellation.
Pursuant to our restated articles of incorporation, holders of Class A subordinate voting shares and Class B multiple voting shares
will be treated equally and identically, on a per share basis, in certain change of control transactions that require approval of our
shareholders under the CBCA, unless different treatment of the shares of each such class is approved by a majority of the votes cast
by the holders of our Class A subordinate voting shares and Class B multiple voting shares, each voting separately as a class.
Take-Over Bid Protection
Under applicable Canadian law, an offer to purchase Class B multiple voting shares would not necessarily require that an offer be
made to purchase Class A subordinate voting shares. In accordance with the rules of the TSX designed to ensure that, in the event
of a take-over bid, the holders of Class A subordinate voting shares will be entitled to participate on an equal footing with holders
of Class B multiple voting shares, upon the completion of our initial public offering the holders of over 80% of the then outstanding
Class B multiple voting shares entered into a customary coattail agreement with Shopify and a trustee, which we refer to as the
Coattail Agreement. The Coattail Agreement contains provisions customary for dual class, TSX listed corporations designed to
prevent transactions that otherwise would deprive the holders of Class A subordinate voting shares of rights under the take-over bid
provisions of applicable Canadian securities legislation to which they would have been entitled if the Class B multiple voting shares
had been Class A subordinate voting shares.
The undertakings in the Coattail Agreement will not apply to prevent a sale of Class B multiple voting shares by a holder of Class B
multiple voting shares party to the Coattail Agreement if concurrently an offer is made to purchase Class A subordinate voting
shares that:
(a) offers a price per Class A subordinate voting share at least as high as the highest price per share paid or required to be paid
pursuant to the take-over bid for the Class B multiple voting shares;
(b) provides that the percentage of outstanding Class A subordinate voting shares to be taken up (exclusive of shares owned
immediately prior to the offer by the offeror or persons acting jointly or in concert with the offeror) is at least as high as the
percentage of outstanding Class B multiple voting shares to be sold (exclusive of Class B multiple voting shares owned
immediately prior to the offer by the offeror and persons acting jointly or in concert with the offeror);
(c) has no condition attached other than the right not to take up and pay for Class A subordinate voting shares tendered if no
shares are purchased pursuant to the offer for Class B multiple voting shares; and
(d) is in all other material respects identical to the offer for Class B multiple voting shares.
In addition, the Coattail Agreement will not prevent the sale of Class B multiple voting shares by a holder thereof to a Permitted
Holder, provided such sale does not or would not constitute a take-over bid or, if so, is exempt or would be exempt from the formal
bid requirements (as defined in applicable securities legislation). The conversion of Class B multiple voting shares into Class A
subordinate voting shares, shall not, in of itself constitute a sale of Class B multiple voting shares for the purposes of the Coattail
Agreement.
Under the Coattail Agreement, any sale of Class B multiple voting shares (including a transfer to a pledgee
56
as security) by a holder of Class B multiple voting shares party to the Coattail Agreement will be conditional upon the transferee or
pledgee becoming a party to the Coattail Agreement, to the extent such transferred Class B multiple voting shares are not
automatically converted into Class A subordinate voting shares in accordance with our restated articles of incorporation.
The Coattail Agreement contains provisions for authorizing action by the trustee to enforce the rights under the Coattail Agreement
on behalf of the holders of the Class A subordinate voting shares. The obligation of the trustee to take such action will be
conditional on Shopify or holders of the Class A subordinate voting shares providing such funds and indemnity as the trustee may
require. No holder of Class A subordinate voting shares will have the right, other than through the trustee, to institute any action or
proceeding or to exercise any other remedy to enforce any rights arising under the Coattail Agreement unless the trustee fails to act
on a request authorized by holders of not less than 10% of the outstanding Class A subordinate voting shares and reasonable funds
and indemnity have been provided to the trustee.
The Coattail Agreement provides that it may not be amended, and no provision thereof may be waived, unless, prior to giving effect
to such amendment or waiver, the following have been obtained: (a) the consent of the TSX and any other applicable securities
regulatory authority in Canada and (b) the approval of at least 66 2/3% of the votes cast by holders of Class A subordinate voting
shares represented at a meeting duly called for the purpose of considering such amendment or waiver, excluding votes attached to
Class A subordinate voting shares held directly or indirectly by holders of Class B multiple voting shares, their affiliates and related
parties and any persons who have an agreement to purchase Class B multiple voting shares on terms which would constitute a sale
for purposes of the Coattail Agreement other than as permitted thereby.
No provision of the Coattail Agreement will limit the rights of any holders of Class A subordinate voting shares under applicable
law.
Preferred Shares
We are authorized to issue an unlimited number of preferred shares issuable in series. Each series of preferred shares shall consist of
such number of shares and having such rights, privileges, restrictions and conditions as may be determined by our board of directors
prior to the issuance thereof. Holders of preferred shares, except as otherwise provided in the terms specific to a series of preferred
shares or as required by law, will not be entitled to vote at meetings of holders of shares, and will not be entitled to vote separately as
a class upon a proposal to amend our restated articles of incorporation in the case of an amendment of the kind referred to in
paragraph (a), (b) or (e) of subsection 176(1) of the CBCA. With respect to the payment of dividends and distribution of assets in the
event of liquidation, dissolution or winding-up of the company, whether voluntary or involuntary, the preferred shares are entitled to
preference over the Class A subordinate voting shares, Class B multiple voting shares and any other shares ranking junior to the
preferred shares from time to time and may also be given such other preferences over Class A subordinate voting shares, Class B
multiple voting shares and any other shares ranking junior to the preferred shares as may be determined at the time of creation of
such series.
The issuance of preferred shares and the terms selected by our board of directors could decrease the amount of earnings and assets
available for distribution to holders of our Class A subordinate voting shares and Class B multiple voting shares or adversely affect
the rights and powers, including the voting rights, of the holders of our Class A subordinate voting shares and Class B multiple
voting shares without any further vote or action by the holders of our Class A subordinate voting shares and Class B multiple voting
shares. The issuance of preferred shares, or the issuance of rights to purchase preferred shares, could make it more difficult for a
third-party to acquire a majority of our outstanding voting shares and thereby have the effect of delaying,
57
deferring or preventing a change of control of us or an unsolicited acquisition proposal or of making the removal of management
more difficult. Additionally, the issuance of preferred shares may have the effect of decreasing the market price of our Class A
subordinate voting shares.
We have no current intention to issue any preferred shares.
Registration Rights
Our Third Amended and Restated Investors’ Rights Agreement (the "Registration Rights Agreement"), provides certain holders of
our Class B multiple voting shares with registration rights in respect of (i) the Class A subordinate voting shares issuable or issued
upon conversion of the Class B multiple voting shares held by such holders, (ii) any Class A subordinate voting shares held by such
holders or any Class A subordinate voting shares issued or issuable upon conversion or exercise of any other securities issued by us
and held by such holders; and (iii) any Class A subordinate voting shares issued as, or issuable upon conversion or exercise of any
other securities issued as, a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares
referenced in clauses (i) and (ii) above. We refer to these Class A subordinate voting shares as "registrable securities".
We will pay the expenses, other than underwriting discounts, selling commissions and share transfer taxes incurred in connection
with the registration, filing or qualification of registrable securities in accordance with the terms of the Registration Rights
Agreement.
The registration rights provided for in the Registration Rights Agreement will expire with respect to any particular holder at such
time that such holder (i) can sell all of its registrable securities under Rule 144(b)(1)(i) under the Securities Act or (ii) holds less
than 1% of the outstanding Class A subordinate voting shares and Class B multiple voting shares, in the aggregate, and can sell its
registrable securities during any three month period under Rule 144 of the Securities Act.
MARKET FOR SECURITIES
Trading Price and Volume
Our Class A subordinate voting shares are listed for trading on the Toronto Stock Exchange (TSX) and on the New York Stock
Exchange (NYSE) under the trading symbol "SHOP". The following table sets forth the price ranges and volumes of Class A
subordinate voting shares traded on the TSX and NYSE for each month of 2017.
58
2017
High
NYSE (US$)
Low
Volume
January
52.00
42.14
24,060,978
TSX (CAD$)
High
Low
Volume
68.58
56.60
84.29
97.68
66.20
2,715,902
3,788,130
78.62
4,903,578
105.25
130.85
90.00
102.22
4,108,211
13,585,898
28,813,329
32,891,421
24,604,792
61,512,397
51,989,424
135.42
108.18
15,286,107
28,694,377
123.50
109.39
5,588,034
48,565,932
139.41
112.01
10,339,855
26,409,484
151.88
133.00
7,412,715
119,833,102
150.90
111.68
17,470,776
38,108,411
22,322,342
148.97
138.96
121.27
117.11
8,671,280
6,228,743
February
March
April
May
June
July
August
September
October
November
December
64.36
73.00
78.19
50.62
58.63
67.22
95.88
74.82
100.80
81.55
96.80
84.80
111.57
88.21
123.94
120.69
108.03
93.31
117.07
95.00
108.04
92.41
Our Class B multiple voting shares are not listed for trading or quoted on any exchange or market; however, as described further
above, at any time, at the option of the holder, Class B multiple voting shares can be converted into Class A subordinate voting
shares on a one-for-one basis.
Our authorized share capital consists of an unlimited number of Class A subordinate voting shares of which 87,067,604 were issued
and outstanding as of December 31, 2017, an unlimited number of Class B multiple voting shares of which 12,810,084 were issued
and outstanding as of December 31, 2017, and an unlimited number of preferred shares, issuable in series, none of which are issued
and outstanding.
Prior Sales
In 2017, 2,951,965 class B multiple voting shares were issued as a result of the exercise of options granted under our Legacy Option
Plan, at a weighted average exercise price of US$1.20 per share.
DIRECTORS AND OFFICERS
Officers
Executive officers are appointed by the board of directors to serve, subject to the discretion of the board of directors, until their
successors are appointed.
Tobias Lütke
Ontario, Canada
Tobias Lütke co-founded Shopify in September 2004. Mr. Lütke has served as our Chief Executive Officer since April 2008. Prior to
that, Mr. Lütke acted as our Chief Technology Officer between September 2004 and April 2008. Mr. Lütke worked on the core team
of the Ruby on Rails framework and has created many popular open source libraries such as Active Merchant. Mr. Lütke also serves
as Chair of our Board of Directors.
59
Harley Finkelstein
Ontario, Canada
Harley Finkelstein is the Chief Operating Officer at Shopify and has been with the company since 2010. Prior to his current role,
Harley founded numerous startups and ecommerce companies. He currently serves on the board of the Canadian Broadcasting
Corporation and is an advisor to Felicis Ventures. Harley holds a Bachelor degree in Economics from Concordia University and a
J.D./M.B.A. joint degree in Law and Business from the University of Ottawa.
Russell Jones
Ontario, Canada
Russell Jones has been our Chief Financial Officer since March 2011. Prior to his appointment at Shopify, Mr. Jones served as Chief
Financial Officer to both BDNA Corporation from September 2009 to August 2010 and to Xambala Incorporated from September
2007 to February 2011. Between March 2002 and August 2007, Mr. Jones co-founded CFO4Results, which provided interim Chief
Financial Officer, business and operational support services to a number of early to mid-stage technology companies. He has also
held senior financial roles with Mitel Corporation, Newbridge Networks and Watchfire. Mr. Jones holds a Bachelor of Commerce
(Honors) degree from Carleton University and is a CPA, CA.
Craig Miller
Ontario, Canada
Craig Miller joined Shopify in September 2011 and has been our Chief Product Officer since February 2017. Previous to that Craig
acted as our Chief Marketing Officer and VP Marketing. In his current role, he oversees the Product, User Experience, Growth,
Marketing, and Communications teams at the Company. Mr. Miller previously held several product and marketing roles at Kijiji, an
eBay Company, between 2006 and 2011. Mr. Miller holds a Bachelor degree in Electrical Engineering from McGill University.
Joseph Frasca
Ontario, Canada
Joseph Frasca is the Senior Vice President, General Counsel and Secretary at Shopify and has been with the company since May
2014. Prior to his appointment at Shopify, Mr. Frasca was Senior Corporate Counsel at EMC Corporation between May 2011 and
May 2014 and Corporate Counsel at EMC Corporation between January 2008 and May 2011. Mr. Frasca also worked in private
practice as an Associate at Skadden, Arps, Slate, Meagher & Flom LLP from 2004 to 2008. Mr. Frasca holds a J.D. from Boston
University School of Law, a Master of Arts in Law and Diplomacy from The Fletcher School at Tufts University and a B.S. in
Russian Language and Linguistics from Georgetown University. Mr. Frasca is a member of the Society of Corporate Secretaries &
Governance Professionals sitting on the Securities Law Committee.
Brittany Forsyth
Ontario, Canada
Brittany Forsyth is the Senior Vice President of Human Relations at Shopify and has been in this role since 2014. She has been with
the company since 2010 and previously served as the Director of HR. Ms. Forsyth is involved with a number of human resources
organizations across North America. Prior to joining Shopify, Ms. Forsyth obtained a Bachelor of Commerce degree at Carleton
University.
Jean-Michel Lemieux
Ontario, Canada
Jean-Michel Lemieux is the Senior Vice President of Engineering at Shopify and joined the company in 2015. Prior to joining
Shopify, he served as the Vice President of Engineering at Atlassian and as the Chief Architect for Rational Team Concert, a
division of IBM. Jean-Michel co-authored the book, Eclipse Rich Client Platform
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and has filed two U.S. patents on software configuration management. Jean-Michel holds a Bachelor’s degree in Computer Science
from the University of Ottawa.
David Lennie
Ontario, Canada
David Lennie is Senior Vice President of Data and Analytics at Shopify and joined the company in 2015. Prior to joining Shopify,
David served as the Senior Vice President of Analytics at LearnVest and Director of Data Science and Engineering at Netflix. He
brings a wealth of experience and knowledge in building data teams, warehouses, and analytics systems. David holds an M.B.A.
from The Wharton School at the University of Pennsylvania and a Bachelor of Science degree from Northwestern University.
Toby Shannan
Ontario, Canada
Toby Shannan is the Senior Vice President of Support at Shopify and has been with the company since 2010. In his current role, he
oversees the customer service strategy for Shopify. Between November 2007 and May 2010, Mr. Shannan co-founded and acted as
Chief Executive Officer of Social Fabric, a personal genomics company. Prior to that, Mr. Shannan acted as Vice President of Sales
and Marketing at DNA Genotek from October 2003 to October 2007.
Directors
Our directors are either elected annually by the shareholders at the annual meeting of shareholders or, subject to our restated articles
of incorporation and applicable law, appointed by our board of directors between annual meetings. Each director holds office until
the close of the next annual meeting of our shareholders or until he or she ceases to be a director by operation of law, or until his or
her removal or resignation becomes effective. In addition to Mr. Tobias Lütke, a director since 2004 who serves chair of the board as
well as CEO, the Company's directors are as follows:
Robert Ashe
Ontario, Canada
Robert Ashe has served as a member of our board of directors since December 2014. Over 24 years, Mr. Ashe held a variety of
positions with increasing responsibility at Cognos Incorporated, a business intelligence and performance management software
company. Mr. Ashe ultimately served as Chief Executive Officer of Cognos Incorporated from 2005 to 2008 before the company
was acquired by IBM. Mr. Ashe remained with IBM as a general manager of business analytics from 2008 to 2012. Mr. Ashe
currently serves on the board of directors of Servicesource International (NASDAQ Stock Exchange, or NASDAQ) and MSCI Inc.
(NYSE). Mr. Ashe holds a Bachelor of Commerce from the University of Ottawa and is a Fellow of the Institute of Chartered
Accountants of Ontario.
Steven Collins
Florida, United States
Steven Collins has served as a member of our board of directors since June 2014. Mr. Collins served as the Executive Vice President
and Chief Financial Officer of ExactTarget Inc., a cross-channel digital marketing company, from 2011 to 2014. Prior to that, Mr.
Collins held the position of Senior Vice President and Chief Financial Officer of NAVTEQ Corporation, a digital mapping
company; Mr. Collins was with NAVTEQ Corporation from 2003 through 2011 and served as the Vice President of Finance and the
Senior Vice President of Finance & Accounting prior to being named Chief Financial Officer. Mr. Collins currently serves on the
board of directors of Instructure (NYSE), MuleSoft, Inc. (NYSE) and a number of privately held companies. Mr. Collins holds a
B.S. degree in Industrial Engineering from Iowa State University and an M.B.A. from
61
the Wharton School of the University of Pennsylvania.
Gail Goodman
Massachusetts, United States
Gail Goodman has served as a member of our board of directors since November 2016. Ms. Goodman most recently served as
President and Chief Executive Officer of Constant Contact, a software company providing small businesses with online marketing
tools to grow their businesses, for over 16 years. Over that time Ms. Goodman served as a director and chairwoman of the board and
led Constant Contact through its initial public offering and for eight years as a publicly traded company, until its acquisition by
Endurance International Group Holdings, Inc. (NASDAQ) in February 2016. Ms. Goodman holds a B.A. from the University of
Pennsylvania and an M.B.A. from The Tuck School of Business at Dartmouth College. Ms. Goodman currently serves on the board
of directors of MINDBODY, Inc. (NASDAQ), a provider of cloud-based business management software for the wellness services
industry.
Jeremy Levine
New York, United States
Jeremy Levine has served as a member of our board of directors since February 2011. Since January 2007, Mr. Levine has been a
Partner at Bessemer Venture Partners, a venture capital firm he joined in May 2001. Mr. Levine currently serves on the board of
directors of Yelp Inc. (NYSE), a local directory and user review service, and a number of privately held companies. Mr. Levine
holds a B.S. degree in Computer Science from Duke University.
John Phillips
Ontario, Canada
John Phillips has served as a member of our board of directors since April 30, 2010. Mr. Phillips has worked with Klister Credit
Corp., an investment and consulting company, and is currently its Chief Executive Officer, a position he has held since 1993. Mr.
Phillips had a career in the legal profession working in private practice at Blake, Cassels & Graydon LLP for 20 years and as general
counsel at Clearnet Communications Inc. for nearly six years. Mr. Phillips currently serves on the board of directors of a number of
privately held companies and gained experience serving on the board of directors of Redknee Solutions Inc., a public company. Mr.
Phillips received a B.A. from Trinity College, University of Toronto and an L.L.B./J.D. from the Faculty of Law, University of
Toronto.
Board Committees
Director
Audit Committee
Member
Chair
Member
Robert Ashe
Steven Collins
Gail Goodman
Jeremy Levine
John Phillips
Tobias Lütke
Audit Committee
Compensation
Committee
Chair
Member
Member
Nominating and
Corporate Governance
Committee
Member
Member
Member
Chair
Our audit committee is comprised of Robert Ashe, Steven Collins, and Gail Goodman, and is chaired by
62
Mr. Collins. Our board of directors has determined that each of these directors meets the independence requirements, including the
heightened independence standards for members of the audit committee, of the NYSE, the SEC and National Instrument 52-110 -
Audit Committees ("NI 52-110"). Our board of directors has determined that each of the members of the audit committee is
"financially literate" within the meaning of the NYSE rules and NI 52-110. Mr. Collins has been identified as an audit committee
financial expert as defined by the SEC rules. Mr. Collins currently serves as chair of the audit committee of Instructure, Inc.
(NYSE) and MuleSoft, Inc. (NYSE). For a description of the education and experience of each member of the audit committee, see
"Directors", above.
Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the
audit committee, consistent with the rules of the NYSE, the SEC and NI 52-110. A copy of the Audit Committee Charter is
appended to this AIF as Exhibit A.
The principal purpose of our audit committee is to assist our board of directors in discharging its oversight of:
•
•
•
•
•
the quality and integrity of our financial statements and related information;
the independence, qualifications, appointment and performance of our external auditor;
our disclosure controls and procedures, internal control over financial reporting and management’s responsibility for
assessing and reporting on the effectiveness of such controls;
our compliance with applicable legal and regulatory requirements; and
our enterprise risk management processes.
At least annually, the audit committee will review and confirm the independence of the auditor by obtaining statements from the
independent auditor describing all relationships or services that may affect their independence and objectivity, and the committee
will take appropriate actions to oversee our auditor.
Our audit committee has access to all of our books, records, facilities and personnel and may request any information about us as it
may deem appropriate. It also has the authority in its sole discretion and at our expense, to retain and set the compensation of outside
legal, accounting or other advisors as necessary to assist in the performance of its duties and responsibilities.
Our audit committee also reviews our policies and procedures for reviewing and approving or ratifying related-party transactions,
and it is responsible for reviewing and approving or ratifying all related-party transactions.
Audit Committee Pre-Approval Policies and Procedures
From time to time, management recommends to and requests approval from the Audit Committee for audit and non-audit services to
be provided by the Company's auditors. The Audit Committee considers such requests, if applicable, on a quarterly basis, and if
acceptable, pre-approves such audit and non-audit services. During such deliberations, the Audit Committee assesses, among other
factors, whether the services requested would be considered "prohibited services" as contemplated by the SEC, and whether the
services requested and the fees related to such services could impair the independence of the Company's auditors.
The Audit Committee considered and agreed that the fees paid to the Company's auditors in the years ended December 31, 2017 and
2016 are compatible with maintaining the independence of the Company's auditors. The Audit Committee determined that, in order
to ensure the continued independence of the auditors, only limited non-audit services will be provided to the Company by
PricewaterhouseCoopers LLP.
63
Since the implementation of the Audit Committee pre-approval process in November 2015, all audit and non-audit services rendered
by our auditors have been pre-approved by the Audit Committee.
Auditor Service Fees
The aggregate amounts paid or accrued by the Company with respect to fees payable to PricewaterhouseCoopers LLP, the auditors
of the Company, for audit (including separate audits of wholly-owned and non-wholly owned entities, financings, regulatory
reporting requirements and SOX related services), audit-related, tax and other services in the years ended December 31, 2017 and
2016 were as follows:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
Fiscal 2017
$
Fiscal 2016
$
(in thousands)
600
—
—
2
602
542
—
—
2
544
Audit fees relate to the audit of our annual consolidated financial statements, the review of our quarterly condensed consolidated
financial statements and services in connection with our registration statement on Form F-10 (related to our May 2017 public
offering of Class A subordinate voting shares).
Audit-related fees consist of aggregate fees for accounting consultations and other services that were reasonably related to the
performance of audits or reviews of our consolidated financial statements and were not reported above under "Audit Fees".
Tax fees relate to assistance with tax compliance, expatriate tax return preparation, tax planning and various tax advisory services.
Other fees are any additional amounts for products and services provided by the principal accountants other than the services
reported above under "Audit Fees", "Audit-Related Fees" and "Tax Fees".
Ownership of Securities
As a group, our directors and executive officers beneficially own, or control or direct, directly or indirectly, a total of 374,852 Class
A subordinate voting shares and 12,309,829 Class B multiple voting shares, representing 0.4% of the Class A subordinate voting
shares and 96.0% of the Class B multiple voting shares outstanding and 57.3% of the voting power attached to all of our issued and
outstanding shares.
64
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the knowledge of Shopify, no director or executive officer of Shopify (a) is at the date hereof or has been, in the last 10 years
before the date hereof, a director, chief executive officer (CEO) or chief financial officer (CFO) of any company, including Shopify,
that (i) was subject to a cease trade order, similar order or an order that denied the relevant company access to any exemptions under
securities legislation, for a period of more than 30 consecutive days (an "Order") that was issued while the director or executive
officer was acting in that capacity; or, (ii) was subject to an Order that was issued after the director or executive officer ceased to be
a director, CEO or CFO and which resulted from an event that occurred while that person was acting in the capacity as director,
CEO or CFO.
To the knowledge of Shopify, no director or executive officer of Shopify, and no shareholder holding a sufficient number of
securities of Shopify to affect materially the control of Shopify, (i) is at the date hereof or has been in the 10 years before the date
hereof, a director or executive officer of a company, including Shopify that, while that person was acting in that capacity or within a
year of that person ceasing to act in that capacity became bankrupt, made a proposal under any legislation relating to bankruptcy or
insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver
manager or trustee appointed to hold its assets, or (ii) has, within the last 10 years before the date hereof, become bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement
or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive
officer or shareholder.
Conflicts of Interest
To the Company's knowledge, there are no existing or potentially material conflicts of interest between the Company or a subsidiary
of the Company and any director or officer of the Company or of a subsidiary of the Company.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
We are involved in legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our
business. In particular, as is common in our industry, we have received notices alleging that we infringe patents belonging to various
third parties. These notices are dealt with in accordance with our internal procedures, which include assessing the merits of each
notice and seeking, where appropriate, a business resolution. Where a business resolution cannot be reached, litigation may be
necessary. The ultimate outcome of any litigation is uncertain, and regardless of outcome, litigation can have an adverse impact on
our business because of defense costs, negative publicity, diversion of management resources and other factors. Our failure to obtain
any necessary license or other rights on commercially reasonable terms, or otherwise, or litigation arising out of intellectual property
claims could materially adversely affect our business. As of the date of this AIF, we are not party to any litigation that we believe is
material to our business.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
No director or executive officer of Shopify, and to the knowledge of the directors and executive officers of Shopify, (i) no person or
company that beneficially owns, or controls or directs, directly or indirectly, more than 10 percent of Shopify's voting shares, (ii) nor
any of such persons' or companies' associates or affiliates,
65
(iii) nor any associates or affiliates of any director of executive officer of Shopify, has had a material interest, direct or indirect, that
has materially affected or is reasonably expected to materially affect the Company within the three most recently completed financial
years or during the current financial year.
TRANSFER AGENTS AND REGISTRARS
The transfer agent and registrar for our Class A subordinate voting shares in the United States is Computershare Trust Company,
N.A. at its principal office in Canton, Massachusetts, and in Canada is Computershare Investor Services Inc. at its principal office in
Toronto, Ontario.
MATERIAL CONTRACTS
The following are the only material contracts, other than those contracts entered into in the ordinary course of business, which have
been entered into by the Company within the most recently completed fiscal year, or were entered into before the most recently
completed fiscal year and are still in effect, deemed to be material:
• Coattail Agreement dated as of May 27, 2015, in connection with our Class B Multiple Voting Shares
• Third Amended and Restated Investors’ Rights Agreement dated May 27, 2015
•
Payment Services Provider Agreement, dated July 22, 2013, between Stripe, Inc. and Shopify Payments (USA) Inc. and the
addendum to Payment Services Provider Agreement for Canada, dated July 22, 2013, among Stripe, Inc., Shopify Payments
(USA) Inc. and Shopify Payments (Canada) Inc.
Copies of the above material agreements may be inspected during ordinary business hours at our principal executive offices located
at 150 Elgin Street, 8th Floor, Ottawa, Canada, K2P 1L4 or may be viewed at the website maintained by the SEC at
http://www.sec.gov or the website maintained by the Canadian Securities Administrators at http://www.sedar.com.
INTERESTS OF EXPERTS
PricewaterhouseCoopers LLP are the auditors of Shopify and are independent within the meaning of the Rules of Professional
Conduct of the Chartered Professional Accountants of Ontario.
ADDITIONAL INFORMATION
Additional information about Shopify is available on our website at www.shopify.com, on t he website maintained by the SEC at
www.sec.gov or the website maintained by the Canadian Securities Administrators at www.sedar.com.
Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of our securities and
securities authorized for issuance under equity compensation plans will be contained in our management information circular that
will be filed in connection with our next annual meeting of
66
shareholders. Once filed, the circular will be available on our website at www.shopify.com, or at www.sec.gov or www.sedar.com.
Additional financial information is provided in our consolidated financial statements and MD&A for the fiscal year ended December
31, 2017, available on our website at www.shopify.com, or at www.sec.gov or www.sedar.com.
We are a "foreign private issuer" as such term is defined in Rule 405 under the U.S. Securities Act of 1933, as amended, and are not
subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the U.S. Securities Exchange Act
of 1934, as amended, we are subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of
U.S. domestic reporting companies. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC,
although we are required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada
under Canadian securities laws.
We will provide without charge to each person, including any beneficial owner, on the written or oral request of such person, a copy
of any or all documents referred to above which have been or may be incorporated by reference in this Annual Information Form or
our Annual Report on Form 40-F for the year ended December 31, 2017 (not including exhibits to such incorporated reports that are
not specifically incorporated by reference into such reports). Requests for such copies should be directed to us via email to
IR@shopify.com, by calling 1 (888) 746-7439, or by writing to Investor Relations, Shopify Inc., 150 Elgin Street, 8th Floor, Ottawa,
ON, K2P 1L4, Canada.
67
EXHIBIT A
SHOPIFY INC.
AUDIT COMMITTEE CHARTER
This Audit Committee Charter (“ Charter ”) has been adopted by the Board of Directors (“ Board ”) of Shopify Inc. (“ Company
”) and sets forth the purpose, composition, authority and responsibility of the Audit Committee (“ Committee ”) of the Board.
I. Purpose
The Committee’s purpose is to assist the Board in its oversight of:
•
•
•
•
•
the quality and integrity of the Company’s financial statements and related information;
the independence, qualifications, appointment and performance of the Company’s external auditor (“ external auditor ”);
the Company’s disclosure controls and procedures, internal controls over financial reporting, and management’s
responsibility for assessing and reporting on the effectiveness of such controls;
the Company’s compliance with applicable legal and regulatory requirements; and
the Company’s enterprise risk management processes.
II. Access to Information and Authority
In carrying out its duties and responsibilities, the Committee shall have the authority to:
•
•
•
•
communicate directly with the external auditors and to meet with and seek any information it requires from employees,
officers, directors, or external parties;
investigate any matter relating to the Company’s accounting, auditing, internal control or financial reporting practices or
anything else within its scope of responsibility;
obtain full access to all Company books, records, facilities and personnel; and
at its sole discretion and at the Company’s expense, retain and set the compensation of outside legal, accounting, or other
advisors, as necessary to assist in the performance of its duties and responsibilities.
The Company will provide appropriate funding, as determined by the Committee, for compensation to the external auditor, to any
advisors that the Committee chooses to engage, and for payment of ordinary administrative expenses of the Committee that are
necessary or appropriate in carrying out its duties.
III. Composition and meetings
The Board shall elect annually from among its members the Committee, which shall be composed of three or more directors as
determined by the Board, each of whom shall meet all applicable standards of independence and financial literacy under applicable
laws, regulations and rules, which determination of independence will be made by the Board. At least one member shall be
designated as an “audit committee financial expert” as defined by applicable legislation and regulation, including within the
meaning of Section 407 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder by the SEC.
The Board may remove members of the Committee at any time, with or without cause.
A-1
The Chair shall be designated by the Board; provided , that if the Board does not so designate a Chair, the Committee shall choose
one of its members to be its Chair by majority vote. The Chair shall have the duties and responsibilities set out in Section VI.
The Committee will meet at least quarterly, or more frequently as circumstances dictate. The Committee shall be convened
whenever requested by external auditors or any member of the Committee or otherwise as required by law. The external auditors
shall be entitled to receive notice of every meeting of the Committee and to attend and be heard at all such meetings. The
Committee shall periodically meet separately with management and the external auditors in executive sessions. In addition, the
Committee shall periodically meet with the external auditors and management to discuss the annual audited financial statements and
quarterly financial statements, including the Company’s disclosure under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”. Subject to applicable law and exchange requirements, the Committee and the Chair may
invite any director, executive, employee, or such other person as it deems appropriate to attend and participate in any portion of any
Committee meeting, and may exclude from all or any portion of its meetings any person it deems appropriate in order to carry out
its responsibilities. The Committee will also meet before or after each regularly scheduled meeting in camera . Meetings may be
held in person or by tele- or video-conference. The Committee may also act by unanimous written consent, whether given in writing
or electronically, in lieu of a meeting.
Unless otherwise determined from time to time by resolution of the Board, a majority of members of the Committee shall constitute
a quorum for the transaction of business at a meeting. For any meeting(s) at which the Committee Chair is absent, the Chair of the
meeting shall be the person present who shall be decided upon by all members present. At a meeting, any question shall be decided
by a majority of the votes cast by members of the Committee, except where only two members are present, in which case any
question shall be decided unanimously. Unless otherwise determined by resolution of the Board, the Corporate Secretary of the
Company or his/her delegate shall be the Secretary of the Committee. The Committee will maintain written minutes of its meetings
and copies of written consents. The Committee shall report regularly to the Board.
I. Responsibilities and Duties of the Committee
In addition to such other duties as may from time to time be expressly assigned to the Committee by the Board, the Committee shall
have the following responsibilities and duties:
Financial Reporting
1. Prepare an audit committee report, if required, to be included in the Company’s annual proxy statement.
2. Prior to their public disclosure, review and discuss with management and, if applicable, the external auditor:
•
•
the Company’s annual financial statements and the related Management’s Discussion and Analysis (“ MD&A ”),
including the discussion of critical accounting estimates included therein and, if appropriate, recommend to the Board the
approval, filing and disclosure of such information;
the Company’s annual earnings press releases, including any pro forma or non-GAAP information included therein and,
if appropriate, recommend to the Board the approval, filing
A-2
and disclosure of such information;
•
•
•
•
•
the Company’s quarterly unaudited financial statements and associated MD&A, including the discussion of critical
accounting estimates included therein and, if appropriate, approve the filing and disclosure of such information;
the Company’s quarterly earnings press releases, including any pro forma or non-GAAP information included therein
and, if appropriate, approve the filing and disclosure of such information;
the type and presentation of financial information and earnings guidance provided to analysts, ratings agencies and
others;
to the extent they include financial information extracted or derived from the Company’s financial statements, other
public reports or filings by the Company, including the Company’s annual information and proxy statements, approve
such information, or where appropriate recommend to the board their approval; and
internal controls (or summaries thereof) and the integrity of the financial reporting and related attestations by the external
auditors of the Company’s internal controls over financial reporting.
External Auditor
3. Review, report and approve of, or where appropriate provide recommendations to the Board as to, the appointment, term,
compensation and review of engagement, removal, independence, audit plan (including the timing and scope of the audit),
estimated and actual fees and contractual arrangements of the external auditor. The external auditor will report directly to the
Committee and the Committee will oversee the work performed by the external auditor and the resolution of disagreements
between management and the external auditor if they arise, taking into account where appropriate the opinions of
management.
4. Review the external auditors’ management letters and management’s responses to such letters.
5. At least annually, the Committee shall assess the external auditor’s independence. The Committee shall obtain and review a
report by the external auditor describing all relationships between the external auditor and the Company, including the written
disclosures and the letter from the external auditor required by applicable requirements. The Committee shall review any
disclosed relationships or services that may affect the independence and objectivity of the auditor and take appropriate actions
to oversee the external auditor.
6. Review and preapprove (which may be pursuant to preapproval policies and procedures) all audit and non-audit services to be
provided by the external auditor. Delegate, if deemed appropriate, authority to one or more members of the Committee to
grant preapprovals of audit and non-audit services, provided that any such approvals be presented to the Committee at its next
scheduled meeting. Consider whether the auditor’s provision of permissible non-audit services is compatible with the
auditor’s independence.
7. Discuss with the external auditor and management any matters required to be discussed in accordance with applicable Public
Company Accounting Oversight Board (“ PCAOB ”) standards.
A-3
8. Meet periodically with the external auditor in the absence of management. Review with the external auditor any audit
problems or difficulties the external auditor encountered in the course of the audit work and management’s response,
including any restrictions on the scope of the external auditor’s activities or access to requested information and any
significant disagreements with management.
9. Review and discuss the reports required to be made by the external auditor regarding:
critical accounting policies and practices;
•
• material selections of accounting policies when there is a choice of policies available under GAAP that have been
discussed with management, including the ramifications of the use of such alternative treatment, and the treatment
preferred by the external auditor;
other material written communications between the external auditor and management; and,
any other matters required to be communicated to the Committee by applicable rules and regulations.
•
•
10. At least annually, obtain and review a report by the external auditor describing:
•
•
•
the external auditor’s internal quality-control procedures;
any material issues raised by the most recent internal quality-control review or peer review, or by any inquiry or
investigation by governmental or professional authorities within the preceding five years with respect to independent
audits carried out by the external auditor, and any steps taken to deal with such issues; and,
all relationships between the external auditor and the Company, addressing the matters set forth in PCAOB Rule 3526.
This report should be used to evaluate the external auditor’s qualifications, performance, and independence. Further, the
Committee will review the experience and qualifications of the lead partner each year and determine that all partner
rotation requirements, as promulgated by applicable rules and regulations, are executed. The Committee will also consider
whether there should be rotation of the external auditor itself. The Committee will present its conclusions to the Board.
11. Set policies, consistent with governing laws and regulations, for the hiring of current or former personnel of the external
auditor.
Financial Reporting Processes, Accounting Policies and Internal Controls
12. Review and discuss with management and the external auditor, and monitor, report and where appropriate, provide
recommendations to the Board on:
•
•
•
•
the adequacy and effectiveness of the Company’s system of internal controls over financial reporting, including any
significant deficiencies and significant changes in internal controls;
the integrity of the Company’s external financial reporting processes;
the Company’s disclosure controls and procedures, including any significant deficiencies in or material non-compliance
with, such controls and procedures; and
the relationship of the Committee with other committees of the Board and management.
13. Understand the scope of the external auditors’ review of internal control over financial reporting and obtain reports on
significant findings and recommendations, together with management responses.
14. Review and discuss with the Company’s Chief Executive Officer (“ CEO ”) and Chief Financial Officer (“ CFO ”) the
process for the certifications to be provided and receive and review any
A-4
disclosure from the Company’s CEO and CFO made in connection with the required certifications of the Company’s
quarterly and annual reports filed, including: a) any significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to
record, process, summarize, and report financial data; and b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company’s internal controls.
15. Review major issues and analyses prepared by management and/or the external auditor regarding accounting principles and
financial reporting issues and judgments made in connection with the preparation of financial statements, including any
significant changes in the Company’s selection or application of accounting principles, the effect of alternative GAAP
methods on the financial statements, complex or unusual transactions and highly judgmental areas, such as the presentation
and impact of significant risks and uncertainties and key estimates and judgments of management that may be material to
financial reporting, the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial
statements of the Company, and major issues as to the adequacy of the Company’s internal controls, and any special audit
steps adopted in light of material control deficiencies.
16. Review the Company’s policies and procedures for reviewing and approving or ratifying related-party transactions. Review
and approve or ratify all related-party transactions.
17. Establish and oversee procedures for the receipt, retention, and treatment of complaints received by the Company regarding
accounting, internal accounting controls, or auditing matters, including procedures for confidential, anonymous submissions
by employees regarding questionable accounting or auditing matters.
18. Meet periodically with management in the absence of the external auditor.
19. Consider the risk of management’s ability to override the Company’s internal controls.
Ethical and Legal Compliance and Risk Management
20. Review, with the Company’s counsel, legal compliance and legal matters that could have a significant impact on the
Company’s financial statements. Review the effectiveness of the system for monitoring compliance with laws and regulations
and the results of management’s investigation and follow-up of any instances of non-compliance. Receive and review
periodic reports from the Company with respect to the Company’s pending or threatened material litigation. Review the
appropriateness of the disclosure thereof in the documents reviewed by the Committee. Review, with Company’s counsel, on
a regular basis, any reports of whistleblowing, including any reports made to the Anonymous Helpline.
21. Discuss the Company’s policies with respect to risk assessment and risk management, the Company’s insurance coverage, as
well as the Company’s major financial risk exposures and the steps management has undertaken to control them.
22. Review the Company’s compliance with internal policies and the Company’s progress in remedying any material deficiencies
that could have a significant impact on the Company.
23. Review the findings of any examinations by regulatory agencies, and any external auditors
A-5
observations made regarding those findings.
Other Responsibilities
24. Report regularly to the Board regarding the execution of the Committee’s duties and responsibilities, activities, any issues
encountered, and related recommendations.
25. Institute and oversee special investigations as needed.
26. Perform any other activities consistent with this Charter, the Company’s by-laws, and governing laws that the Board or
Committee determines are necessary or appropriate.
II.Delegation of Authority
The Committee may form subcommittees for any purpose that the Committee deems appropriate and may delegate to such
subcommittees such power and authority as the Committee deems appropriate; provided, however, that no subcommittee shall
consist of fewer than two members; and provided further that the Committee shall not delegate to a subcommittee any power or
authority required by any law, regulation or listing standard to be exercised by the Committee as a whole.
III.Responsibilities and Duties of the Chair
The Chair shall have the following responsibilities and duties:
•
•
•
•
•
•
chair meetings of the Committee;
in consultation with the Board Chair and the Corporate Secretary, determine the frequency, dates and locations of
meetings of the Committee;
in consultation with the CEO, the CFO, the Corporate Secretary and others as required, review the annual work plan and
the meeting agendas to ensure all required business is brought before the Committee;
in consultation with the Board Chair, ensure that all items requiring the Committee’s approval are appropriately tabled;
report to the Board on the matters reviewed by, and on any decisions or recommendations of, the Committee at the next
meeting of the Board following any meeting of the Committee; and
carry out any other or special assignments or any functions as may be requested by the Board.
IV. Limitation on Committee’s Duties
The Committee shall discharge its responsibilities, and shall assess the information provided by the Company’s management and
the external auditor, in accordance with its business judgment. Members of the Committee are not full-time employees of the
Company and are not, and do not represent themselves to be, professional accountants or auditors. The authority and
responsibilities set forth in this Charter do not reflect or create any duty or obligation of the Committee to (i) plan or conduct any
audits, (ii) determine
A-6
or certify that the Company’s financial statements are complete, accurate, fairly presented or in accordance with generally accepted
accounting principles or applicable law, (iii) guarantee the external auditor’s reports, or (iv) provide any expert or special assurance
as to the Company’s internal controls or management of risk. Members of the Committee are entitled to rely, absent knowledge to
the contrary, on the integrity of the persons and organizations from whom they receive information, the accuracy and completeness
of the information provided, and representations made by management as to any audit or non-audit services provided by the
external auditor.
Nothing in this Charter is intended or may be construed as imposing on any member of the Committee or the Board a standard of
care or diligence that is in any way more onerous or extensive than the standard to which the directors are subject under applicable
law. This Charter is not intended to change or interpret the amended articles of incorporation or by-laws of the Company or any
federal, provincial, state or exchange law, regulation or rule to which the Company is subject, and this Charter should be interpreted
in a manner consistent with all such applicable laws, regulations and rules . The Board may, from time to time, permit departures
from the terms hereof, either prospectively or retrospectively, and no provision contained herein is intended to give rise to civil
liability to securityholders of the Company or other liability whatsoever.
Any action that may or is to be taken by the Committee may, to the extent permitted by law or regulation, be taken directly by the
Board.
V. Evaluation of Committee
The Committee shall, on an annual basis, review and evaluate its performance. In conducting this review, the Committee shall
address such matters that the Committee considers relevant to its performance and evaluate whether this Charter appropriately
addresses the matters that are or should be within its scope. The review and evaluation shall be conducted in such a manner as the
Committee deems appropriate.
The Committee shall deliver to the Board a report, which may be oral, setting forth the results of its review and evaluation,
including any recommended changes to this Charter and any recommended changes to the Company’s or the Board’s policies or
procedures, as it deems necessary or appropriate.
* * * * *
A-7
EXHIBIT 1.2
Consolidated Financial Statements
December 31, 2017
Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company, under the supervision of the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements in accordance with United States generally accepted accounting principles.
We, including the Chief Executive Officer and Chief Financial Officer, have assessed the effectiveness of the Company's internal control over financial reporting
in accordance with Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, we, including the Chief Executive Officer and Chief Financial Officer, have determined that the Company's internal control over
financial reporting was effective as at December 31, 2017 . Additionally, based on our assessment, we determined that there were no material weaknesses in the
Company's internal control over financial reporting as at December 31, 2017 .
The effectiveness of the Company's internal control over financial reporting as at December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report on the audited consolidated financial statements for December 31, 2017 .
February 15, 2018
/s/ Tobias Lütke
Tobias Lütke
Chief Executive Officer
/s/ Russell Jones
Russell Jones
Chief Financial Officer
2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Shopify Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Shopify Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related
consolidated statements of operations and comprehensive loss, changes in shareholders’ equity and cash flows for the years then ended, including the related notes
(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December
31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December
31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
3
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Chartered Professional Accountants, Licensed Public Accountants
Ottawa, Ontario, Canada
February 15, 2018
We have served as the Company’s auditor since 2011, which includes periods before the Company became subject to SEC reporting requirements.
4
Shopify Inc.
Consolidated Balance Sheets
Expressed in US $000’s except share amounts
As at
December 31, 2017
December 31, 2016
Note
$
$
Assets
Current assets
Cash and cash equivalents
Marketable securities
Trade and other receivables
Merchant cash advances receivable, net
Other current assets
Long-term assets
Property and equipment, net
Intangible assets, net
Goodwill
Total assets
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities
Current portion of deferred revenue
Current portion of lease incentives
Long-term liabilities
Deferred revenue
Lease incentives
Deferred tax liability
Commitments and contingencies
Shareholders’ equity
Common stock, unlimited Class A subordinate voting shares authorized, 87,067,604 and
77,030,952 issued and outstanding; unlimited Class B multiple voting shares authorized,
12,810,084 and 12,374,528 issued and outstanding
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
On Behalf of the Board:
"/s/ Tobias Lütke " "/s/ Steven Collins "
Tobias Lütke Steven Collins
Chairman, Board of Directors Chairman, Audit Committee
5
4
5
6
7
8
9
10
11
12
13
13
19
15
16
17
141,677
796,362
21,939
47,101
18,598
1,025,677
50,360
17,210
20,317
87,887
1,113,564
62,576
30,694
1,484
94,754
1,352
14,970
1,388
17,710
1,077,477
43,392
3,435
(123,204)
1,001,100
1,113,564
84,013
308,401
9,599
11,896
8,989
422,898
45,719
6,437
15,504
67,660
490,558
45,057
20,164
1,311
66,532
922
12,628
—
13,550
468,494
27,009
(1,818)
(83,209)
410,476
490,558
Shopify Inc.
Consolidated Statements of Operations and Comprehensive Loss
Expressed in US $000’s, except share and per share amounts
Revenues
Subscription solutions
Merchant solutions
Cost of revenues
Subscription solutions
Merchant solutions
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income
Interest income, net
Foreign exchange gain
Net loss
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on cash flow hedges
Comprehensive loss
Basic and diluted net loss per share attributable to shareholders
Weighted average shares used to compute basic and diluted net loss per share attributable
to shareholders
Years ended
December 31, 2017
December 31, 2016
$
$
310,031
363,273
673,304
61,267
231,784
293,051
380,253
225,694
135,997
67,719
429,410
(49,157)
7,850
1,312
9,162
(39,995)
5,253
(34,742)
$
(0.42)
$
188,606
200,724
389,330
39,478
140,357
179,835
209,495
129,214
74,336
43,110
246,660
(37,165)
1,536
274
1,810
(35,355)
(1,818)
(37,173)
(0.42)
95,774,897
83,988,597
Note
20
20
17
18
18
The accompanying notes are an integral part of these consolidated financial statements.
6
Shopify Inc.
Statements of Changes in Shareholders’ Equity
Expressed in US $000’s except share amounts
Common Stock
Note
Shares
Amount $
Additional
Paid-In Capital
$
Accumulated
Other
Comprehensive
Income (Loss)
$
As at December 31, 2015
Exercise of stock options
Stock-based compensation
Vesting of restricted shares
Vesting of restricted share units
Issuance of Class A subordinate voting shares, net
of offering costs of $9,859
Net loss and comprehensive loss for the year
As at December 31, 2016
Exercise of stock options
Stock-based compensation
Vesting of restricted share units
Issuance of Class A subordinate voting shares, net
of offering costs of $15,518
Net loss and comprehensive loss for the year
As at December 31, 2017
1
1
80,089,858
3,037,644
—
48,238
104,740
6,125,000
—
89,405,480
3,322,993
—
824,215
6,325,000
—
99,877,688
231,452
9,077
—
202
3,340
224,423
—
468,494
24,959
—
23,967
560,057
—
1,077,477
11,719
(4,915)
23,545
—
(3,340)
—
—
27,009
(10,185)
50,535
(23,967)
—
—
43,392
The accompanying notes are an integral part of these consolidated financial statements.
7
Accumulated
Deficit
$
(47,854)
—
—
—
—
—
—
—
—
—
—
—
(1,818)
(1,818)
(35,355)
(83,209)
—
—
—
—
—
—
—
—
5,253
3,435
(39,995)
(123,204)
Total
$
195,317
4,162
23,545
202
—
224,423
(37,173)
410,476
14,774
50,535
—
560,057
(34,742)
1,001,100
Shopify Inc.
Consolidated Statements of Cash Flows
Expressed in US $000’s
Cash flows from operating activities
Net loss for the year
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation
Stock-based compensation
Provision for uncollectible receivables related to merchant cash advances
Vesting of restricted shares
Unrealized foreign exchange gain
Changes in operating assets and liabilities:
Trade and other receivables
Merchant cash advances receivable
Other current assets
Accounts payable and accrued liabilities
Deferred revenue
Lease incentives
Net cash provided by operating activities
Cash flows from investing activities
Purchase of marketable securities
Maturity of marketable securities
Acquisitions of property and equipment
Acquisitions of intangible assets
Acquisition of businesses, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the exercise of stock options
Proceeds from public offering, net of issuance costs
Net cash provided by financing activities
Effect of foreign exchange on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents – Beginning of Year
Cash and cash equivalents – End of Year
Non-cash investing activities:
Acquired property and equipment remaining unpaid
Capitalized stock-based compensation
The accompanying notes are an integral part of these consolidated financial statements.
8
Years ended
December 31, 2017
December 31, 2016
Note
$
$
(39,995)
(35,355)
13
21
1
23,382
49,163
2,606
—
(1,604)
(13,037)
(37,811)
(3,706)
15,428
10,960
2,515
7,901
(1,129,263)
642,073
(20,043)
(4,219)
(15,718)
(527,170)
14,774
560,057
574,831
2,102
57,664
84,013
141,677
1,764
1,372
13,967
22,896
1,028
202
(969)
(2,356)
(12,924)
(2,604)
19,813
7,699
2,620
14,017
(369,208)
139,872
(23,773)
(2,463)
(14,114)
(269,686)
4,162
224,423
228,585
1,027
(26,057)
110,070
84,013
587
649
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
1.
Nature of Business
Shopify Inc. (“Shopify” or the “Company”) was incorporated as a Canadian corporation on September 28, 2004. The Company’s mission is to make
commerce better for everyone. Shopify is the leading cloud-based, multi-channel commerce platform designed for small and medium-sized businesses.
The Company builds web- and mobile-based software and lets merchants easily set up beautiful online storefronts that are rich with retail functionality.
Merchants use the Company's software to run their business across all of their sales channels, including web and mobile storefronts, physical retail
locations, social media storefronts, and marketplaces. The Shopify platform provides merchants with a single view of their business and customers across
all of their sales channels and enables them to manage products and inventory, process orders and payments, ship orders, build customer relationships and
leverage analytics and reporting all from one integrated back office.
The Company’s headquarters and principal place of business are in Ottawa, Canada.
Public Offerings
In May 2017, the Company completed a public offering, in which it issued and sold 5,500,000 Class A subordinate voting shares at a public offering price
of $91.00 per share. Subsequently, in June 2017, the Company issued and sold 825,000 Class A subordinate voting shares at the same price as a result of
the underwriters' exercise of their over-allotment option. The Company received total net proceeds of $560,057 after deducting underwriting discounts
and commissions of $14,390 and other offering expenses of $1,128 .
In August 2016, the Company completed a public offering, in which it issued and sold 8,625,000 Class A subordinate voting shares at a public offering
price of $38.25 per share, including the 1,125,000 Class A subordinate voting shares purchased by the underwriters pursuant to the exercise of the over-
allotment option, and 2,500,000 Class A subordinate voting shares which were sold by selling shareholders. The Company received net proceeds of
$224,423 after deducting underwriting discounts and commissions of $8,786 and other offering expenses of $1,073 .
2.
Basis of Presentation and Consolidation
These consolidated financial statements include the accounts of the Company and its directly and indirectly wholly owned subsidiaries including, but not
limited to: Shopify Payments (Canada) Inc., incorporated in Canada; Shopify International Limited, incorporated in Ireland; Shopify Capital Inc.,
incorporated in the state of Virginia in the United States; Shopify LLC, Shopify Payments (USA) Inc. and Shopify Holdings (USA) Inc., incorporated in
the state of Delaware in the United States; and Oberlo UAB, incorporated in Lithuania. All intercompany accounts and transactions have been eliminated
upon consolidation.
These consolidated financial statements of the Company have been presented in United States dollars (USD) and have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP), including the applicable rules and regulations of the Securities
and Exchange Commission (SEC) regarding financial reporting.
3.
Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements, in accordance with U.S. GAAP, requires management to make estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates, judgments and assumptions in these consolidated financial statements include:
estimates related to revenue recognition; estimates related to refundable tax credits; provision for uncollectible receivables related to merchant cash
advances and chargebacks on Shopify Payments transactions
9
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
that are unrecoverable from merchants; recoverability of deferred tax assets; fair values of assets and liabilities acquired in business combinations; fair
value of acquired intangible assets; capitalization of software development costs; estimated useful lives of property and equipment and intangible assets;
estimates relating to the recoverability of lease inducements; and assumptions used when employing the Black-Scholes valuation model to estimate the
fair value of stock-based awards. Actual results may differ from the estimates made by management.
Revenue Recognition
The Company’s sources of revenue consist of subscription solutions and merchant solutions. Arrangements with merchants do not provide the merchants
with the right to take possession of the software supporting the Company’s hosting platform at any time and are therefore accounted for as service
contracts. The Company’s subscription service contracts do not provide for refunds or any other rights of return to merchants in the event of cancellations.
The Company recognizes revenue when all of the following criteria are met:
•
•
•
•
There is persuasive evidence of an arrangement;
The services have been or are being provided to the merchant;
The amount of fees to be paid by the merchant is fixed or determinable; and
The collection is reasonably assured.
The Company follows the guidance provided in ASC 605-45, Principal Agent Considerations for determining whether the Company should recognize
revenue based on the gross amount billed to a merchant or the net amount retained. This determination is a matter of judgment that depends on the facts
and circumstances of each arrangement. The Company recognizes revenue from Shopify Shipping and the sales of Apps on a net basis as it has been
determined that the Company is the agent in the arrangement with merchants. All other revenue is reported on a gross basis, as the Company has
determined it is the principal in the arrangement, in that it is the primary obligor for providing services and assumes the risk of any loss or changes in
costs.
Sales taxes collected from merchants and remitted to government authorities are excluded from revenue.
The Company's arrangements can include multiple elements, which may consist of some or all of the Company's subscription solutions. When multiple-
element arrangements exist, the Company evaluates whether these individual deliverables should be accounted for as separate units of accounting or one
single unit of accounting. In order to treat deliverables in a multiple-element arrangement as separate units of accounting, the delivered item or items must
have standalone value upon delivery. A delivered item has standalone value to the customer when either (1) any vendor sells that item separately or (2)
the customer could resell that item on a standalone basis. Each of the Company's subscription solutions have standalone value, as the solutions are sold
separately. Accordingly, the Company considers the separate units of accounting in multiple deliverable arrangements to be the subscription fees, themes,
apps and domain names. When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement
consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple-element arrangement accounting
guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (VSOE)
of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling
price is not available, third-party evidence (TPE) of selling price is used to establish the selling price if it exists. The Company has not established VSOE
for its subscription solutions due to lack of pricing consistency, the introduction of new services and other factors. The Company has also concluded that
TPE of selling price is not a practical alternative due to differences in the Company's service offerings compared to other parties and the availability of
relevant third-party pricing information. Accordingly, the Company uses its best estimate of selling price (BESP) to determine the relative selling price
for our subscription solutions.
10
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The Company determined BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into
consideration for our subscription solutions include discounting practices, the size and volume of our transactions, the customer demographic, the
geographic area where services are sold, price lists, our go-to-market strategy, historical standalone sales and contract prices. The determination of BESP
is made through consultation with and approval by our management, taking into consideration our go-to-market strategy. As the Company's go-to-market
strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in relative selling prices.
Subscription Solutions
Subscription revenue is recognized on a ratable basis over the contractual term. The terms range from monthly, annual or multi-year subscription terms.
Revenue recognition begins on the date that the Company’s service is made available to the merchant. Payments received in advance of services being
rendered are recorded as deferred revenue and recognized on a ratable basis over the requisite service period.
The Company also sells separately priced Themes and Apps to merchants for which revenue is recognized at the time of the sale. The right to use domain
names is also sold separately and is recognized on a ratable basis over the contractual term, which is generally an annual term. Revenue from Themes, as
well as Apps and Domains have been classified within Subscription solutions on the basis that they are typically sold at the time the merchant enters into
the subscription services arrangement or because they are charged on a recurring basis.
Merchant Solutions
The Company generates merchant solutions revenue by providing additional value to merchants to increase their use of the platform. The majority of its
merchant solutions revenue is from fees that it charges merchants on their customer orders processed through Shopify Payments. The Company also
derives merchant solutions revenue relating to Shopify Shipping, Shopify Capital, other transaction services and referral fees, as well as from the sale of
Point-of-Sale (POS) hardware. For the sale of POS hardware, revenue is recognized when title passes to the merchant, in accordance with the shipping
terms. Revenues earned from Shopify Payments, Shopify Shipping, other transaction services, and referral fees are recognized at the time of the
transaction. The Company offers Shopify Capital, a merchant cash advance (MCA) program to eligible merchants. The Company applies underwriting
criteria prior to purchasing the eligible merchant's future receivables to help ensure collectibility. Under Shopify Capital, the Company purchases a
designated amount of future receivables at a discount. The purchase price is paid to the merchant at the time the MCA is entered into, and the merchant
remits a fixed percentage of their daily sales until the outstanding balance has been fully remitted. As cash remittances are collected by the Company, a
portion is recognized ratably as a reduction to the merchant's receivable balance, and a portion, which is related to the discount, is recognized ratably as
merchant solutions revenue.
Cost of Revenues
The Company’s cost of revenues consists of payments for Themes and Domain registration, credit card fees, hosting infrastructure costs, an allocation of
costs incurred by both the operations and support functions, and amortization of capitalized software development costs. In addition, included in the cost
of merchant solutions are costs associated with credit card processing, and the cost of POS hardware.
Software Development Costs
Research and development costs are generally expensed as incurred. These costs primarily consist of personnel and related expenses, contractor and
consultant fees, stock-based compensation, and corporate overhead allocations, including depreciation.
11
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The Company capitalizes certain development costs incurred in connection with its internal use software. These capitalized costs are related to the
development of its software platform that is hosted by the Company and accessed by its merchants on a subscription basis as well as material internal
infrastructure software. Costs incurred in the preliminary stages of development are expensed as incurred. The Company capitalizes all direct and
incremental costs incurred during the application development phase, until such time when the software is substantially complete and ready for its
intended use. Capitalization ceases upon completion of all substantial testing.
The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional features
and functionality. Capitalized costs are recorded as part of intangible assets in the consolidated balance sheets and are amortized on a straight-line basis
over their estimated useful lives of two or three years. Maintenance costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs included in sales and marketing expenses during the years ended December 31, 2017 and
2016 were $ 92,031 and $ 58,348 respectively.
Operating Leases
The total payments and costs associated with operating leases, including leases that contain lease inducements and uneven payments, are aggregated and
amortized on a straight-line basis over the initial lease term of each respective agreement.
Stock-Based Compensation
The accounting for stock-based awards is based on the fair value of the award measured at the grant date. Accordingly, stock-based compensation cost is
recognized in the Consolidated Statements of Operations and Comprehensive Loss as an operating expense over the requisite service period.
The fair value of stock options is determined using the Black-Scholes option-pricing model, single option approach. An estimate of forfeitures is applied
when determining compensation expense. The Company determines the fair value of stock option awards on the date of grant using assumptions
regarding expected term, share price volatility over the expected term of the awards, risk-free interest rate, and dividend rate. All shares issued under the
Company's Fourth Amended and Restated Stock Option Plan (the "Legacy Option Plan") and the new Stock Option Plan (the "Stock Option Plan") are
from treasury.
The fair value of restricted share units (RSUs) is measured using the fair value of the Company's shares as if the RSUs were vested and issued on the
grant date. An estimate of forfeitures is applied when determining compensation expense. All shares issued under the Company's Long Term Incentive
Plan (LTIP) are from treasury.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized.
12
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The Company evaluates tax positions taken or expected to be taken in the course of preparing tax returns to determine whether the tax positions have met
a “more-likely-than-not” threshold of being sustained by the applicable tax authority. Tax benefits related to tax positions not deemed to meet the “more-
likely-than-not” threshold are not permitted to be recognized in the consolidated financial statements. The Company classifies accrued interest and
penalties related to liabilities for income taxes in income tax expense.
Earnings Per Share
Basic earnings per share are calculated by dividing net earnings attributable to common equity holders of the Company by the weighted average number
of shares of common stock outstanding during the year.
Diluted earnings per share are calculated by dividing net earnings attributable to common equity holders of the Company by the weighted average number
of shares of common stock outstanding during the year, plus the effect of dilutive potential common stock outstanding during the year. This method
requires that diluted earnings per share be calculated (using the treasury stock method) as if all dilutive potential common stock had been exercised at the
latest of the beginning of the year or on the date of issuance, as the case may be, and that the funds obtained thereby (plus an amount equivalent to the
unamortized portion of related stock-based compensation costs) be used to purchase common stock of the Company at the average fair value of the
common stock during the year.
Foreign Currency Transactions
The functional and reporting currency of the Company and its subsidiaries is the United States dollar. Monetary assets and liabilities denominated in
foreign currencies are re-measured to United States dollars using the exchange rates at the consolidated balance sheet dates. Non-monetary assets and
liabilities denominated in foreign currencies are measured in United States dollars using historical exchange rates. Revenues and expenses are measured
using the actual exchange rates prevailing on the dates of the transactions. Gains and losses resulting from re-measurement are recorded in the Company’s
Consolidated Statements of Operations and Comprehensive Loss as Foreign exchange gain (loss), with the exception of foreign exchange forward
contracts used for hedging which are re-measured in Other Comprehensive Income (Loss) and the gain (loss) is then reclassified into earnings to either
cost of revenue or operating expenses in the same period, or period, during which the hedged transaction affects earnings.
Cash and Cash Equivalents
The Company considers all short term highly liquid investments purchased with original maturities at their acquisition date of three months or less to be
cash equivalents.
Marketable Securities
The Company’s marketable securities consist of U.S. and Canadian federal agency bonds, U.S. term deposits, corporate bonds and money market funds,
and mature within 12 months from the date of purchase. Marketable securities are classified as held-to-maturity at the time of purchase and this
classification is re-evaluated as of each consolidated balance sheet date. Held-to-maturity securities represent those securities that the Company has both
the intent and ability to hold to maturity and are carried at amortized cost, which approximates their fair market value. Interest on these securities, as well
as amortization/accretion of premiums/discounts, are included in interest income. All investments are assessed as to whether any unrealized loss positions
are other than temporarily impaired. Impairments are considered other than temporary if they are related to deterioration in credit risk or if it is likely the
Company will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value determined to be other than
temporary are determined based on the specific identification method and are reported in other income (expense) in the Consolidated Statements of
Operations and Comprehensive Loss.
13
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
Fair Value Measurements
The carrying amounts for cash and cash equivalents, marketable securities, trade and other receivables, merchant cash advances receivable, foreign
exchange contracts, trade accounts payable and accruals, and employee related accruals approximate fair value due to the short-term maturities of these
instruments.
The Company measures the fair value of its financial assets and liabilities using a fair value hierarchy. A financial instrument’s classification within the
fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure
fair value.
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3
assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar
techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inventory
The Company holds inventory related to its POS hardware. Inventories are stated at the lower of cost or net realizable value. Inventories are written down
for estimated obsolescence equal to the difference between inventory cost and estimated net realizable value based on a combination of historical usage
and assumptions based on expected usage related to estimated future merchant and market demands. The Company utilizes the first-in, first-out (FIFO)
method for determining the cost of inventories.
Derivatives and Hedging
The majority of the Company's derivative products are foreign exchange forward contracts which are designated as cash flow hedges consisting of foreign
currency forecasted revenue, cost of revenue and operating expenses. By their nature, derivative financial instruments involve risk, including the credit
risk of non-performance by counter parties. The Company may hold foreign exchange forward contracts to mitigate the risk of future foreign exchange
rate volatility related to future Canadian dollar (CAD) denominated costs and current and future obligations.
The Company's foreign currency forward contracts generally have maturities of twelve months or less. The critical terms match method is used when the
key terms of the hedging instrument and that of the hedged item are aligned; therefore, the changes in fair value of the forward contracts are recorded in
accumulated other comprehensive income (AOCI). The effective portion of the gain or loss on each forward contract is reported as a component of AOCI
and reclassified into earnings to either cost of revenue or operating expense in the same period, or periods, during which the hedged transaction affects
earnings. The ineffective portion of the gains or losses, if any, is recorded immediately in other income (expense).
For hedges that do not qualify for the critical terms match method of accounting, a formal assessment is performed to verify that derivatives used in
hedging transactions continue to be highly effective in offsetting the changes in fair value or cash flows of the hedged item. Hedge accounting is
discontinued if a derivative ceases to be highly effective, matures, is terminated or sold, if a hedged forecasted transaction is no longer probable of
occurring, or if the Company removes the derivative's hedge designation. For discontinued cash flow hedges, the accumulated gain or loss on the
derivative remains in AOCI and is reclassified into earnings in the period in which the previously hedged forecasted transaction impacts earnings or is no
longer probable of occurring.
14
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
In addition, the Company has a master netting agreement with each of the Company's counterparties, which permits net settlement of multiple, separate
derivative contracts with a single payment. The Company presents its derivative instruments on a net basis in the consolidated financial statements.
Provision for Uncollectible Receivables Related to MCAs
Merchant cash advance receivables represents the aggregate amount of MCA related receivables owed by merchants as of the consolidated balance sheet
date, net of an allowance for uncollectible amounts. The Company estimates the allowance based on an assessment of various factors, including historical
trends, merchants' gross merchandise volume, and other factors that may affect the merchants' ability to make future payments on the receivables.
Additions to the allowance are reflected in current operating results, while charges against the allowance are made when losses are incurred. These
additions are classified within general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss. Recoveries
are reflected as a reduction in the allowance for uncollectible receivables related to MCAs when the recovery occurs.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful
lives of the related assets. Computer equipment is depreciated over the shorter of three years or their estimated useful lives while office furniture and
equipment are depreciated over four years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives
or the term of their associated leases, which range from three to thirteen years.
The carrying values of property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable. The determination of whether any impairment exists includes a comparison of estimated undiscounted
future cash flows anticipated to be generated over the remaining life of the asset to the net carrying value of the asset. If the estimated undiscounted future
cash flows associated with the asset are less than the carrying value, an impairment loss will be recorded based on the estimated fair value.
Intangible Assets
Intangible assets are stated at cost, less accumulated amortization. Amortization is calculated using the straight-line method over the estimated useful lives
of the related assets. Purchased software, acquired technology, acquired customer relationships, and capitalized software development costs are amortized
into cost of revenues and operating expenses over a two or three year period, depending on the nature of the asset.
The carrying values of intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of
such assets may not be recoverable. The determination of whether any impairment exists includes a comparison of estimated undiscounted future cash
flows anticipated to be generated over the remaining life of the asset to the net carrying value of the asset. If the estimated undiscounted future cash flows
associated with the asset are less than the carrying value, an impairment loss will be recorded based on the estimated fair value.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of net assets of a business acquired in a business combination. Goodwill
is not amortized, but instead tested for impairment at least annually. Should certain events or indicators of impairment occur between annual impairment
tests, the Company will perform the impairment test as those events or indicators occur. Examples of such events or circumstances include the following:
a significant decline in the Company’s expected future cash flows; a
15
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
sustained, significant decline in the Company’s fair value; a significant adverse change in the business climate; and slower growth rates.
Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not
that the fair value of the reporting unit is less than its carrying value. The qualitative assessment considers the following factors: macroeconomic
conditions, industry and market considerations, cost factors, overall company financial performance, events affecting the reporting unit, and changes in
the Company’s fair value. If the reporting unit does not pass the qualitative assessment, the Company carries out a two-step test for impairment of
goodwill. The first step of the test compares the fair value of the reporting unit with the carrying value of its net assets. If the fair value of the reporting
unit is greater than its carrying value, no impairment results. If the fair value of the reporting unit is less than its carrying value, the Company performs
the second step of the test for impairment of goodwill. During the second step of the test, the Company compares the implied fair value of the reporting
unit’s goodwill with the carrying value of that goodwill. If the implied fair value of goodwill is less than the carrying value, an impairment charge would
be recorded in the Consolidated Statements of Operations and Comprehensive Loss. The Company has one reporting unit and evaluates goodwill for
impairment at the entity level.
Business Combinations
The Company follows the acquisition method to account for business combinations in accordance with ASC 805, Business Combinations. The acquisition
method of accounting requires that assets acquired and liabilities assumed be recorded at their estimated fair values on the date of a business acquisition.
The excess of the purchase price over the estimated fair value is recorded as goodwill. Upon the conclusion of the measurement period or final
determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments would be recorded in the
consolidated statements of operations and comprehensive loss.
Segment Information
The Company’s chief operating decision maker (CODM) is a function comprised of two executives, specifically the Chief Executive Officer and the
Chief Financial Officer. The CODM is the highest level of management responsible for assessing Shopify’s overall performance, and making operational
decisions such as resource allocations related to operations, product prioritization, and delegations of authority. Management has determined that the
Company operates in a single operating and reportable segment.
Concentration of Credit Risk
The Company’s cash and cash equivalents, marketable securities, trade and other receivables, merchant cash advances receivable, and foreign exchange
derivative products subject the Company to concentrations of credit risk. Management mitigates this risk associated with cash and cash equivalents by
making deposits and entering into foreign exchange derivative products only with large banks and financial institutions that are considered to be highly
credit worthy. Management mitigates the risks associated with marketable securities by adhering to its investment policy, which stipulates minimum
rating requirements, maximum investment exposures and maximum maturities. Due to the Company’s diversified merchant base, there is no particular
concentration of credit risk related to the Company’s trade and other receivables and merchant cash advances receivable. Trade and other receivables and
merchant cash advances receivable are monitored on an ongoing basis to ensure timely collection of amounts. The Company has mitigated some of the
risks associated with Shopify Capital by entering into an agreement with a third party to insure merchant cash advances offered by Shopify Capital. There
are no receivables from individual merchants accounting for 10% or more of revenues or receivables.
16
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
Interest Rate Risk
Certain of the Company’s cash, cash equivalents and marketable securities earn interest. The Company’s trade and other receivables, accounts payable
and accrued liabilities and lease liabilities do not bear interest. The Company is not exposed to material interest rate risk.
Foreign Exchange Risk
The Company’s exposure to foreign exchange risk is primarily related to fluctuations between the Canadian Dollar (CAD) and the USD. The Company is
exposed to foreign exchange fluctuations on the revaluation of foreign currency assets and liabilities. The Company uses foreign exchange derivative
products to manage the impact of foreign exchange fluctuations. By their nature, derivative financial instruments involve risk, including the credit risk of
non-performance by counter parties.
While the majority of the Company's revenues are denominated in USD, a significant portion of operating expenses are incurred in CAD. As a result,
earnings are adversely affected by an increase in the value of the CAD relative to the USD.
The following table summarizes the effects on revenues, cost of revenues, operating expenses, and loss from operations of a 10% strengthening (1) of the
CAD versus the USD without considering the impact of the Company's hedging activities and without factoring in any potential changes in demand for
the Company's solutions as a result of changes in the CAD to USD exchange rates.
Years ended
December 31, 2017
December 31, 2016
GAAP
Amounts As
Reported
Exchange
Rate Effect (2)
At 10%
Stronger CAD
Rate (3)
GAAP
Amounts As
Reported
Exchange
Rate Effect (2)
At 10%
Stronger CAD
Rate (3)
(in thousands)
Revenues
Cost of revenues
Operating expenses
Loss from operations
$
$
673,304 $
1,104 $
674,408 $
389,330 $
659 $
389,989
(293,051)
(429,410)
(2,131)
(19,068)
(295,182)
(448,478)
(179,835)
(246,660)
(1,281)
(11,469)
(181,116)
(258,129)
(49,157) $
(20,095) $
(69,252) $
(37,165) $
(12,091) $
(49,256)
(1) A 10% weakening of the CAD versus the USD would have an equal and opposite impact on our revenues, cost of revenues, operating expenses and loss from operations as presented in the
table.
(2) Represents the increase or decrease in GAAP amounts reported resulting from a 10% strengthening in the CAD-USD foreign exchange rates.
(3) Represents the outcome that would have resulted had the CAD-USD rates in those periods been 10% stronger than they actually were.
Accounting Pronouncements Adopted in the Year
In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting", which simplifies the accounting for stock based compensation, including forfeitures and the classification
of employee taxes paid on the statement of cash flows. The standard was effective for annual periods beginning after December 15, 2016. This standard
did not have a material impact on the Company's consolidated financial statements because under this standard the Company continued to account for
forfeitures based on the estimated forfeiture rate and the tax implications are currently not applicable to the Company.
17
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-9 “Revenue from Contracts with
Customers.” The new accounting standards update requires an entity to apply a five step model to recognize revenue to depict the transfer of promised
goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services, as well as a cohesive set of disclosure requirements that would result in an entity providing comprehensive information about the nature, timing,
and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In March 2016, the Financial Accounting Standards Board
issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross
versus Net)”, updating the implementation guidance on principal versus agent considerations in the new revenue recognition standard. This update
clarifies that an entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The update also
includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. In May 2016,
the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients”, which provides clarification on how to assess collectibility,
present sales taxes, treat non-cash consideration, and account for completed and modified contracts at the time of transition. ASU 2016-12 also clarifies
that an entity retrospectively applying the guidance in Topic 606 is not required to disclose the effect of the accounting change in the period of adoption.
All of these accounting standard updates become effective for reporting periods beginning after December 15, 2017.
The Company is finalizing its assessment of the impact of the adoption of this new revenue standard on the consolidated financial statements and related
disclosures. The Company has determined that it will be required to capitalize certain sales commissions and expense these contract costs on a straight-
line basis over the expected life of the related customer relationship. The Company will also need to provide expanded disclosures relating to the nature,
amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The Company is implementing financial reporting
system changes and related controls that are necessary to implement the new revenue standard. The Company has transitioned to the standard effective
January 1, 2018 using the full retrospective approach.
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, "Leases", which requires a lessee to record a right-of-use asset
and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than
12 months, as well as the disclosure of key information about leasing arrangements. The standard requires recognition in the statement of operations of a
single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This standard also requires
classification of all cash payments within operating activities in the statement of cash flows. A modified retrospective transition approach is required for
operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. The standard is effective for annual periods beginning after December 15, 2018. Early adoption is permitted. The Company
believes that this standard will have a material impact on its consolidated balance sheets and continues to assess the impact that adoption of this standard
will have on the statement of operations and comprehensive loss.
In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment", which simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The
standard is effective for annual periods beginning after December 15, 2019 including interim periods within those periods and should be applied
prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017.
In August 2017, the Financial Accounting Standards Board issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities", which will make more financial and non-financial hedging strategies eligible for hedge accounting while also
amending the presentation and disclosure requirements. The standard is effective for fiscal years beginning after December 15, 2018. Early
18
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
4.
Cash and Cash Equivalents
As at December 31, 2017 and 2016 , the Company’s cash and cash equivalents balance was $ 141,677 and $ 84,013 . These balances included $61,263
and $54,522 , respectively, of money market funds and corporate bonds.
5.
Financial Instruments
As at December 31, 2017 , the fair value of the Company’s financial instruments, which are measured or disclosed at fair value, were as follows:
Assets:
Cash equivalents:
Corporate bonds and commercial paper
—
9,965
Fair Value Measurements Using
Level 1
$
Level 2
$
Level 3
$
Marketable securities:
U.S. term deposits
U.S. federal bonds
Canadian federal bonds
Corporate bonds and commercial paper
Derivative assets:
Foreign exchange forward contracts
Liabilities:
Derivative liabilities:
65,284
119,057
19,940
—
—
—
—
—
593,554
4,503
Foreign exchange forward contracts
—
795
All cash equivalents and marketable securities mature within one year of the consolidated balance sheet date.
19
—
—
—
—
—
—
—
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
As at December 31, 2016 , the fair value of the Company’s financial instruments, which are measured or disclosed at fair value, were as follows:
Assets:
Cash equivalents:
U.S. federal bonds
Marketable securities:
U.S. term deposits
U.S. federal bonds
Corporate bonds and commercial paper
Liabilities:
Derivative liabilities:
Fair Value Measurements Using
Level 1
$
Level 2
$
Level 3
$
—
9,994
46,385
70,667
—
—
—
191,345
Foreign exchange forward contracts
—
1,818
—
—
—
—
—
As at December 31, 2017 the Company held foreign exchange forward contracts to convert USD into CAD, with a total notional value of $182,464 (
December 31, 2016 - $104,344 ), to fund a portion of its operations. The foreign exchange forward contracts have maturities of twelve months or less.
The fair value of foreign exchange forward contracts and corporate bonds was based upon Level 2 inputs, which included period-end mid-market
quotations for each underlying contract as calculated by the financial institution with which the Company has transacted. The quotations are based on
bid/ask quotations and represent the discounted future settlement amounts based on current market rates. There were no transfers between Levels 1, 2 and
3 during the years ended December 31, 2017 and December 31, 2016 .
Derivative Instruments and Hedging
The Company has a hedging program to mitigate the impact of foreign currency fluctuations on future cash flows and earnings. Under this program the
Company has entered into foreign exchange forward contracts with certain financial institutions and designated those hedges as cash flow hedges. As of
December 31, 2017 , $4,230 of unrealized gains and $795 of unrealized losses related to changes in the fair value of foreign exchange forward contracts
designated as cash flow hedges were included in accumulated other comprehensive income and current assets and current liabilities, respectively on the
condensed consolidated balance sheet. These amounts are expected to be reclassified into earnings over the next twelve months. In the year ended
December 31, 2017 , $3,398 , of realized gains ( 2016 - realized loss of $475 ) related to the maturity of foreign exchange forward contracts designated as
cash flow hedges were included in operating expenses. Under the current hedging program, the Company is hedging cash flows associated with payroll
and facility costs.
20
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
6.
Trade and Other Receivables
Unbilled revenues
Trade receivables
Refundable tax credits
Accrued interest
Leasehold incentives receivable
Sales tax receivable
Other receivables
2017
$
2016
$
7,616
7,073
2,048
2,015
1,607
832
748
21,939
2,293
2,818
1,514
896
1,452
390
236
9,599
Unbilled revenues represent amounts not yet billed to merchants related to transaction fee and shipping charges, as at the consolidated balance sheet date.
7.
Merchant Cash Advances Receivable
Merchant cash advances ("MCA") receivable, gross
Allowance for uncollectible MCA receivable
Merchant cash advances receivable, net
December 31, 2017
December 31, 2016
$
$
49,143
(2,042)
47,101
$
$
12,924
(1,028)
11,896
The following table summarizes the activities of the Company’s allowance for uncollectible MCA receivable:
Years ended
December 31, 2017
December 31, 2016
Allowance for uncollectible MCA receivable, beginning of the year
Provision for uncollectible MCA receivable
MCA receivable charged off
Allowance for uncollectible MCA receivable, end of the year
$
$
1,028
$
2,606
(1,592)
2,042
$
8.
Other Current Assets
Prepaid expenses
Deposits
Foreign exchange contracts
POS hardware
2017
$
2016
$
7,239
5,240
4,503
1,616
18,598
21
22
1,006
—
1,028
5,347
3,079
41
522
8,989
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
9.
Property and Equipment
Leasehold improvements
Computer equipment
Office furniture and equipment
Leasehold improvements
Computer equipment
Office furniture and equipment
2017
Accumulated
depreciation
$
10,541
20,592
3,869
35,002
2016
Accumulated
depreciation
$
5,521
10,888
2,247
18,656
Cost
$
43,058
34,644
7,660
85,362
Cost
$
32,816
25,572
5,987
64,375
Net book
value
$
32,517
14,052
3,791
50,360
Net book
value
$
27,295
14,684
3,740
45,719
The following table illustrates the classification of depreciation in the Consolidated Statements of Operations and Comprehensive Loss.
Cost of revenues
Sales and marketing
Research and development
General and administrative
2017
$
2016
$
8,055
2,405
4,654
1,466
16,580
5,329
2,320
1,920
822
10,391
22
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
10. Intangible Assets
Acquired technology and customer relationships
Software development costs
Purchased software
Domain names
Acquired technology and customer relationships
Software development costs
Purchased software
Domain names
Cost
$
12,935
12,297
3,752
591
29,575
Cost
$
1,071
6,750
3,689
569
12,079
2017
Accumulated
amortization
$
3,382
5,394
3,080
509
12,365
2016
Accumulated
amortization
$
250
2,557
2,442
393
5,642
Net book
value
$
9,553
6,903
672
82
17,210
Net book
value
$
821
4,193
1,247
176
6,437
Internal software development costs of $5,547 and $3,063 were capitalized during the years ended December 31, 2017 and 2016 , respectively, and are
classified within "Software development costs" as an intangible asset. Amortization expense related to the capitalized internally developed software was
$2,837 and $1,414 for the years ended December 31, 2017 and 2016 , respectively, and is included in cost of revenues and general and administrative
expenses in the accompanying consolidated statements of operations and comprehensive loss.
The following table illustrates the classification of amortization expense related to intangible assets in the consolidated statements of operations and
comprehensive loss.
Cost of revenues
Sales and marketing
Research and development
General and administrative
Estimated future amortization expense related to intangible assets, as at December 31, 2017 is as follows:
Fiscal Year
2018
2019
2020
2021
Total
23
2017
$
2016
$
5,983
312
299
208
6,802
1,305
939
601
731
3,576
Amount
$
8,032
6,259
2,482
437
17,210
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
11. Goodwill
The Company’s goodwill was recognized upon the acquisitions of various companies including, but not limited to, Oberlo UAB, which was acquired
during the year ended December 31, 2017, Kit CRM Inc. and Boltmade Inc., which were both acquired during the year ended December 31, 2016 .
Goodwill is attributable to the Company’s single reporting unit.
The Company performed its annual impairment test of goodwill as at September 30, 2017. The Company exercised its option to bypass the qualitative
assessment pursuant to ASC 350, Intangibles - Goodwill and Other, and perform a quantitative analysis. The Company determined that the consolidated
business is represented by a single reporting unit and concluded that the estimated fair value of the reporting unit was greater than its carrying amount. As
a result, the second step of the two-step goodwill impairment test was not required.
No goodwill impairment was recognized for the years ended December 31, 2017 and 2016 .
The gross changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 are as follows:
Balance, beginning of the year
Acquisition of Oberlo UAB
Acquisition of Kit CRM Inc.
Acquisition of Boltmade, Inc.
Other Acquisitions
Balance, end of the year
12.
Accounts Payable and Accrued Liabilities
Trade accounts payable and trade accruals
Employee related accruals
Accrued transaction losses
Accrued payroll taxes related to exercised stock options
Accrued sales tax
Foreign exchange forward contracts
13. Lease Incentives
2017
$
2016
$
15,504
4,813
—
—
—
20,317
2,373
—
6,929
5,450
752
15,504
2017
$
2016
$
44,333
7,689
5,636
2,921
1,202
795
62,576
34,319
3,969
2,593
1,611
747
1,818
45,057
The Company leases space for its offices. The Company’s principal lease is for its head office, which is located at 150 Elgin Street in Ottawa, Canada.
This lease covers a period of twelve years, ten months that began on March 1, 2014. The lease includes an option to renew for a further five years . The
Company received leasehold incentives in the form of rent-free periods and fit-up allowances. The lease agreement also includes scheduled rent increases
that are not dependent on future events and therefore the lease payments are being accounted for on a straight-line basis over the expected term of the
lease.
24
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The Company also maintains other offices in Canada, the United States, Germany, Lithuania, and China. In most of these locations, the Company
received leasehold incentives in the form of rent-free periods and fit-up allowances. The lease agreements also include scheduled rent increases that are
not dependent on future events and therefore the lease payments are being accounted for on a straight-line basis over the expected term of the lease.
The following table represents the details of the Company’s lease incentives balance as of December 31, 2017 and 2016 .
Current portion
Long term portion
14. Credit Facility
2017
$
1,484
14,970
16,454
2016
$
1,311
12,628
13,939
In the first quarter of 2017, the Company increased its revolving credit facility with Royal Bank of Canada to $8,000 CAD. The credit facility bears
interest at the Royal Bank Prime Rate plus 0.30% . As at December 31, 2017 the effective rate was 3.50% , and no cash amounts have been drawn under
this credit facility.
15.
Commitments and Contingencies
Operating Leases
The Company has entered into various non-cancellable operating leases for certain offices with contractual lease periods expiring between 2018 and 2036.
Rent expense was $11,744 and $8,593 for the years ended December 31, 2017 and 2016 , respectively.
Amounts of minimum future annual rental payments under non-cancellable operating leases in each of the next five years and thereafter are as follows:
Fiscal Year
2018
2019
2020
2021
2022
Thereafter
Total future minimum lease payments
Litigation and Loss Contingencies
Amount
$
15,271
24,802
28,768
29,497
29,016
235,667
363,021
The Company records accruals for loss contingencies when losses are probable and reasonably estimable. From time to time, the Company may become a
party to litigation and subject to claims incidental to the ordinary course of business, including intellectual property claims, labour and employment
claims and threatened claims, breach of contract claims, tax and other matters. The Company currently has no material pending litigation or claims. The
Company is not aware of any litigation matters or loss contingencies that would be expected to have a material adverse effect on the business,
consolidated financial position, results of operations, or cash flows.
25
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
16. Shareholders’ Equity
Common Stock Authorized
The Company is authorized to issue an unlimited number of Class A subordinate voting shares and an unlimited number of Class B multiple voting
shares. The Class A subordinate voting shares have one vote per share and the Class B multiple voting shares have 10 votes per share. The Class B
multiple voting shares are convertible into Class A subordinate voting shares on a one -for-one basis at the option of the holder. Class B multiple voting
shares will automatically convert into Class A subordinate voting shares in certain other circumstances.
Preferred Shares
The Company is authorized to issue an unlimited number of preferred shares issuable in series. Each series of preferred shares shall consist of such
number of shares and having such rights, privileges, restrictions and conditions as may be determined by the Company’s Board of Directors prior to the
issuance thereof. Holders of preferred shares, except as otherwise provided in the terms specific to a series of preferred shares or as required by law, will
not be entitled to vote at meetings of holders of shares.
Stock-Based Compensation
In 2008, the Board of Directors adopted and the Company’s shareholders approved the Legacy Stock Option Plan (“the Legacy Option Plan”).
Immediately prior to the completion of the Company’s May 2015 IPO, and in connection with the closing of the offering, each option outstanding under
the Legacy Option Plan became exercisable for one Class B multiple voting share. Following the closing of the Company’s IPO, no further awards were
made under the Legacy Option Plan. The Legacy Option Plan continues to govern awards granted thereunder.
The Company’s Board of Directors and shareholders approved a new stock option plan (“Stock Option Plan”) as well as a LTIP, each of which became
effective upon the closing of the Company's IPO on May 27, 2015. The Stock Option Plan allows for the grant of options to the Company’s officers,
directors, employees and consultants. All options granted under the Stock Option Plan will have an exercise price determined and approved by the
Company’s Board of Directors at the time of grant, which shall not be less than the market price of the Class A subordinate voting shares at such time.
For purposes of the Stock Option Plan, the market price of the Class A subordinate voting shares shall be the volume weighted average trading price of
the Class A subordinate voting shares on the NYSE for the five trading days ending on the last trading day before the day on which the option is granted.
Options granted under the Stock Option Plan are exercisable for Class A subordinate voting shares. Both the vesting period and term of the options in the
Stock Option Plan are determined by the Board of Directors at the time of grant. The majority of grants outstanding under both the Stock Option Plan and
the Legacy Option Plan have been approved with a four year vesting schedule with 25% vesting after one year and the remainder vesting evenly over the
remaining 36 months. Options granted under the Stock Option Plan since November 2017 have been approved with a three year vesting schedule with 1/3
vesting after one year and the remainder vesting evenly over the remaining 24 months.
The LTIP provides for the grant of share units, or LTIP Units, consisting of RSUs, performance share units (PSUs), and deferred share units (DSUs).
Each LTIP Unit represents the right to receive one Class A subordinate voting share in accordance with the terms of the LTIP. Unless otherwise approved
by the Board of Directors, RSUs will vest as to 1/3 each on the first, second and third anniversary dates of the date of grant. Prior to November 2017 all
RSU grants have been approved with a four year vesting schedule with 25% vesting after one year and the remainder vesting evenly over the remaining
36 months. RSUs granted since November 2017 have been approved with a three year vesting schedule with 1/3 vesting after one year and the remainder
vesting evenly over the remaining 24 months. A PSU participant’s grant agreement will describe the performance criteria established by the Company’s
Board of Directors that must be achieved for PSUs to vest to the PSU participant, provided the participant is continuously employed by or in the
Company’s service or the service or employment of any of the Company’s affiliates from the date of grant until such PSU vesting
26
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
date. DSUs will be granted solely to directors of the Company, at their option, in lieu of their Board retainer fees. DSUs will vest upon a director ceasing
to act as a director. As at the consolidated balance sheet date there have been nil PSUs or DSUs granted.
The maximum number of Class A subordinate voting shares reserved for issuance, in the aggregate, under the Company's Stock Option Plan and the LTIP
was initially equal to 3,743,692 Class A subordinate voting shares. The number of Class A subordinate voting shares available for issuance, in the
aggregate, under the Stock Option Plan and the LTIP will be automatically increased on January 1st of each year, beginning on January 1, 2016 and
ending on January 1, 2026, in an amount equal to 5% of the aggregate number of outstanding Class A subordinate voting shares and Class B multiple
voting shares on December 31st of the preceding calendar year. As at January 1, 2018 there were 10,740,971 shares available for issuance under the
Company's Stock Option Plan and LTIP.
The following table summarizes the stock option and RSU award activities under the Company's share-based compensation plans for the years ended
December 31, 2017 and 2016 :
Shares Subject to Options Outstanding
Outstanding RSUs
Weighted
Average
Exercise
Price
$
Remaining
Contractual
Term (in
years)
Aggregate
Intrinsic
Value (2)
$
Weighted
Average
Grant Date
Fair Value
$
3.65
31.73
1.37
15.62
—
—
—
9.74
74.80
4.45
31.65
—
—
—
20.67
6.99
—
—
—
—
—
—
6.78
—
—
—
—
—
—
6.81
248,119
—
—
—
—
—
—
328,003
—
—
—
—
—
—
590,700
—
16.13
—
—
—
—
—
—
37.51
—
—
—
—
—
—
Weighted
Average
Grant Date
Fair Value
$
32.19
—
—
—
29.60
32.46
28.90
29.97
—
—
—
81.89
28.85
40.21
53.84
Outstanding
RSUs
428,566
—
—
—
2,116,701
(104,740)
(79,710)
2,360,817
—
—
—
1,172,707
(824,215)
(210,631)
2,498,678
Number of
Options (1)
11,204,026
2,021,723
(3,037,644)
(288,712)
—
—
—
9,899,393
1,061,478
(3,322,993)
(284,332)
—
—
—
7,353,546
4,331,284
6.18
5.69
410,710
December 31, 2015
Stock options granted
Stock options
exercised
Stock options
forfeited
RSUs granted
RSUs settled
RSUs forfeited
December 31, 2016
Stock options granted
Stock options
exercised
Stock options
forfeited
RSUs granted
RSUs settled
RSUs forfeited
December 31, 2017
Stock options
exercisable as of
December 31, 2017
(1) As at December 31, 2017 , 4,359,989 of the outstanding stock options were granted under the Company's Legacy Option Plan and are exercisable for Class B multiple voting
shares, and 2,993,557 of the outstanding stock options were granted under the Company's Stock Option Plan and are exercisable for Class A subordinate voting shares.
(2) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company's
common stock as of December 31, 2017 and December 31, 2016 .
The total intrinsic value of stock options exercised and RSUs settled during the years ended December 31, 2017 and 2016 was $311,354 and $96,926 ,
respectively. The Aggregate intrinsic value of options exercised
27
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
is calculated as the difference between the exercise price of the underlying stock option awards and the market value on the date of exercise.
As of December 31, 2017 and 2016 , there was $157,471 and $94,112 , respectively, of remaining unamortized compensation cost related to unvested
stock options and RSUs granted to the Company’s employees. This cost will be recognized over an estimated weighted-average remaining period of 2.89
years. Total unamortized compensation cost will be adjusted for future changes in estimated forfeitures.
Share-Based Compensation Expense
All share-based awards are measured based on the grant date fair value of the awards and recognized in the Consolidated Statements of Operations and
Comprehensive Loss over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of
the award).
The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model, which requires assumptions, including
the fair value of our underlying common stock, expected term, expected volatility, risk-free interest rate and dividend yield of the Company's common
stock. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used,
share-based compensation expense could be materially different in the future.
These assumptions are estimated as follows:
• Fair Value of Common Stock. The Company uses the Volume Weighted Average Price for its common stock as reported on the New York Stock
Exchange.
• Expected Term. The Company determines the expected term based on the average period the stock options are expected to remain outstanding. The
Company bases the expected term assumptions on its historical behavior combined with estimates of post-vesting holding period.
• Expected Volatility. The Company determines the price volatility factor based on a weighted combination of the Company's historical volatility and
the historical volatility of publicly traded industry peers. To determine its peer group of companies, the Company considers public companies in the
technology industry and selects those that are similar to us in size, stage of life cycle, and financial leverage. The Company intends to continue to
consistently apply this methodology using the same or similar public companies until a sufficient amount of historical information regarding the
volatility of its own common stock price becomes available, or unless circumstances change such that the identified companies are no longer similar,
in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
• Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the yield available on U.S.
Treasury zero-coupon issues with an equivalent remaining term of the stock options for each stock option group.
• Expected Dividend. The Company has not paid and does not anticipate paying any cash dividends in the foreseeable future and, therefore, uses an
expected dividend yield of zero in the option pricing model.
28
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The assumptions used to estimate the fair value of stock options granted to employees are as follows:
Expected volatility
Risk free interest rate
Dividend yield
Average expected life
2017
2016
56.0%
1.85%
Nil
5.15
59.1%
1.32%
Nil
5.07
In addition to the assumptions used in the Black-Scholes option valuation model, the Company must also estimate a forfeiture rate to calculate the share-
based compensation expense for our awards. The Company's forfeiture rate is based on an analysis of its actual forfeitures. The Company will continue to
evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Changes in the
estimated forfeiture rate can have a significant impact on share-based compensation expense as the cumulative effect of adjusting the rate is recognized in
the period the forfeiture estimate is changed. If a revised forfeiture rate is higher/lower than the previously estimated forfeiture rate, an adjustment is
made that will result in an increase/decrease to the share-based compensation expense recognized in the consolidated financial statements.
The following table illustrates the classification of stock-based compensation in the Consolidated Statements of Operations and Comprehensive Loss,
which includes both stock-based compensation and restricted share-based compensation expense.
Cost of revenues
Sales and marketing
Research and development
General and administrative
Years ended
December 31, 2017
December 31, 2016
$
$
1,102
8,986
31,338
7,737
49,163
629
3,951
14,318
4,200
23,098
29
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
17. Changes in Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss), which is reported as a component of shareholders’
equity, for the years ended December 31, 2017 and 2016 :
Balance, beginning of the year
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Balance, end of the year
18. Net Loss per Share
Gains and Losses on Cash Flow Hedges
(all amounts net of tax)
Years ended
December 31, 2017
December 31, 2016
$
$
(1,818) $
8,651
(3,398)
5,253
3,435 $
—
(2,293)
475
(1,818)
(1,818)
The Company applies the two-class method to calculate its basic and diluted net loss per share as both classes of its voting shares are participating
securities with equal participation rights and are entitled to receive dividends on a share for share basis.
The following table summarizes the reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number
of shares outstanding.
Basic and diluted weighted average number of shares outstanding
95,774,897
83,988,597
Years ended
December 31, 2017
December 31, 2016
The following items have been excluded from the diluted weighted average number of
shares outstanding because they are anti-dilutive:
Stock options
Restricted share units
7,353,546
2,498,678
9,852,224
9,899,393
2,360,817
12,260,210
In the years ended December 31, 2017 and 2016 , the Company was in a loss position and therefore diluted loss per share is equal to basic loss per share.
30
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
19.
Income Taxes
The reconciliation of the expected provision for income tax recovery/expense to the actual provision for income tax recovery/expense reported in the
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017 and 2016 is as follows:
Comprehensive loss
Expected income tax expense at Canadian statutory income tax rate of 26.51% (2016-26.51%)
Permanent differences
Share issuance costs
Stock-based compensation benefits
State tax losses
Other items
Foreign tax rate differential
Increase in valuation allowance
Provision for income tax (recovery) expense
2017
$
2016
$
(34,742)
(9,211)
13,015
(4,502)
(4,722)
(4,875)
367
711
9,217
—
(37,173)
(9,856)
5,099
(2,965)
—
—
(39)
(664)
8,425
—
During the years ended December 31, 2017 and 2016 , the loss before income taxes includes foreign income loss of $3,686 and $1,791 , respectively.
The significant components of the Company’s deferred income tax assets and liabilities as of December 31, 2017 and 2016 are as follows:
Deferred tax assets
State tax loss carryforwards
Share issuance costs
Lease accruals and reserves
Tax loss carryforwards
SR&ED expenditure carryforwards
Temporary differences on capital and intangible assets
Investment tax credits
Stock based compensation expense
Total deferred tax assets
Valuation allowance
Deferred tax liabilities
Capitalized software development costs
Total deferred tax liabilities
Net deferred tax liability
2017
$
2016
$
6,839
6,662
5,747
4,283
3,486
3,236
3,046
237
33,536
(31,653)
1,883
3,271
3,271
1,388
—
4,662
4,827
4,936
3,363
2,596
2,766
689
23,839
(22,436)
1,403
1,403
1,403
—
The Company has determined that it is not more likely than not that it will realize any of its deferred tax assets, and therefore a full valuation allowance
has been established against the total deferred tax assets.
31
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The Company does no t have any unrecognized tax benefits.
The Company's accounting policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. In the
years ended December 31, 2017 and 2016 , there was no interest or penalties related to uncertain tax positions.
The Company and its Canadian subsidiaries file federal and provincial income tax returns in Canada. The Company and its subsidiaries in the United
States (U.S.) file federal and state income tax returns in the U.S. and its other foreign subsidiaries file income tax returns in their respective foreign
jurisdictions. The Company remains subject to audit by the relevant tax authorities for the years ended 2012 through 2017 .
As of December 31, 2017 , a corporate income tax audit by the Canadian Revenue Agency (CRA) for the year ended December 31, 2015 remains open.
The Company is subject to the possibility of penalty and interest amounts arising from the outcome of this CRA audit. As of December 31, 2017 , the
Company believes that interest and penalties resulting from the CRA audit are reasonably estimable but not probable. As a result, the Company has not
recorded a contingent liability related to the CRA audit.
On December 22, 2017 the United States signed into law the Tax Cuts and Jobs Act. As a result of this law, the United States federal corporations tax rate
decreased to 21% beginning January 1, 2018. During the year ending December 31, 2017, the impact on the Company's net deferred tax assets and
liabilities as a result of the decrease in the tax rate was not material.
The Company estimates SR&ED expenditures and claims investment tax credits for income tax purposes based on management’s interpretation of the
applicable legislation in the Income Tax Act (“the Act”) and related provincial legislation. These claims are subject to audit by the tax authorities. In the
opinion of management, the treatment of research and development expenditures for income tax purposes is appropriate. Any difference between recorded
refundable tax credits and amounts ultimately received is recorded when the amount becomes known.
As at December 31, 2017 and 2016 , the Company had unused non-capital tax losses of approximately $96,495 and $17,728 respectively. U.S. state losses
of $80,458 are included in the balance at December 31, 2017 . In addition, at December 31, 2017 and 2016 , the Company has SR&ED expenditure pool
balance totaling $13,148 and $12,683 respectively, and investment tax credits of $3,762 and $3,435 respectively, that are due to expire as follows:
2032
2033
2034
2035
2036
2037
Indefinite
Non-Capital
Losses
$
SR&ED
Expenditures
$
Investment
Tax Credits
$
14
52
245
625
30,023
65,536
—
96,495
—
—
—
—
—
—
13,148
13,148
394
197
563
557
1,050
1,001
—
3,762
32
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
20. Segment and Geographical Information
The Company has determined that it operates in a single operating and reportable segment.
The following table presents total external revenues by geographic location, based on the location of the Company’s merchants.
Canada
United States
United Kingdom
Australia
Rest of World
2017
2016
Amount
$
%
Amount
$
%
48,107
478,286
44,590
31,625
70,696
673,304
7.2%
71.0%
6.6%
4.7%
10.5%
100.0%
26,893
284,095
25,958
18,163
34,221
389,330
The following table presents the total net book value of the Company’s long-lived physical assets by geographic location.
2017
2016
Amount
$
%
Amount
$
%
40,309
9,633
418
50,360
80.0%
19.2%
0.8%
100.0%
33,863
11,689
167
45,719
Canada
United States
Rest of World
21.
Business Acquisitions
Oberlo UAB
6.9%
72.9%
6.7%
4.7%
8.8%
100.0%
74.1%
25.5%
0.4%
100.0%
On April 28, 2017, the Company completed the acquisition of Oberlo UAB (Oberlo), a company located in Lithuania that facilitates product sourcing and
dropshipping. The Company acquired 100 percent of the outstanding shares of Oberlo in exchange for cash consideration of $17,239 . The transaction
was accounted for as a business combination. The operations of Oberlo have been consolidated into the Company's results as of the acquisition date.
33
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The following table summarizes the purchase price allocation of the Oberlo assets acquired and liabilities assumed at the acquisition date:
Net closing working capital:
Cash
Trade Accounts Receivable
Accounts Payable
Estimated fair value of identifiable assets acquired:
Acquired technology
Customer relationships
Goodwill
Deferred tax liability on acquired intangibles
Total purchase price
Amount
$
1,521
1,603
(885)
11,590
395
4,813
(1,798)
17,239
The acquired technology, the Oberlo app, was valued at $11,590 and customer relationships were valued at $395 using a discounted cash flow
methodology, and are being amortized over 3 and 2 years, respectively. Goodwill from the Oberlo acquisition is primarily attributable to the expected
synergies that will result from integrating the Oberlo solution with the Company's platform, and the acquisition of an assembled workforce. None of the
goodwill recognized is expected to be deductible for income tax purposes. The deferred tax liability relates to the taxable temporary difference on the
acquired intangible assets.
Prior Year Acquisitions
Boltmade, Inc.
On October 3, 2016, the Company completed the acquisition of Boltmade, Inc. (Boltmade), a product design and development consultancy firm based in
Waterloo, Ontario. The Company acquired 100 percent of the outstanding shares of Boltmade in exchange for cash consideration of $6,015 . The
transaction was accounted for as a business combination. The operations of Boltmade have been consolidated into the Company's results as of the
acquisition date.
The following table summarizes the purchase price allocation of the Boltmade assets acquired and liabilities assumed at the acquisition date:
Net closing working capital
Estimated fair value of identifiable assets acquired:
Net tangible assets acquired
Goodwill
Total purchase price
Amount
$
515
50
5,450
6,015
Goodwill from the Boltmade acquisition is primarily attributable to the incremental income that is expected to be generated by the Company as a result of
acquiring the Boltmade assembled workforce, which is expected to deliver synergies in web and mobile development by providing an immediate pool of
talent to execute on the Shopify Plus product roadmap. No ne of the goodwill recognized is expected to be deductible for income tax purposes.
34
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
Kit CRM Inc.
On April 18, 2016, the Company completed the acquisition of Kit CRM Inc. (Kit), a virtual marketing assistant that leverages messaging to help
businesses market their online stores. The Company acquired 100 percent of the outstanding shares of Kit in exchange for cash consideration of $8,254 .
The transaction was accounted for as a business combination. The operations of Kit have been consolidated into the Company's results as of the
acquisition date.
The following table summarizes the purchase price allocation of the Kit assets acquired and liabilities assumed at the acquisition date:
Net closing working capital
Estimated fair value of identifiable assets acquired:
Acquired technology
Goodwill
Total purchase price
Amount
$
254
1,071
6,929
8,254
The acquired technology, the Kit app, which was valued at $1,071 using a discounted cash flows methodology, is being amortized over 2 years . Goodwill
from the Kit acquisition is primarily attributable to expected synergies as the Company supports the growing trend towards conversational commerce,
supporting the continued growth of gross merchants’ volume by enhancing the Company’s merchants’ marketing capabilities, and the acquisition of an
assembled workforce. No ne of the goodwill recognized is expected to be deductible for income tax purposes.
22. Comparative Figures
Certain comparative figures have been reclassified in order to conform to the current period presentation.
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EXHIBIT 1.3
February 15, 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
In this Management's Discussion and Analysis ("MD&A"), "we", "us", "our", "Shopify" and "the Company" refer to Shopify Inc. and its consolidated subsidiaries,
unless the context requires otherwise. In this MD&A, we explain Shopify's results of operations and cash flows for the fourth quarter and the fiscal years ended
December 31, 2017, 2016 and 2015, and our financial position as of December 31, 2017. You should read this MD&A together with our audited consolidated
financial statements and the accompanying notes for the fiscal years ended December 31, 2017, 2016 and 2015. Additional information regarding Shopify,
including our 2017 annual information form and our annual report on Form 40-F for the year ended December 31, 2017, is available on our website at
www.shopify.com, or at www.sedar.com and www.sec.gov.
Our audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
("U.S. GAAP"). All amounts are in U.S. dollars ("USD") except where otherwise indicated.
Our MD&A is intended to enable readers to gain an understanding of Shopify’s results of operations, cash flows and financial position. To do so, we provide
information and analysis comparing our results of operations, cash flows and financial position for the most recently completed fiscal year with the preceding
fiscal year. We also provide analysis and commentary that we believe will help investors assess our future prospects. In addition, we provide “forward-looking
statements” that are not historical facts, but that are based on our current estimates, beliefs and assumptions and which are subject to known and unknown
important risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from current expectations. Forward-looking
statements are intended to assist readers in understanding management's expectations as of the date of this MD&A and may not be suitable for other purposes. See
“Forward-looking statements” below.
In this MD&A, references to our “solutions” means the combination of products and services that we offer to merchants, and references to “our merchants” as of
a particular date means the total number of unique shops that are paying for a subscription to our platform.
Forward-looking statements
This MD&A contains forward-looking statements under the provisions of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the
U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, and forward-looking information within the meaning of
applicable Canadian securities legislation.
In some cases, you can identify forward-looking statements by words such as “may”, "might", “will”, “should”, “could”, “expects”, “intends”, “plans”,
“anticipates”, “believes”, “estimates”, “predicts”, “projects”, “potential”, “continue”, or the negative of these terms or other similar words. In addition, any
statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances,
including any underlying assumptions, are forward-looking. In particular, forward-looking statements in this MD&A include, but are not limited to, statements
about:
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the continued expansion of the number of channels for merchants to transact through;
the continued growth of our app developer, theme designer and partner ecosystem;
the achievement of advances in, and expansion of, our platform and our solutions;
our revenue growth objectives and expectations about future profitability;
plans to continue making investments to drive future growth;
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our expectation that as a result of the continued growth of our merchant solutions offerings, our seasonality will continue to affect our quarterly
results and our business may become more seasonal in the future, and that historical patterns may not be a reliable indicator of our future
performance;
our expectation that our results of operations will be adversely impacted by an increase in the value of the Canadian dollar relative to the U.S. dollar;
our expectation that the cost of subscription solutions will increase as we continue to invest in growing our business and as the number of merchants
utilizing the platform increases along with the costs of supporting those merchants;
our expectation that our subscription solutions gross margin percentage will fluctuate modestly based on the mix of subscription plans that our
merchants select and the timing of expenditures related to infrastructure expansion projects;
our expectation that the cost of merchant solutions will increase in absolute dollars in the future as the number of merchants utilizing these solutions
increases and the volume processed also grows;
our expectation that there may be increases in our gross margin percentage of merchant solutions as additional higher-margin merchant solutions
offerings, such as Shopify Capital and Shopify Shipping, become a larger component of our merchant solutions revenue as we continue to expand
Shopify Payments internationally;
our plan to continue to expand sales and marketing efforts to attract new merchants, retain revenue from existing merchants and increase revenues
from both new and existing merchants, including adding sales personnel and expanding our marketing activities to continue to generate additional
leads and build brand awareness;
our expectation that sales and marketing expenses will decline as a percentage of total revenues over time;
our expectation that research and development expenses will increase in absolute dollars as we continue to increase the functionality of our platform,
but will decline as a percentage of total revenues over the long term;
our expectation that general and administrative expenses will increase on an absolute dollar basis but may decrease as a percentage of total revenues
as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business;
our expectation that the overall trend of merchant solutions revenue making up an increasing component of total revenues over time, most notably in
the fourth quarter due to higher holiday volume, will continue over time;
our belief that we have sufficient liquidity to meet our current and planned financial obligations over the next 12 months;
our expectations regarding contractual and contingent obligations;
our accounting estimates and assumptions made in the preparation of our financial statements;
our expectation that we will not pay any cash dividends in the foreseeable future; and
our expectations regarding the impact of accounting standards not yet adopted.
The forward-looking statements contained in this MD&A are based on our management’s perception of historic trends, current conditions and expected future
developments, as well as other assumptions that management believes are appropriate in the circumstances, which include, but are not limited to:
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our ability to offer more sales channels that can connect to the platform;
our belief in the increasing importance of a multi-channel platform that is both fully integrated and easy to use ;
our belief that commerce transacted over mobile will continue to grow more rapidly than desktop transactions;
our ability to expand our merchant base, retain revenue from existing merchants as they grow their businesses, and increase sales to both new and
existing merchants;
our ability to manage our growth effectively;
our ability to protect our intellectual property rights;
our belief that our merchant solutions make it easier for merchants to start a business and grow on our platform;
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our ability to develop new solutions to extend the functionality of our platform, provide a high level of merchant service and support;
our ability to hire, retain and motivate qualified personnel;
our ability to enhance our ecosystem and partner programs, and the assumption that this will drive growth in our merchant base, further accelerating
growth of the ecosystem;
our belief that our investments and acquisitions will increase our revenue base, improve the retention of this base and strengthen our ability to increase
sales to our merchants and help drive our growth;
our ability to achieve our revenue growth objectives while controlling costs and expenses, and our ability to achieve or maintain profitability;
our belief that monthly recurring revenue ("MRR") is most closely correlated with the long-term value of our merchant relationships;
our assumptions regarding the principal competitive factors in our markets;
our ability to predict future commerce trends and technology;
our assumptions that higher-margin solutions such as Shopify Capital and Shopify Shipping will continue to grow through increased adoption and
international expansion;
our expectation that Shopify Payments will continue to expand internationally;
our belief that our investments in sales and marketing initiatives will continue to be effective in growing the number of merchants using our platform,
in retaining revenue from existing merchants and increasing revenues from both;
our ability to develop processes, systems and controls to enable our internal support functions to scale with the growth of our business;
our ability to increase the functionality of our platform;
our ability to obtain sufficient space for our growing employee base;
our ability to retain key personnel;
our ability to protect against currency, interest rate, concentration of credit and inflation risks;
our assumptions as to our future expenses and financing requirements;
our assumptions as to our critical accounting policies and estimates; and
our assumptions as to the effects of accounting pronouncements to be adopted.
Factors that may cause actual results to differ materially from current expectations may include, but are not limited to, risks and uncertainties that are discussed in
greater detail in the "Risk Factors" section of our Annual Information Form for the year ended December 31, 2017 and elsewhere in this MD&A, including but not
limited to risks relating to:
sustaining our rapid growth;
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• managing our growth;
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our history of losses and our potential inability to achieve profitability;
our limited operating history in new and developing markets and new geographic regions;
our ability to innovate;
a denial of service attack or security breach;
payments processed through Shopify Payments;
our reliance on a single supplier to provide the technology we offer through Shopify Payments;
the security of personal information we store relating to merchants and their customers, and consumers with whom we have a direct relationship;
evolving privacy laws and regulations, cross-border data transfer restrictions, data localization requirements and other domestic or foreign regulations
may limit the use and adoption of our services;
our potential inability to hire, retain and motivate qualified personnel;
serious software errors or defects;
exchange rate fluctuations that may negatively affect our results of operations;
our potential inability to achieve or maintain data transmission capacity;
the reliance of our growth in part on the success of our strategic relationships with third parties;
our potential failure to maintain a consistently high level of customer service;
our use of a limited number of data centers and a cloud-based platform to deliver our services;
ineffective operations of our solutions when accessed through mobile devices;
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changes to technologies used in our platform or new versions or upgrades of operating systems and internet browsers;
the impact of worldwide economic conditions, including the resulting effect on spending by small and medium-sized businesses ("SMBs") or their
customers;
potential claims by third parties of intellectual property infringement;
our potential inability to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third parties from making
unauthorized use of our technology;
our use of "open source" software;
our potential inability to generate traffic to our website through search engines and social networking sites;
our potential failure to effectively maintain, promote and enhance our brand;
our dependence on the continued services and performance of our senior management and other key employees;
activities of merchants or partners or the content of merchants' shops;
seasonal fluctuations;
international sales and the use of our platform in various countries;
our reliance on computer hardware, purchased or leased, software licensed from and services rendered by third parties, in order to provide our
solutions and run our business, sometimes by a single-source supplier;
our potential inability to compete successfully against current and future competitors;
Shopify Capital and offering merchant cash advances;
our pricing decisions for our solutions;
acquisitions and investments;
provisions of our financial instruments;
our potential inability to raise additional funds as may be needed to pursue our growth strategy or continue our operations, on favorable terms or at all;
unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns;
new tax laws could be enacted or existing laws could be applied to us or our merchants;
being required to collect federal, state and local business taxes and sales and use taxes in additional jurisdictions or for past sales;
our tax loss carryforwards;
our dependence upon consumers’ and merchants’ access to, and willingness to use, the internet for commerce;
ownership of our shares;
our sensitivity to interest rate fluctuations;
our concentration of credit risk, and the ability to mitigate that risk using third parties; and
the risk of inflation.
Although we believe that the plans, intentions, expectations, assumptions and strategies reflected in our forward-looking statements are reasonable, these
statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors which are, in some
cases, beyond our control. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual results may vary
significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future results. You should read
this MD&A and the documents that we reference in this MD&A completely and with the understanding that our actual future results may be materially different
from any future results expressed or implied by these forward-looking statements.
The forward-looking statements in this MD&A represent our views as of the date of this MD&A. We anticipate that subsequent events and developments may
cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of
doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date
of this MD&A.
4
Overview
Shopify is the leading cloud-based, multi-channel commerce platform designed for small and medium-sized businesses. Shopify builds web- and mobile-based
software and lets merchants easily set up beautiful online storefronts that are rich with retail functionality. Merchants use our software to run their business across
all of their sales channels, including web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces. The Shopify platform
provides merchants with a single view of their business and customers across all of their sales channels and enables them to manage products and inventory,
process orders and payments, ship orders, build customer relationships and leverage analytics and reporting all from one integrated back office.
In an era where social media, cloud computing, mobile devices and data analytics are creating new possibilities for commerce, Shopify provides differentiated
value by offering merchants:
A multi-channel front end . Our software enables merchants to easily display, manage and sell their products across over a dozen different sales channels, including
web and mobile storefronts, physical retail locations, pop-up shops, social media storefronts, such as Facebook and Pinterest, apps, buy buttons, and marketplaces,
such as Amazon and eBay. The Shopify API has been developed to support custom storefronts that let merchants sell anywhere, in any language.
A single integrated back end . Our software provides one single integrated, easy-to-use back end that merchants use to manage their business and customers across
these multiple sales channels. Merchants use their Shopify dashboard to manage products and inventory, process orders and payments, ship orders, build customer
relationships, leverage analytics and reporting, and access financing.
A data advantage . Our software is delivered to merchants as a service, and operates on a shared infrastructure, and as a result we have amassed tens of billions of
data points to date. With each new transaction processed, we grow our data proficiency for SMBs. This cloud-based infrastructure not only relieves merchants from
running and securing their own hardware; it also consolidates all the data generated by the billions of interactions between consumers and merchants’ shops, as
well as those of our merchants on the Shopify platform, providing rich data to inform both our own decisions as well as those of our merchants.
Shopify also enables merchants to build their own brand, leverage mobile technology, and handle massive traffic spikes with flexible infrastructure.
Brand ownership . Unlike an online marketplace, Shopify is designed to help our merchants own their brand and make their consumer experience memorable and
distinctive. We recognize that in a world where consumers have more choices than ever before, a merchant’s brand is increasingly important. If a consumer
searches a third-party marketplace or ecommerce site and selects a merchant’s product from among thousands of search results, the consumer is more likely to
remember the brand of the third-party site than the brand of the merchant. The Shopify platform is designed to allow a merchant to keep their brand present in
every interaction to help build customer loyalty and competitive advantage against traditional retailers.
Mobile . As ecommerce expands as a percentage of overall retail transactions, today’s consumers expect to be able to transact anywhere, anytime, on any device
through an experience that is simple, seamless and secure. As transactions over mobile devices now represent the majority of transactions across online stores
powered by Shopify, the mobile experience is a merchants’ primary and most important interaction with online consumers. For several years Shopify has focused
on enabling mobile commerce, and the Shopify platform now includes a mobile-optimized checkout system, designed to enable merchants' consumers to more
easily buy products over mobile websites. Our merchants are now able to offer their customers the ability to quickly and securely check out by using Shopify Pay
and Apple Pay on the web, and we continue to explore other new ways to accelerate checkout. Shopify’s mobile capabilities are not limited to the front end:
merchants who are often on-the-go find themselves managing their storefronts via their mobile devices, as Shopify continues to strive to make it ever-easier to do
so.
Infrastructure . We build our platform to address the growing challenges facing merchants with the aim of making complex tasks simple. The Shopify platform is
engineered to enterprise-level standards and functionality while being
5
designed for simplicity and ease of use. We also design our platform with a robust technical infrastructure able to manage large spikes in traffic that accompany
events such as new product releases, holiday shopping seasons and flash sales. We are constantly innovating and enhancing our platform, with our continuously
deployed, multi-tenant architecture ensuring all of our merchants are always using the latest technology.
This combination of ease of use with enterprise-level functionality allows merchants to start with a Shopify store and grow with our platform to almost any size.
Using Shopify, merchants may never need to re-platform. Our Shopify Plus subscription plan was created to accommodate larger merchants, with additional
functionality, scalability and support requirements. Shopify Plus is also designed for larger merchants not already on Shopify who want to migrate from their
expensive and complex legacy solutions and get more functionality.
A rich ecosystem of app developers, theme designers and other partners, such as digital and service professionals, marketers, photographers, and affiliates has
evolved around the Shopify platform. Approximately 15,000 of these partners have referred merchants to Shopify over the last year, and this strong, symbiotic
relationship continues to grow. We believe this ecosystem has grown in part due to the platform’s functionality, which is highly extensible and can be expanded
through our application program interface ("API") and the approximately 2,300 apps available in the Shopify App Store. The partner ecosystem helps drive the
growth of our merchant base, which in turn further accelerates growth of the ecosystem.
Our mission is to make commerce better for everyone, and we believe we can help merchants of nearly all sizes and retail verticals realize their potential. While
our platform can scale to meet the needs of large merchants, we focus on selling to SMBs and entrepreneurs. Most of our merchants are on subscription plans that
cost less than $50 per month, which is in line with our focus of providing cost effective solutions for early stage businesses. In the year ended December 31, 2017 ,
our platform facilitated Gross Merchandise Volume ("GMV") of $26.3 billion , representing an increase of 71.2% from the year ended December 31, 2016 . A
detailed description of this metric is presented below in the section entitled, “Key Performance Indicators.”
Our business has experienced rapid growth. During the year ended December 31, 2017 our total revenue was $ 673.3 million , an increase of 72.9% versus the year
ended December 31, 2016 . Our business model has two revenue streams: a recurring subscription component we call subscription solutions and a merchant
success-based component we call merchant solutions.
In the year ended December 31, 2017 , subscription solutions revenues accounted for 46.0% of our total revenues ( 48.4% in the year ended December 31, 2016 ).
We offer a range of plans that increase in price depending on additional features and economic considerations. Our highest-end plan, Shopify Plus, is offered at a
starting rate that is several times that of our Shopify Advanced plan. Shopify Plus caters to merchants with higher-volume sales and offers additional functionality,
scalability and support requirements, including a dedicated Merchant Success Manager. Nestle, Red Bull, Rebecca Minkoff, and Kylie Cosmetics are a few of the
Shopify Plus merchants seeking a reliable, cost-effective and scalable commerce solution. The flexibility of our pricing plans is designed to help our merchants
grow in a cost-effective manner and to provide more advanced features and support as their business needs evolve.
Revenue from subscription solutions is generated through the sale of subscriptions to our platform as well as from the sale of themes, apps and the registration of
domain names. Our merchants typically enter into monthly subscription agreements. As described in the section entitled "Key Components of Results of
Operations," the revenue from these agreements is recognized ratably over the relative period and therefore we have deferred revenue on our balance sheet. We do
not consider this deferred revenue balance to be a good indicator of future revenue. Instead, we believe Monthly Recurring Revenue ("MRR") is most closely
correlated with the long-term value of our merchant relationships. Subscription solutions revenues increased from $ 188.6 million in the year ended December 31,
2016 to $ 310.0 million in the year ended December 31, 2017 , representing an increase of 64.4% . As of December 31, 2017 , MRR totaled $ 29.9 million ,
representing an increase of 61.8% relative to MRR at December 31, 2016 . A detailed description of this metric is presented below in the section entitled, “Key
Performance Indicators.” The number of merchants on our platform has grown from approximately 377,500, as at December 31, 2016 , to approximately 609,000,
as at December 31, 2017 .
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We offer a variety of merchant solutions that are designed to add value to our merchants and augment our subscription solutions. During the year ended
December 31, 2017 , merchant solutions revenues accounted for 54.0% of total revenues ( 51.6% in the year ended December 31, 2016 ). We principally generate
merchant solutions revenues from payment processing fees from Shopify Payments. Shopify Payments is a fully integrated payment processing service that allows
our merchants to accept and process payment cards online and offline. In addition to payment processing fees from Shopify Payments, we also generate merchant
solutions revenue from transaction fees, Shopify Capital, Shopify Shipping, referral fees from partners, and sales of point-of-sale ("POS") hardware. Our merchant
solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform. Merchant solutions revenues increased
from $ 200.7 million in the year ended December 31, 2016 , to $ 363.3 million in the year ended December 31, 2017 , representing an increase of 81.0% .
Our business model is driven by our ability to attract new merchants, retain revenue from existing merchants, and increase sales to both new and existing
merchants. Our merchants represent a wide array of retail verticals and business sizes and no single merchant has ever represented more than five percent of our
total revenues in a single reporting period. We believe that our future success is dependent on many factors, including our ability to grow our merchant base,
improve our platform to help our merchants sell more, build more sales channels and additional functionality to make our merchants more effective, grow our
ecosystem of partners that bolster the functionality of our platform, create and strengthen relationships with referral partners, and build with a focus on maximizing
long-term value.
We have focused on rapidly growing our business and plan to continue making investments to drive future growth. We believe that our investments will increase
our revenue base, improve the retention of this base and strengthen our ability to increase sales to our merchants. If we are unable to achieve our revenue growth
objectives, we may not be able to achieve or maintain profitability.
Key Performance Indicators
Key performance indicators, which we do not consider to be non-GAAP measures, that we use to evaluate our business, measure our performance, identify trends
affecting our business, formulate financial projections and make strategic decisions include Monthly Recurring Revenue ("MRR"), Gross Merchandise Volume
("GMV"), and Monthly Billings Retention Rate ("MBRR"). Our key performance indicators may be calculated in a manner different than similar key performance
indicators used by other companies.
The following table sets forth the key performance indicators that we use to evaluate our business for the years ended December 31, 2017 and 2016 .
Monthly Recurring Revenue
Gross Merchandise Volume
Monthly Billings Retention Rate
Monthly Recurring Revenue
Years ended December 31,
2017
2016
(in thousands)
$
$
29,877 $
26,320,150 $
18,461
15,374,166
over 100%
over 100%
We calculate MRR at the end of each period by multiplying the number of merchants who have subscription plans with us at the period end date by the average
monthly subscription plan fee in effect on the last day of that period, assuming they maintain their subscription plans the following month. MRR allows us to
average our various pricing plans and billing periods into a single, consistent number that we can track over time. We also analyze the factors that make up MRR,
specifically the number of paying merchants using our platform and changes in our average revenue earned from subscription plan fees per paying merchant. In
addition, we use MRR to forecast monthly, quarterly and annual subscription plan revenue, which makes up the majority of our subscriptions solutions revenue.
We had $29.9 million of MRR as at December 31, 2017 .
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Gross Merchandise Volume
GMV is the total dollar value of orders facilitated through our platform in the period, net of refunds, and inclusive of shipping and handling, duty and value-added
taxes. GMV does not represent revenue earned by us. However, the volume of GMV facilitated through our platform is an indicator of the success of our
merchants and the strength of our platform. Our merchant solutions revenues are also directionally correlated with the level of GMV facilitated through our
platform. For the years ended December 31, 2017 and 2016 , we facilitated GMV of $ 26.3 billion and $ 15.4 billion , respectively. For merchants on the platform
for 12 months or more, year-over-year GMV growth was approximately 20% or higher for every month of 2017.
Monthly Billings Retention Rate
MBRR is calculated as of the end of each month by considering the cohort of merchants on the Shopify platform as of the beginning of the month and dividing
total billings attributable to this cohort in the then-current month by total billings attributable to this cohort in the immediately preceding month. Billings include
billings from subscriptions, recurring apps (net of developer cost), Shopify Payments fees, transaction fees, and Shopify Shipping fees (net of shipping costs). For
annual fiscal periods, we report the average MBRR over the preceding 12 months. We use MBRR to evaluate our ability to maintain and expand our relationships
with merchants.
To provide a deeper understanding of our merchant economics, the chart below displays the annual revenue for merchant cohorts that joined the Shopify platform
at different times in our history. A merchant decline within any cohort has been largely offset by increased revenue from remaining merchants within that cohort.
This shows what we believe to be one of the most powerful drivers of our business model: as our merchants have grown their businesses and become more
successful, they have consumed more of our merchant solutions and upgraded to higher subscription plans or purchased additional apps.
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Factors Affecting the Comparability of our Results
Change in Revenue Mix
As a result of the continued growth of Shopify Payments, Shopify Capital, Shopify Shipping, transaction fees, and revenue sharing agreements, our revenues from
merchant solutions have generally increased significantly. Merchant solutions are intended to complement subscription solutions by providing additional value to
our merchants and increasing their use of our platform. Gross profit margins on Shopify Payments, the biggest driver of merchant solutions revenue, are typically
lower than on subscription solutions due to the associated third-party costs of providing these solutions. We view this revenue stream as beneficial to our operating
margins, as Shopify Payments requires significantly less sales and marketing and research and development expense than Shopify’s core subscription business. The
lower margins on merchant solutions compared to subscription solutions means that the continued growth of merchant solutions is likely to cause a decline in our
overall gross margin percentage. However, in the current fiscal year this impact was masked by improved margins on Shopify Payments and the relative growth of
the higher margin solutions, Shopify Capital and Shopify Shipping, as well as an increase in referral fees from partners.
Seasonality
Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants facilitated through our platform. Our merchants typically
process additional GMV during the fourth quarter holiday season. As a result, we have historically generated higher merchant solutions revenues in our fourth
quarter than in other quarters. While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely
masked seasonal trends to date. As a result of the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in
the future and that historical patterns in our business may not be a reliable indicator of our future performance.
Foreign Currency Fluctuations
While most of our revenues are denominated in U.S. dollars, a significant portion of our operating expenses are incurred in Canadian dollars. As a result, our
results of operations will be adversely impacted by an increase in the value of the Canadian dollar relative to the U.S. dollar. In addition, a portion of Shopify
Payments revenue is based on the local currency of the country in which the applicable merchant is located and these transactions expose us to currency
fluctuations to the extent non-U.S. dollar based payment processing and other merchant solutions revenues increase. Refer to the "Quantitative and Qualitative
Disclosures about Market Risk— Foreign Currency Exchange Risk" section below for additional information on the effect on reported results of changes in foreign
exchange rates.
Key Components of Results of Operations
Revenues
We derive revenues from subscription solutions and merchant solutions.
Subscription Solutions
We principally generate subscription solutions revenues through the sale of subscriptions to our platform. We also generate associated subscription solutions
revenues from the sale of themes, apps, and the registration of domain names.
We offer subscription plans with various price points, from entry level plans to Shopify Plus, a plan for merchants with higher-volume sales that offers additional
functionality, scalability and support. Our subscription plans typically have a one-month term, although a small number of our merchants have annual or multi-year
subscription terms. Subscription terms automatically renew unless notice of cancellation is provided in advance. Merchants purchase subscription plans directly
from us. Subscription fees are paid to us at the start of the applicable subscription period, regardless of the length of the subscription period. As subscription fees
are received in advance of providing the related services, we
9
record deferred revenue on our consolidated balance sheet for the unearned revenue and recognize revenue ratably over the related subscription period. These
subscription fees are non-refundable.
We also generate additional subscription solutions revenues from merchants that have subscription plans with us through the sale of themes, apps, and the
registration of domain names. Revenues from the sale of themes and apps are recognized at the time of the transaction. The right to use domain names is sold
separately and is recognized on a ratable basis over the contractual term, which is typically an annual term. Revenues from the sale of apps are recognized net of
amounts attributable to the third-party app developers, while revenues from the sale of themes and domains are recognized on a gross basis. Revenues from the sale
of themes, apps, and the registration of domain names have been classified within subscription solutions on the basis that they are typically sold at the time the
merchant enters into the subscription arrangement or because they are charged on a recurring basis.
Merchant Solutions
We generate merchant solutions revenues from payment processing fees from Shopify Payments, transaction fees, Shopify Shipping, Shopify Capital, referral fees
from partners, and sales of POS hardware.
The significant majority of merchant solutions revenues are generated from Shopify Payments. Revenue from processing payments is recognized at the time of the
transaction. For Shopify Payments transactions, fees are determined based in part on a percentage of the dollar amount processed plus a per transaction fee, where
applicable.
For subscription plans where the merchant does not sign up for Shopify Payments, we typically charge a transaction fee based on a percentage of GMV sold
through the platform. We bill our merchants for transaction fees at the end of a 30-day billing cycle or when predetermined billing thresholds are surpassed. Any
fees that have not been billed are accrued as an unbilled receivable at the end of the reporting period.
Shopify Capital, a merchant cash advance ("MCA") program, was launched in the United States in April 2016 to help eligible merchants secure financing and
accelerate the growth of their business by providing access to simple, fast, and convenient working capital. We apply underwriting criteria prior to purchasing the
eligible merchant's future receivables to help ensure collectibility. Under Shopify Capital, we purchase a designated amount of future receivables at a discount. The
purchase price is paid to the merchant at the time the MCA is entered into, and the merchant remits a fixed percentage of their daily sales until the outstanding
balance has been remitted. As cash remittances are collected by us, a portion is recognized ratably as a reduction to the merchant's receivable balance, and a
portion, which is related to the discount, is recognized ratably as merchant solutions revenue. We have mitigated some of the risks associated with Shopify Capital
by entering into an agreement with a third party to insure merchant cash advances offered by Shopify Capital.
Shopify Shipping allows merchants to buy and print shipping labels and track orders directly within the Shopify platform. We bill our merchants when they have
purchased shipping labels in excess of predetermined billing thresholds, and any charges that have not been billed are accrued as unbilled receivables at the end of
the reporting period. For Shopify Shipping, fees are determined based on the type of labels purchased or the arrangement negotiated with third parties. In the case
of the former, we recognize revenue from Shopify Shipping net of shipping costs, as we are the agent in the arrangement with merchants.
We also generate merchant solutions revenues in the form of referral fees from partners to whom we direct business and with whom we have an arrangement in
place. Pursuant to terms of the agreements with our partners, these revenues can be recurring or non-recurring. Where the agreement provides for recurring
payments to us, we typically earn revenues so long as the merchant that we have referred to the partner continues to use the services of the partner. Non-recurring
revenues generally take the form of one-time payments that we receive when we initially refer the merchant to the partner. In either case, we recognize referral
revenues when we are entitled to receive payment from the partner pursuant to the terms of the underlying agreement.
In connection with Shopify POS, a sales channel that lets merchants sell their products and accept payments in-person from a mobile device, we sell compatible
hardware products which are sourced from third-party vendors. We recognize
10
revenues from the sale of POS hardware when title passes to the merchant in accordance with the shipping terms of the sale.
For a discussion of how we expect seasonal factors to affect our merchant solutions revenue, see “Factors Affecting the Comparability of our Results—
Seasonality.”
Cost of Revenues
Cost of Subscription Solutions
Cost of subscription solutions consists primarily of costs associated with hosting infrastructure, billing processing fees and operations and merchant support
expenses. Operations and merchant support expenses include costs associated with our data and network infrastructure and personnel-related costs directly
associated with operations and merchant support, including salaries, benefits and stock-based compensation, as well as allocated overhead. Overhead associated
with facilities, information technology and depreciation is allocated to our cost of revenues and operating expenses based on headcount.
Additionally, cost of subscription solutions includes costs we are required to pay to third-party developers in connection with sales of themes. Our paid themes are
primarily designed by third-party developers who earn fees for each theme sold by us.
Also included as cost of subscription solutions are domain registration fees and amortization of internal use software relating to the capitalized costs associated
with the development of the platform and data infrastructure.
We expect that cost of subscription solutions will increase in absolute dollars as we continue to invest in growing our business, and as the number of merchants
utilizing the platform increases along with the costs of supporting those merchants. Over time, we expect that our subscription solutions gross margin percentage
will fluctuate modestly based on the mix of subscription plans that our merchants select and the timing of expenditures related to infrastructure expansion projects.
Cost of Merchant Solutions
Cost of merchant solutions primarily consists of costs that we incur when transactions are processed using Shopify Payments, such as credit card interchange and
network fees (charged by credit card providers such as Visa, MasterCard and American Express) as well as third-party processing fees. Cost of merchant solutions
also consists of costs associated with hosting infrastructure and operations and merchant support expenses, including personnel-related costs directly associated
with merchant solutions such as salaries, benefits and stock-based compensation, as well as allocated overhead. Overhead associated with facilities, information
technology and depreciation is allocated to our cost of revenues and operating expenses based on headcount.
Cost of merchant solutions also includes costs associated with POS hardware, such as the cost of acquiring the hardware inventory, including hardware purchase
price, expenses associated with our use of a third-party fulfillment company, shipping and handling and inventory adjustments. Also included within cost of
merchant solutions is amortization of internal use software relating to capitalized costs associated with the development of merchant solutions.
We expect that the cost of merchant solutions will increase in absolute dollars in future periods as the number of merchants utilizing these solutions increases and
the volume processed also grows. We believe that we may see increases in our gross margin percentage of merchant solutions as additional higher-margin
merchant solutions offerings, such as Shopify Capital and Shopify Shipping, become a larger component of our merchant solutions revenue as we continue to
expand Shopify Payments internationally.
11
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of marketing programs, partner referral payments related to merchant acquisitions, costs associated with partner
and developer conferences, employee-related expenses for marketing, business development and sales, as well as the portion of merchant support required for the
onboarding of prospective new merchants. Other costs within sales and marketing include travel-related expenses and corporate overhead allocations. Costs to
acquire merchants are expensed as incurred, however, starting in 2018 contract costs will be amortized over the expected life of their relative contract. We plan to
continue to expand sales and marketing efforts to attract new merchants, retain revenue from existing merchants and increase revenues from both new and existing
merchants. This growth will include adding sales personnel and expanding our marketing activities to continue to generate additional leads and build brand
awareness. Sales and marketing expenses are expected to increase in absolute dollars but over time, we expect sales and marketing expenses will eventually decline
as a percentage of total revenues.
Research and Development
Research and development expenses consist primarily of employee-related expenses for product management, product development, product design, data analytics,
contractor and consultant fees and corporate overhead allocations. We continue to focus our research and development efforts on adding new features and
solutions, and increasing the functionality and enhancing the ease of use of our platform. While we expect research and development expenses to increase in
absolute dollars as we continue to increase the functionality of our platform, over the long term we expect our research and development expenses will eventually
decline as a percentage of total revenues.
General and Administrative
General and administrative expenses consist of employee-related expenses for finance and accounting, legal, administrative, human relations and IT personnel,
professional services fees, expected and actual losses related to Shopify Payments and Shopify Capital, other corporate expenses and corporate overhead
allocations. We expect that general and administrative expenses will increase on an absolute dollar basis but may decrease as a percentage of total revenues as we
focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business.
Other Income (Expenses)
Other income (expenses) consists primarily of transaction gains or losses on foreign currency and interest income net of interest expense.
12
Results of Operations
The following table sets forth our consolidated statement of operations for the years ended December 31, 2017 , 2016 , and 2015 .
Years ended December 31,
2017
2016
2015
(in thousands, except share and per share data)
Revenues:
Subscription solutions
Merchant solutions
Cost of revenues (1) :
Subscription solutions
Merchant solutions
Gross profit
Operating expenses:
Sales and marketing (1)
Research and development (1)
General and administrative (1)
Total operating expenses
Loss from operations
Other income (expense)
Net loss
Basic and diluted net loss per share attributable to shareholders (2)
Weighted average shares used to compute net loss per share attributable to shareholders
(1) Includes stock-based compensation expense and related payroll taxes as follows:
Cost of revenues
Sales and marketing
Research and development
General and administrative
$
310,031
$
188,606
$
363,273
673,304
61,267
231,784
293,051
380,253
225,694
135,997
67,719
429,410
(49,157)
9,162
(39,995)
(0.42)
$
$
200,724
389,330
39,478
140,357
179,835
209,495
129,214
74,336
43,110
246,660
(37,165)
1,810
(35,355)
(0.42)
$
$
111,979
93,254
205,233
24,531
67,447
91,978
113,255
70,374
39,722
20,915
131,011
(17,756)
(1,034)
(18,790)
(0.30)
95,774,897
83,988,597
61,716,065
Years ended December 31,
2017
2016
(in thousands)
2015
1,281
$
718
$
9,876
34,560
9,485
4,444
15,364
4,495
55,202
$
25,021
$
345
1,351
6,373
2,419
10,488
$
$
$
$
(2) For the period preceding our initial public offering, does not give effect to the conversion of Series A, Series B and Series C convertible preferred shares, which occurred upon the
consummation of our initial public offering on May 27, 2015.
13
The following table sets forth our consolidated statement of operations as a percentage of total revenues for the years ended December 31, 2017 , 2016 , and 2015 .
Revenues
Subscription solutions
Merchant solutions
Cost of revenues
Subscription solutions
Merchant solutions
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expenses)
Net loss
Years ended December 31,
2017
2016
2015
46.0 %
54.0 %
100.0 %
9.1 %
34.4 %
43.5 %
56.5 %
33.5 %
20.2 %
10.1 %
63.8 %
(7.3)%
1.4 %
(5.9)%
48.4 %
51.6 %
100.0 %
10.1 %
36.1 %
46.2 %
53.8 %
33.2 %
19.1 %
11.1 %
63.4 %
(9.5)%
0.5 %
(9.1)%
54.6 %
45.4 %
100.0 %
12.0 %
32.9 %
44.8 %
55.2 %
34.3 %
19.4 %
10.2 %
63.8 %
(8.7)%
(0.5)%
(9.2)%
The following table sets forth our consolidated revenues by geographic location for the years ended December 31, 2017 , 2016 , and 2015 .
Revenues:
Canada
United States
United Kingdom
Australia
Rest of World
Total Revenues
Years ended December 31,
2017
2016
2015
(in thousands)
$
$
48,107
$
26,893
$
478,286
44,590
31,625
70,696
284,095
25,958
18,163
34,221
673,304
$
389,330
$
14,691
144,748
15,436
10,531
19,827
205,233
The following table sets forth our consolidated revenues by geographic location as a percentage of total revenues for the years ended December 31, 2017 , 2016 ,
and 2015 .
Revenues:
Canada
United States
United Kingdom
Australia
Rest of World
Total Revenues
Years ended December 31,
2017
2016
2015
7.2%
71.0%
6.6%
4.7%
10.5%
100.0%
6.9%
72.9%
6.7%
4.7%
8.8%
100.0%
7.2%
70.5%
7.5%
5.1%
9.7%
100.0%
14
Discussion of the Results of Operations for the years ended December 31, 2017 , 2016 , and 2015
Revenues
Revenues:
Subscription solutions
Merchant solutions
Percentage of revenues:
Subscription solutions
Merchant solutions
Total revenues
Subscription Solutions
Years ended December 31,
2017
2016
2015
2017 vs 2016
% Change
2016 vs 2015
% Change
(in thousands, except percentages)
$
$
310,031
363,273
673,304
$
$
188,606
200,724
389,330
$
$
111,979
93,254
205,233
64.4%
81.0%
72.9 %
68.4%
115.2%
89.7 %
46.0 %
54.0 %
100.0 %
48.4 %
51.6 %
100.0 %
54.6 %
45.4 %
100.0 %
Subscription solutions revenues increased $ 121.4 million , or 64.4% , for the year ended December 31, 2017 compared to the same period in 2016 . Subscription
solutions revenues increased $ 76.6 million , or 68.4% , for the year ended December 31, 2016 compared to the same period in 2015. The increase in both periods
was primarily a result of growth in MRR driven by the higher number of merchants using our platform.
Merchant Solutions
Merchant solutions revenues increased $ 162.5 million , or 81.0% , for the year ended December 31, 2017 compared to the same period in 2016 . The increase in
merchant solutions revenues was primarily a result of Shopify Payments revenue growing by $111.1 million, or 68.5%, in 2017 compared to the same period in
2016 . This increase was a result of an increase in the number of merchants using our platform, continued expansion into new geographical regions, and an increase
in adoption of Shopify Payments by our merchants, which drove $4.0 billion of additional GMV facilitated using Shopify Payments in 2017 compared to the same
period in 2016 . As at December 31, 2017 Shopify Payments adoption among our merchants was as follows: United States, 91%; Canada, 90%; United Kingdom,
79%; Australia, 78%; Ireland, 61%; and New Zealand, 40%. Additionally, revenue from transaction fees and referral fees from partners increased by $18.0 million,
or 91.6%, and $16.1 million, or 172.2%, respectively, during the year ended December 31, 2017 as a result of the increase in non-Payments GMV facilitated
through our platform compared to the same period in 2016 . Merchant solutions also includes Shopify Capital and Shopify Shipping, which together grew by $17.1
million, or 304.0%, in the year ended December 31, 2017 .
Merchant solutions revenues increased $ 107.5 million , or 115.2% , for the year ended December 31, 2016 compared to the same period in 2015. The increase in
merchant solutions revenues was primarily a result of Shopify Payments revenue growing by $88.4 million, or 120%, transaction fees growing by $7.9 million, or
67.5%, and referral fees from partners growing by $3.6 million, or 90.1%.
15
Cost of Revenues
Cost of revenues:
Cost of subscription solutions
Cost of merchant solutions
Total cost of revenues
Percentage of revenues:
Cost of subscription solutions
Cost of merchant solutions
Cost of Subscription Solutions
Years ended December 31,
2017
2016
2015
2017 vs 2016
% Change
2016 vs 2015
% Change
(in thousands, except percentages)
$
$
61,267
231,784
293,051
$
$
39,478
140,357
179,835
$
$
24,531
67,447
91,978
55.2 %
65.1 %
63.0 %
60.9 %
108.1 %
95.5 %
9.1 %
34.4 %
43.5 %
10.1 %
36.1 %
46.2 %
12.0 %
32.9 %
44.8 %
Cost of subscription solutions increased $21.8 million , or 55.2% , for the year ended December 31, 2017 compared to the same period in 2016 . The increase was
primarily due to an increase in the costs necessary to support a greater number of merchants using our platform, resulting in an $8.5 million increase in hosting
costs, which include amortization from our investment in software and hardware relating to our data centers as well as expenses related to third-party hosting, a
$6.5 million increase in allocated employee-related costs, a $3.0 million increase in payments to third-party theme developers and domain registration providers,
and a $2.2 million increase in credit card fees for processing merchant billings. Although cost of subscription solutions increased in terms of dollars, it decreased as
a percentage of revenues from 10.1% in 2016 to 9.1% in 2017 . The change was principally a result of a decrease in hosting costs and credit card fees for
processing merchant billings which both decreased as a percentage of revenue in 2017 .
Cost of subscription solutions increased $ 14.9 million , or 60.9% , for the year ended December 31, 2016 compared to the same period in 2015. The increase was
primarily due to an increase in the costs necessary to support a greater number of merchants using our platform.
Cost of Merchant Solutions
Cost of merchant solutions increased $91.4 million , or 65.1% , for the year ended December 31, 2017 compared to the same period in 2016 . The increase was
primarily due to the increase in GMV facilitated through Shopify Payments, which resulted in payment processing fees, including interchange fees, increasing for
the year ended December 31, 2017 as compared to 2016 . Cost of sales associated with amortization also increased by $2.9 million for the year ended December
31, 2017 mainly due to the amortization of software technology acquired from Oberlo.
Cost of merchant solutions increased $ 72.9 million , or 108.1% , for the year ended December 31, 2016 compared to the same period in 2015. The increase was
primarily due to the increase in GMV facilitated through Shopify Payments, which resulted in payment processing fees, including interchange fees, increasing for
the year ended December 31, 2016 as compared to the same period in 2015.
Gross Profit
Years ended December 31,
2017
2016
2015
2017 vs 2016
% Change
2016 vs 2015
% Change
(in thousands, except percentages)
Gross profit
Percentage of total revenues
$
380,253
$
209,495
$
113,255
81.5 %
85.0 %
56.5 %
53.8 %
55.2 %
Gross profit increased $170.8 million , or 81.5% , for the year ended December 31, 2017 compared to the same period in 2016 . As a percentage of total revenues,
gross profit increased from 53.8% in the year ended December 31, 2016 to 56.5% in the year ended December 31, 2017 , due to the impact of increased margins on
Shopify Payments and the relative growth of revenue from higher margin products, such as Shopify Capital, Shopify Shipping, and referral fees from partners.
16
Gross profit increased $ 96.2 million , or 85.0% , for the year ended December 31, 2016 compared to the same period in 2015. However, as a percentage of total
revenues, gross profit decreased from 55.2% in the year ended December 31, 2015 to 53.8% in the year ended December 31, 2016, principally due to the higher
third-party costs associated with providing payment-processing services.
Operating Expenses
Sales and Marketing
Years ended December 31,
2017
2016
2015
2017 vs 2016
% Change
2016 vs 2015
% Change
(in thousands, except percentages)
Sales and marketing
Percentage of total revenues
$
225,694
$
129,214
$
70,374
74.7 %
83.6 %
33.5 %
33.2 %
34.3 %
Sales and marketing expenses increased $96.5 million , or 74.7% , for the year ended December 31, 2017 compared to the same period in 2016 , primarily due to
an increase of $48.3 million in marketing programs, such as advertisements on search engines and social media, to support the growth of our business. We believe
the strong investment we are making in external marketing programs and internal ones, such as Shopify Unite, the Company's annual Partner and Developer
conference, our Build a Business competition, our retail tours, and the Shopify Blog, continue to be effective in growing the number of merchants using our
platform. During the year ended December 31, 2017 , the total number of merchants increased 61.4% . In addition to external marketing spending, employee-
related costs, including facilities expense, increased by $42.8 million in the year ended December 31, 2017 , primarily resulting from total sales and marketing
headcount growth of 49.2%. Costs for software licenses increased $2.9 million in the year ended December 31, 2017 . Consulting services costs also increased by
$2.4 million in the year ended December 31, 2017 compared to 2016 . Sales and marketing expenses as a percentage of revenue have remained relatively consistent
year over year.
Sales and marketing expenses increased $ 58.8 million , or 83.6% , for the year ended December 31, 2016 compared to the same period in 2015, primarily due to
an increase of $29.4 million in marketing programs. In addition to external marketing spending, employee-related costs, including facilities expense, increased by
$26.0 million.
Research and Development
Years ended December 31,
2017
2016
2015
2017 vs 2016
% Change
2016 vs 2015
% Change
(in thousands, except percentages)
Research and development
Percentage of total revenues
$
135,997
$
74,336
$
39,722
82.9 %
87.1 %
20.2 %
19.1 %
19.4 %
Research and development expenses increased $61.7 million , or 82.9% , for the year ended December 31, 2017 compared to the same period in 2016 , due to an
increase of $53.1 million in employee-related costs (including a $19.5 million increase in stock-based compensation) resulting from the growth in research and
development headcount by 62.9%. Allocated facilities expenses increased $4.5 million in the year ended December 31, 2017 relative to the year ended December
31, 2016 as a result of the facilities expansion in all of our locations to support the growth in our employee base. Software license costs increased by $3.5 million
as a result of the growth of both our business and headcount. As a percentage of revenue, research and development expenses increased as a result of expanded
development programs.
Research and development expenses increased $ 34.6 million , or 87.1% , for the year ended December 31, 2016 compared to the same period in 2015, due to an
increase of $30.3 million in employee-related costs, an allocated facilities expenses increase of $2.6 million and a software license costs increase of $1.2 million,
all of which increased to support the growth in the business.
17
General and Administrative
Years ended December 31,
2017
2016
2015
2017 vs 2016
% Change
2016 vs 2015
% Change
(in thousands, except percentages)
General and administrative
Percentage of total revenues
$
67,719
$
43,110
$
20,915
57.1 %
106.1 %
10.1 %
11.1 %
10.2 %
General and administrative expenses increased $24.6 million , or 57.1% , for the year ended December 31, 2017 compared to the same period in 2016 , due to an
increase of $12.3 million in employee-related costs, $4.8 million in finance costs, which includes insurance, listing fees, and board expenses, $4.9 million increase
in actual and expected losses associated with Shopify Payments and Shopify Capital, $1.3 million in allocated facilities expense, $1.0 million in professional
services fees, and $0.4 million in software license costs. The increase in employee-related costs was associated with 27.7% higher general and administrative
headcount, which, along with the increase in allocated facilities expense and software license costs, was a result of the growth of our business. The increase in
professional services fees in absolute dollars was attributable to legal, accounting and tax services as a result of our growth. However, as a percentage of revenue,
general and administrative expenses decreased.
General and administrative expenses increased $ 22.2 million , or 106.1% , for the year ended December 31, 2016 compared to the same period in 2015, due to an
increase of $11.7 million in employee-related costs, a $5.1 million increase in actual and expected losses associated with Shopify Payments and Shopify Capital, a
$1.7 million increase in software license costs, a $1.6 million increase in allocated facilities expense, a $1.3 million in professional services fees, and a $0.5 million
increase in finance costs.
Other Income (Expenses)
Other income (expenses), net
$
9,162
$
1,810
$
(1,034)
*
*
Years ended December 31,
2017
2016
2015
2017 vs 2016
% Change
2016 vs 2015
% Change
(in thousands, except percentages)
* Not a meaningful comparison
In the year ended December 31, 2017 we had other income of $9.2 million compared to other income of $1.8 million in the same period in 2016 , a positive change
of $7.4 million. The increase was driven primarily by $6.4 million higher interest income from investments due to our higher cash and marketable securities
balances. The remainder of the increase came from foreign exchange gains.
Other income increased by $ 2.8 million in the year ended December 31, 2016 compared to the same period in 2015. In the year ended December 31, 2016 the
amount was driven primarily by investment income of $1.5 million, compared to the same period in 2015 when the amount was driven primarily by foreign
exchange losses of $1.2 million.
Profit (Loss)
Net loss
Basic and diluted net loss per share attributable
to shareholders
Weighted average shares used to compute
basic and diluted net loss per share
attributable to shareholders
* Not a meaningful comparison
Years ended December 31,
2017
2016
2015
2017 vs 2016
% Change
2016 vs 2015
% Change
(in thousands, except share and per share data)
$
$
(39,995)
(0.42)
$
$
(35,355)
(0.42)
$
$
(18,790)
*
*
(0.30)
95,774,897
83,988,597
61,716,065
18
Basic and diluted net loss per share attributable to shareholders was consistent for the years ended December 31, 2017 and 2016. The basic and diluted net loss per
share attributable to shareholders for the year ended December 31, 2016, is not necessarily comparable with the same period in 2015 as a result of our Initial Public
Offering (“IPO”) of Class A subordinate voting shares and the conversion of all issued and outstanding convertible preferred shares into Class B multiple voting
shares, both of which occurred in May 2015.
Quarterly Results of Operations
The following table sets forth our results of operations for the three months ended December 31, 2017 and 2016 .
Revenues:
Subscription solutions
Merchant solutions
Cost of revenues (1) :
Subscription solutions
Merchant solutions
Gross profit
Operating expenses:
Sales and marketing (1)
Research and development (1)
General and administrative (1)
Total operating expenses
Loss from operations
Other income (expense):
Interest income, net
Foreign exchange gain (loss)
Net loss
Basic and diluted net loss per share attributable to shareholders
Three months ended December 31,
2017
2016
(in thousands, except share and per share data)
$
$
$
93,918 $
128,896
222,814
19,867
81,802
101,669
121,145
67,174
40,339
19,745
127,258
(6,113)
2,966
160
3,126
(2,987) $
(0.03) $
56,387
73,996
130,383
11,593
50,655
62,248
68,135
39,016
24,472
13,952
77,440
(9,305)
698
(260)
438
(8,867)
(0.10)
Weighted average shares used to compute net loss per share attributable to shareholders
99,551,791
89,137,155
(1) Includes stock-based compensation expense and related payroll taxes as follows:
Cost of revenues
Sales and marketing
Research and development
General and administrative
Three months ended December 31,
2017
2016
(in thousands)
370
$
3,182
10,843
3,302
17,697
$
216
1,424
5,462
1,396
8,498
$
$
19
Revenues
Revenues:
Subscription solutions
Merchant solutions
Percentage of revenues:
Subscription solutions
Merchant solutions
Total revenues
Subscription Solutions
Three months ended December 31,
2017
2016
2017 vs. 2016
% Change
(in thousands, except percentages)
$
$
93,918
128,896
222,814
$
$
42.2 %
57.8 %
100.0 %
56,387
73,996
130,383
43.2 %
56.8 %
100.0 %
66.6%
74.2%
70.9 %
Subscription solutions revenues increased $37.5 million , or 66.6% , for the three months ended December 31, 2017 compared to the same period in 2016 . The
period over period increase was primarily a result of growth in MRR, which was driven largely by the higher number of merchants using our platform.
Merchant Solutions
Merchant solutions revenues increased $54.9 million , or 74.2% , for the three months ended December 31, 2017 compared to the same period in 2016 . The
increase in merchant solutions revenues was primarily a result of Shopify Payments revenue growing in the three months ended December 31, 2017 compared to
the same period in 2016 . This increase was a result of an increase in the number of merchants using our platform, continued expansion into new geographical
regions, and an increase in adoption of Shopify Payments by our merchants, which drove GMV of $ 3.5 billion that was facilitated using Shopify Payments for the
three months ended December 31, 2017 . This compares to $ 2.2 billion in the same period in 2016 .
In addition to the increase in revenue from Shopify Payments, revenue from transaction fees, Shopify Capital, referral fees from partners and Shopify Shipping
increased during the three months ended December 31, 2017 compared to the same period in 2016 , as a result of the increase in GMV facilitated through our
platform compared to the same periods in 2016 .
20
Cost of Revenues
Cost of revenues:
Cost of subscription solutions
Cost of merchant solutions
Total cost of revenues
Percentage of revenues:
Cost of subscription solutions
Cost of merchant solutions
Cost of Subscription Solutions
Three months ended December 31,
2017
2016
2017 vs. 2016
% Change
(in thousands, except percentages)
$
$
19,867
81,802
101,669
$
$
8.9 %
36.7 %
45.6 %
11,593
50,655
62,248
8.9 %
38.9 %
47.7 %
71.4 %
61.5 %
63.3 %
Cost of subscription solutions increased $8.3 million , or 71.4% , for the three months ended December 31, 2017 compared to the same period in 2016 . The
increase was primarily due to an increase in the costs necessary to support a greater number of merchants using our platform, resulting in an increase in:
amortization related to our data centers, employee-related costs, credit card fees for processing merchant billings, payments to third-party theme developers, and
third-party infrastructure and hosting costs. Although cost of subscription solutions increased in terms of dollars, it was consistent as a percentage of revenues at
8.9% for the three months ended December 31, 2017 and the same period in 2016 .
Cost of Merchant Solutions
Cost of merchant solutions increased $31.1 million , or 61.5% , for the three months ended December 31, 2017 compared to the same period in 2016 . The increase
was primarily due to the increase in GMV facilitated through Shopify Payments, which resulted in higher payment processing and interchange fees. Although cost
of merchant solutions increased in terms of dollars, it decreased as a percentage of revenues from 38.9% in the three months ended December 31, 2016 to 36.7% in
the three months ended December 31, 2017 . The decrease was a result of growth of revenue from Shopify Capital and Shopify Shipping, and an increase in
referral fees from partners, which are higher margin merchant solutions products.
Gross Profit
Gross profit
Percentage of total revenues
Three months ended December 31,
2017
2016
2017 vs. 2016
% Change
$
121,145
$
54.4 %
68,135
52.3 %
(in thousands, except percentages)
77.8 %
Gross profit increased $53.0 million , or 77.8% , for the three months ended December 31, 2017 compared to the same period in 2016 . As a percentage of total
revenues, gross profit increased from 52.3% in the three months ended December 31, 2016 to 54.4% in the three months ended December 31, 2017 , principally
due to the relative growth of revenue from higher-margin merchant solutions products: Shopify Capital, Shopify Shipping, and referral fees from partners,
21
as well as higher margins on Shopify Payments revenues versus the same period in 2016 . With regard to subscription solutions, our increased costs related to
third-party hosting services led to a slight decrease in margins.
Operating Expenses
Sales and Marketing
Sales and marketing
Percentage of total revenues
Three months ended December 31,
2017
2016
2017 vs. 2016
% Change
$
(in thousands, except percentages)
67,174
$
30.1 %
39,016
29.9 %
72.2 %
Sales and marketing expenses increased $28.2 million , or 72.2% , for the three months ended December 31, 2017 compared to the same period in 2016 , due to an
increase of $15.0 million in marketing programs and payments to partners, such as advertisements on search engines and social media, to support the growth of our
business, an increase of $11.7 million in employee-related costs, including allocated facilities expense ($1.8 million of which related to stock-based compensation
and related payroll taxes), an increase of $0.8 million related to computer hardware and software, and an increase of $0.6 million in professional services fees year
over year.
Research and Development
Research and development
Percentage of total revenues
Three months ended December 31,
2017
2016
2017 vs. 2016
% Change
$
(in thousands, except percentages)
40,339
$
18.1 %
24,472
18.8 %
64.8 %
Research and development expenses increased $15.9 million , or 64.8% , for the three months ended December 31, 2017 compared to the same period in 2016 ,
due to an increase of $13.5 million in employee-related costs ($5.4 million of which related to stock-based compensation and related payroll taxes), a $1.3 million
increase in computer software and third-party licensing fees, and a $1.0 million increase in allocated facilities expenses, all as a result of the growth in our
employee base and expanded development programs.
General and Administrative
General and administrative
Percentage of total revenues
Three months ended December 31,
2017
2016
2017 vs. 2016
% Change
$
(in thousands, except percentages)
19,745
$
8.9 %
13,952
10.7 %
41.5 %
General and administrative expenses increased $5.8 million , or 41.5% , for the three months ended December 31, 2017 compared to the same period in 2016 , due
to an increase of $3.4 million in employee-related costs ($1.9 million of which related to stock-based compensation and related payroll taxes), a $2.4 million
increase in finance related expenses and an increase of $0.4 million in professional services fees.
22
Other Income (Expenses)
Three months ended December 31,
2017
2016
2017 vs. 2016
% Change
(in thousands, except percentages)
Other income (expenses), net
$
3,126
$
438
*
* Not a meaningful comparison
In the three months ended December 31, 2017 we had other income of $ 3.1 million , compared to other income of $ 0.4 million in the same period in 2016 . The
year-over-year increase was driven mainly by an increase in interest income of $2.3 million primarily as a result of our increased cash, cash equivalents and
marketable securities balances. We also went from a loss on foreign exchange in 2016 to a gain in 2017 which resulted in an increase of $0.4 million.
Summary of Quarterly Results
The following table sets forth selected unaudited quarterly results of operations data for each of the eight quarters ended December 31, 2017 . The information for
each of these quarters has been derived from unaudited condensed consolidated financial statements that were prepared on the same basis as the audited annual
financial statements and, in the opinion of management, reflects all adjustments, which includes only normal recurring adjustments, necessary for the fair
presentation of the results of operations for these periods in accordance with U.S. GAAP. This data should be read in conjunction with our unaudited condensed
consolidated financial statements and audited consolidated financial statements and related notes for the relevant period. These quarterly operating results are not
necessarily indicative of our operating results for a full year or any future period.
Dec 31, 2017
Sep 30,
2017
June
30, 2017
Mar 31,
2017
Dec 31, 2016
Sep 30,
2016
June 30,
2016
Mar 31,
2016
(in thousands, except per share data)
Three months ended
Revenues:
Subscription solutions
Merchant solutions
Cost of revenues: (1)
Subscription solutions
Merchant solutions
Gross profit
Operating expenses:
Sales and marketing (1)
Research and development (1)
General and administrative (1)
Total operating expenses
Loss from operations
Other income
Net loss
Basic and diluted net loss per share
attributable to shareholders
$
$
$
93,918 $
82,435 $
71,598 $
62,080 $
56,387 $
49,839 $
43,674 $
128,896
89,021
80,057
65,299
73,996
222,814
171,456
151,655
127,379
130,383
19,867
81,802
101,669
15,458
55,971
71,429
121,145
100,027
67,174
40,339
19,745
58,314
36,350
18,039
127,258
112,703
(6,113)
3,126
(12,676)
3,296
13,688
51,127
64,815
86,840
54,872
32,714
15,161
102,747
(15,907)
1,877
12,254
42,884
55,138
72,241
45,334
26,594
14,774
86,702
(14,461)
863
11,593
50,655
62,248
68,135
39,016
24,472
13,952
77,440
(9,305)
438
49,739
99,578
10,555
35,271
45,826
53,752
32,777
19,462
11,002
63,241
(9,489)
369
42,973
86,647
9,098
30,026
39,124
47,523
29,413
16,732
10,037
56,182
(8,659)
220
38,706
34,016
72,722
8,232
24,405
32,637
40,085
28,008
13,670
8,119
49,797
(9,712)
783
(2,987) $
(9,380) $
(14,030) $
(13,598) $
(8,867) $
(9,120) $
(8,439) $
(8,929)
(0.03) $
(0.09) $
(0.15) $
(0.15) $
(0.10) $
(0.11) $
(0.10) $
(0.11)
23
(1) Includes stock-based compensation expense and related payroll taxes as follows:
Dec 31, 2017
Sep 30, 2017
June
30, 2017
Mar 31,
2017
Dec 31,
2016
Sep 30,
2016
June 30,
2016
Mar 31,
2016
Three months ended
Cost of revenues
Sales and marketing
Research and development
General and administrative
$
$
370 $
3,182
10,843
3,302
17,697 $
355 $
2,729
9,324
1,981
14,389 $
307 $
2,305
8,075
2,282
12,969 $
249 $
1,660
6,318
1,920
10,147 $
216 $
1,424
5,462
1,396
8,498 $
234 $
1,390
4,358
1,301
7,283 $
152 $
1,025
3,255
1,016
5,448 $
115
605
2,291
781
3,792
(in thousands)
The following table sets forth selected unaudited quarterly statements of operations data as a percentage of total revenues for each of the eight quarters ended
December 31, 2017 .
Dec 31, 2017
Sep 30, 2017
June
30, 2017
Mar 31, 2017
Dec 31, 2016
Sep 30, 2016
June 30, 2016 Mar 31, 2016
Three months ended
Revenues
Subscription solutions
Merchant solutions
Cost of revenues
Subscription solutions
Merchant solutions
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Loss from operations
Other income
Net loss
42.2 %
57.8 %
100.0 %
48.1 %
51.9 %
100.0 %
8.9 %
36.7 %
45.6 %
54.4 %
30.1 %
18.1 %
8.9 %
57.1 %
(2.7)%
1.4 %
(1.3)%
9.0 %
32.6 %
41.6 %
58.4 %
34.0 %
21.2 %
10.5 %
65.7 %
(7.4)%
1.9 %
(5.5)%
47.2 %
52.8 %
100.0 %
9.0 %
33.7 %
42.7 %
57.3 %
36.2 %
21.6 %
10.0 %
67.8 %
(10.5)%
1.2 %
(9.3)%
48.7 %
51.3 %
43.2 %
56.8 %
50.1 %
49.9 %
50.4 %
49.6 %
53.2 %
46.8 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
9.6 %
33.7 %
43.3 %
56.7 %
35.6 %
20.9 %
11.6 %
68.1 %
(11.4)%
0.7 %
(10.7)%
8.9 %
38.9 %
47.7 %
52.3 %
29.9 %
18.8 %
10.7 %
59.4 %
(7.1)%
0.3 %
(6.8)%
10.5 %
35.4 %
45.9 %
54.0 %
32.9 %
19.5 %
11.0 %
63.5 %
(9.5)%
0.4 %
(9.2)%
10.5 %
34.7 %
45.2 %
54.8 %
33.9 %
19.3 %
11.6 %
64.8 %
(10.0)%
0.3 %
(9.7)%
11.3 %
33.6 %
44.9 %
55.1 %
38.5 %
18.8 %
11.2 %
68.5 %
(13.4)%
1.1 %
(12.3)%
We believe that year-over-year comparisons are more meaningful than our sequential results due to seasonality in our business. While we believe that this
seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date. Our merchant solutions
revenues are directionally correlated with our merchants' GMV. Our merchants' GMV typically increases during the holiday season. As a result, we have
historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. As a result of the continued growth of our merchant solutions
offerings, we believe that our business may become more seasonal in the future, and that historical patterns in our business may not be a reliable indicator of our
future performance.
Quarterly Revenue and Gross Margin Trends
Our quarterly revenue has generally increased sequentially for each of the past eight quarters, primarily due to sales of new subscriptions to our platform as well as
the introduction and growth of merchant solutions, which have largely masked the impacts of seasonality.
Our gross margin percentage has varied over the past eight quarters and is generally driven by the mix between our higher margin subscription solutions revenue
and lower margin merchant solutions revenue. While our total revenues have increased in recent periods, the mix has shifted towards merchant solutions revenue,
most notably in the fourth
24
quarter due to higher holiday volume of orders facilitated and the resulting Shopify Payments revenue during this period. We expect this overall trend to continue
over time.
Quarterly Operating Expenses Trends
Total operating expenses have increased sequentially for each period presented primarily due to the addition of personnel in connection with the expansion of our
business as well as additional marketing initiatives to attract potential merchants.
Key Balance Sheet Information
Cash, cash equivalents and marketable securities
$
Total assets
Total liabilities
Total non-current liabilities
December 31, 2017
December 31, 2016
(in thousands)
938,039
$
1,113,564
112,464
17,710
392,414
490,558
80,082
13,550
Total assets increased $623.0 million as at December 31, 2017 compared to December 31, 2016 , principally due to our sale of Class A subordinate voting shares,
which closed in the three months ended June 30, 2017. The offering raised, net of commissions and offering expenses, $560.1 million of cash, which has been
subsequently used to purchase marketable securities and to support the growth of Shopify Capital. Total liabilities increased by $32.4 million, principally as a
result of an increase in accounts payable and accrued liabilities of $17.5 million, which was due to an increase in payment processing costs, payroll liabilities, and
accrued transaction losses. The growth in sales of our subscription solutions offering also resulted in an increase of deferred revenue of $11.0 million.
Liquidity and Capital Resources
To date, we have financed our operations primarily through the sale of equity securities, raising approximately $1.0 billion, net of issuance costs, from investors.
In August 2016, we filed a short-form base shelf prospectus with the Securities Commissions in each of the provinces and territories of Canada, except Quebec,
and a corresponding shelf registration statement on Form F-10 with the U.S. Securities and Exchange Commission. The shelf prospectus and the registration
statement allow us to offer and issue the following securities: Class A subordinate voting shares; preferred shares; debt securities; warrants; subscription receipts;
and units. The securities may be issued separately or together and the aggregate amount of the securities that may be sold by us during the 25-month period that the
prospectus remains effective was initially $500 million. In May 2017, we filed an amendment to our short-form base shelf prospectus increasing the amount of
securities that may be issued to a total of $2.5 billion.
In August 2016, we completed a public offering of Class A subordinate voting shares for an aggregate amount of $329.9 million, which consisted of a treasury
offering by us and a secondary offering by certain of our shareholders. The Company received net proceeds of $224.4 million from the public offering.
In May 2017, the Company completed a public offering, in which it issued and sold 5,500,000 Class A subordinate voting shares at a public offering price of
$91.00 per share. Subsequently, in June 2017, the Company issued and sold 825,000 Class A subordinate voting shares at the same price as a result of the
underwriters' exercise of their over-allotment option. The Company received total net proceeds of $560.1 million after deducting underwriting discounts and
commissions of $14.4 million and other offering expenses of $1.1 million.
Our principal cash requirements are for working capital and capital expenditures. Excluding current deferred revenue, working capital at December 31, 2017 was $
961.6 million . Given the ongoing cash generated from operations and our existing cash and cash equivalents, we believe there is sufficient liquidity to meet our
current and planned financial obligations over the next 12 months. Our future financing requirements will depend on many factors including our
25
growth rate, subscription renewal activity, the timing and extent of spending to support development of our platform and the expansion of sales and marketing
activities. Although we currently are not a party to any material undisclosed agreement and do not have any understanding with any third-parties with respect to
potential material investments in, or acquisitions of, businesses or technologies, we may enter into these types of arrangements in the future, which could also
require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Cash, Cash Equivalents and Marketable Securities
Cash, cash equivalents, and marketable securities increased by $ 545.6 million to $ 938.0 million as at December 31, 2017 from $ 392.4 million as at December 31,
2016 , primarily as a result of our Q2 2017 public offering.
Cash equivalents and marketable securities include money market funds, term deposits, U.S. and Canadian federal bonds, corporate bonds, and commercial paper,
all maturing within the 12 months from December 31, 2017 .
The following table summarizes our total cash, cash equivalents and marketable securities as at December 31, 2017 and 2016 as well as our operating, investing
and financing activities for the years ended December 31, 2017, and 2016:
Years ended December 31,
2017
2016
(in thousands)
938,039
$
392,414
7,901
$
(527,170)
574,831
2,102
57,664
487,961
14,017
(269,686)
228,585
1,027
(26,057)
228,298
202,241
Cash, cash equivalents and marketable securities (end of period)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign exchange on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Change in marketable securities
$
$
Net increase in cash, cash equivalents and marketable securities
$
545,625
$
Cash Flows From Operating Activities
Our largest source of operating cash is from subscription solutions. These payments are typically paid to us at the beginning of the applicable subscription period,
except for our Shopify Plus merchants who typically pay us at the end of their monthly billing cycle. We also generate significant cash flows from our Shopify
Payments processing fee arrangements, which are received on a daily basis as transactions are processed. Our primary uses of cash from operating activities are for
third-party payment processing fees, employee-related expenditures, marketing programs, network costs, and leased facilities.
Net cash flows from operating activities for the year ended December 31, 2017 , as compared to the same period of 2016 , decreased by $6.1 million . The decrease
was primarily as a result of the $35.2 million increase in net merchant cash advances outstanding as a result of the growth of our Shopify Capital product. This
decrease was offset by the change in our net loss, which, when adjusted for non-cash charges of $23.4 million of amortization and depreciation, $49.2 million of
stock-based compensation expense, an increase of our provision for uncollectible merchant cash advances of $2.6 million , and unrealized foreign exchange gains
of $1.6 million had a favorable impact of $33.6 million. The changes in other operating assets and liabilities, excluding the increase in merchant cash advances
receivables, resulted in a net source of cash of $12.2 million. The change in the year ended December 31, 2017 was primarily attributable to: an increase of $15.4
million in accounts payable and accrued liabilities due to an increase in payment processing costs, payroll liabilities, and accrued transaction losses; and a $11.0
million increase in deferred revenue
26
due to the growth in sales of our subscription solutions. This was offset by an increase in trade and other receivables of $13.0 million primarily related to trade and
unbilled receivables, and an increase of $3.7 million in other current assets driven primarily by an increase in prepaid expenses and deposits.
Cash Flows From Investing Activities
To date, cash flows used in investing activities have primarily related to the purchase and sale of marketable securities, purchases of computer and hosting
equipment, leasehold improvements and furniture and fixtures to support our expanding infrastructure and workforce, software development costs eligible for
capitalization, and business acquisitions.
Net cash used in investing activities in the year ended December 31, 2017 was $ 527.2 million , which was driven by net purchases of $487.2 million in marketable
securities, and $ 20.0 million used to purchase property and equipment, which primarily consisted of expenditures on leasehold improvements and equipment to
support our expanding merchant base and growing workforce as a result. During the year ended December 31, 2017 , we also acquired Oberlo UAB for $15.7
million cash, net of cash acquired.
Net cash used in investing activities in the year ended December 31, 2016 was $ 269.7 million , reflecting net purchases of $229.3 million in marketable securities.
Cash used in investing activities also included $23.8 million used to purchase property and equipment, which primarily consisted of expenditures on leasehold
improvements, equipment used in our data centers to support our expanding merchant base and equipment to support our growing workforce, and $14.1 million
related to the acquisitions of Kit CRM and Boltmade, net of cash acquired.
Cash Flows From Financing Activities
To date, cash flows from financing activities have related to proceeds from private placements, public offerings, and exercises of stock options.
Net cash provided by financing activities in the year ended December 31, 2017 was $ 574.8 million driven mainly by the $560.1 million raised by our Q2 2017
public offering, and $14.8 million in proceeds from the issuance of Class A subordinate voting shares and Class B multiple voting shares as a result of stock option
exercises. This compares to $228.6 million for the same period in 2016 , which was primarily proceeds from a public offering where we issued Class A subordinate
voting shares and received net proceeds of $224.4 million.
Contractual Obligations and Contingencies
Our principal commitments consist of obligations under our operating leases for office space. The following table summarizes our contractual obligations as of
December 31, 2017 :
Less Than 1 Year
1 to 3 Years
3 to 5 Years
More Than 5 Years
Total
Payments Due by Period
(in thousands)
Bank indebtedness
Operating lease obligations (1)
Total contractual obligations
$
$
—
$
—
$
—
$
—
$
15,271
53,570
58,513
235,667
15,271
$
53,570
$
58,513
$
235,667
$
—
363,021
363,021
(1) Consists of payment obligations under our office leases in Canada, the United States, Germany, Lithuania, and China.
27
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than operating leases (which have been disclosed under "Contractual Obligations and Contingencies").
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to a variety of risks, including foreign currency exchange fluctuations, changes in interest rates, concentration of credit and inflation. We regularly
assess currency, interest rate and inflation risks to minimize any adverse effects on our business as a result of those factors.
Foreign Currency Exchange Risk
While the majority of our revenues are denominated in USD, a significant portion of operating expenses are incurred in Canadian Dollars ("CAD"). As a result, our
earnings are adversely affected by an increase in the value of the CAD relative to the USD. Foreign currency forward contracts are used to hedge against the
earning effects of such fluctuations.
Non-GAAP Financial Measure
Effect of Foreign Exchange Rates
Converting our revenues, cost of revenues, operating expenses, and loss from operations using the comparative period's monthly average exchange rates would
have the following effects:
Years ended December 31,
2017
2016
GAAP
Amounts As
Reported
Exchange Rate
Effect (1)
At Prior Year
Monthly Rates (2)
GAAP Amounts As
Reported
(in thousands)
Revenues
Cost of revenues
Operating expenses
Loss from operations
$
$
673,304 $
(265) $
673,039 $
(293,051)
(429,410)
562
4,540
(292,489)
(424,870)
(49,157) $
4,837 $
(44,320) $
389,330
(179,835)
(246,660)
(37,165)
(1) Represents the increase or decrease in GAAP amounts reported resulting from using the comparative period's monthly average CAD-USD foreign exchange rates.
(2) Represents the outcome that would have resulted had the CAD-USD rates in the reported period been the same as those in effect in the comparable months in 2016 for operating results.
This effect of foreign exchange rates on our consolidated statements of operations disclosure is a supplement to our consolidated financial statements, which are
prepared and presented in accordance with U.S. GAAP. We have provided the above non-GAAP disclosure as we believe it presents a clearer comparison of our
period to period operating results by removing the impact of fluctuations in the CAD to USD exchange rate and to assist investors in understanding our financial
and operating performance. Non-GAAP financial measures are not recognized measures for financial statement presentation under U.S. GAAP, do not have
standardized meanings, and may not be comparable to similar measures presented by other public companies. Such non-GAAP financial measures should be
considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with U.S. GAAP.
28
Interest Rate Sensitivity
We had cash, cash equivalents and marketable securities totaling $ 938.0 million as of December 31, 2017 . The cash and cash equivalents are held for operations
and working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their
market value adversely affected due to a rise in interest rates. Our future investment income may fall short of our expectations due to changes in interest rates or we
may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt
securities as "held to maturity," no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair
value are determined to be other than temporary.
Concentration of Credit Risk
The Company’s cash and cash equivalents, marketable securities, trade and other receivables, merchant cash advances receivable, and foreign exchange derivative
products subject the Company to concentrations of credit risk. Management mitigates this risk associated with cash and cash equivalents by making deposits and
entering into foreign exchange derivative products only with large banks and financial institutions that are considered to be highly credit worthy. Management
mitigates the risks associated with marketable securities by adhering to its investment policy, which stipulates minimum rating requirements, maximum investment
exposures and maximum maturities. Due to the Company’s diversified merchant base, there is no particular concentration of credit risk related to the Company’s
trade and other receivables and merchant cash advances receivable. Trade and other receivables and merchant cash advances receivable are monitored on an
ongoing basis to ensure timely collection of amounts. The Company has mitigated some of the risks associated with Shopify Capital by entering into an agreement
with a third party to insure merchant cash advances offered by Shopify Capital. There are no receivables from individual merchants accounting for 10% or more of
revenues or receivables.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to
significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our
business, financial condition and results of operations.
Disclosure Controls and Procedures and Internal Control Over Financial Reporting
All control systems, no matter how well designed, have inherent limitations. Accordingly, even disclosure controls and procedures, and internal controls over
financial reporting determined to be effective can only provide reasonable assurance of achieving their control objectives with respect to financial statement
preparation and presentation.
Disclosure Controls and Procedures
Management of the Company, under the supervision of the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining
disclosure controls and procedures (as defined by the United States Securities and Exchange Commission ("SEC") in Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") for the Company to ensure that material information relating to the Company, including its consolidated
subsidiaries, that is required to be made known to the Chief Executive Officer and Chief Financial Officer by others within the Company and disclosed by the
Company in reports filed or submitted by it under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the
SEC's rules and forms; and (ii) accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
29
We, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company's disclosure controls and procedures as of
December 31, 2017 and have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2017.
Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company, under the supervision of the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements in accordance with United States generally accepted accounting principles.
We, including the Chief Executive Officer and Chief Financial Officer, have assessed the effectiveness of the Company's internal control over financial reporting
in accordance with Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Based on this assessment, we, including the Chief Executive Officer and Chief Financial Officer, have determined that the Company's internal control over
financial reporting was effective as at December 31, 2017. Additionally, based on our assessment, we determined that there were no material weaknesses in the
Company's internal control over financial reporting as at December 31, 2017.
The Company's Chief Executive Officer and Chief Financial Officer have certified the Company's annual report on Form 40-F for the year ended December 31,
2017, as required by Section 302 and Section 906 of the United States Sarbanes-Oxley Act of 2002 ("SOX"). The Company is relying on the statutory exemption
contained in section 8.1 of National Instrument 52-109, "Certification of Disclosure in Issuers' Annual and Interim Filings", which allows it to file with the
Canadian securities regulatory authorities the certificates required under SOX as soon as practicable after such certificates are filed with or furnished to the SEC.
The effectiveness of the Company's internal control over financial reporting as at December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report on the audited consolidated financial statements for December 31, 2017.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2017, there were no significant changes in the Company's internal control over financial reporting, or any other factors that
could significantly affect such internal control, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over
financial reporting.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. In the preparation of these consolidated financial statements, we are required to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. To the extent that there
are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on
past experience and other assumptions that we believe are reasonable under the circumstances, and we re-evaluate these estimates on an ongoing basis. We refer to
accounting estimates of this type as critical accounting policies and estimates, which we discuss below.
Revenue Recognition
Our sources of revenue consist of subscription solutions and merchant solutions. Arrangements with merchants do not provide the merchant with the right to take
possession of the software supporting our platform at any time and are therefore accounted for as service contracts. Our subscription solutions contracts do not
provide for refunds or any other rights of return to merchants in the event of cancellations.
30
We recognize revenue when all of the following criteria are met:
•
•
•
•
there is persuasive evidence of an arrangement;
the services have been or are being provided to the merchant;
the amount of fees to be paid by the customer is fixed or determinable; and
collection is reasonable assured.
We follow the guidance provided in ASC 605-45, Principal Agent Considerations for determining whether we should recognize revenue based on the gross amount
billed to a merchant or the net amount retained. This determination is a matter of judgment that depends on the facts and circumstances of each arrangement. We
recognize revenue from Shopify Shipping and the sales of apps on a net basis as it has been determined that we are the agent in the arrangement with merchants.
All other revenue is reported on a gross basis, as we have determined we are the principal in the arrangement, in that we are the primary obligor for providing
services and assume the risk of any loss or changes in costs.
Software Development Costs
Research and development costs are generally expensed as incurred. These costs primarily consist of personnel and related expenses, contractor and consultant
fees, stock-based compensation, and corporate overhead allocations, including depreciation.
The Company capitalizes certain development costs incurred in connection with its internal use software. These capitalized costs are related to the development of
its software platform that is hosted by the Company and accessed by its merchants on a subscription basis as well as material internal infrastructure software. Costs
incurred in the preliminary stages of development are expensed as incurred. The Company capitalizes all direct and incremental costs incurred during the
application development phase, until such time when the software is substantially complete and ready for its intended use. Capitalization ceases upon completion
of all substantial testing.
The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional features and
functionality. Capitalized costs are recorded as part of intangible assets in the consolidated balance sheets and are amortized on a straight-line basis over their
estimated useful lives of two or three years. Maintenance costs are expensed as incurred.
Stock-Based Compensation
The accounting for stock-based awards is based on the fair value of the award measured at the grant date. Accordingly, stock-based compensation cost is
recognized in the Consolidated Statements of Operations and Comprehensive Loss as an operating expense over the requisite service period.
The fair value of restricted share units (RSUs) is measured using the fair value of the Company's shares as if the RSUs were vested and issued on the grant date. An
estimate of forfeitures is applied when determining compensation expense. All shares issued under the Company's Long Term Incentive Plan (LTIP) are from
treasury.
The fair value of stock options is determined using the Black-Scholes option-pricing model, single option approach. An estimate of forfeitures is applied when
determining compensation expense. The Company determines the fair value of stock option awards on the date of grant using assumptions regarding expected
term, share price volatility over the expected term of the awards, risk-free interest rate, and dividend rate. All shares issued under the Company's Fourth Amended
and Restated Stock Option Plan (the "Legacy Option Plan") and the new Stock Option Plan (the "Stock Option Plan") are from treasury.
31
The following weighted-average assumptions were used to determine the fair value of stock option awards in the periods presented below:
Expected volatility
Risk free interest rate
Dividend yield
Average expected life
These assumptions are estimated as follows:
2017
2016
56.0%
1.85%
Nil
5.15
59.1%
1.32%
Nil
5.07
• Fair Value of Common Stock. The Company uses the Volume Weighted Average Price for its common stock as reported on the New York Stock
Exchange.
• Expected Term. The Company determines the expected term based on the average period the stock options are expected to remain outstanding. The
Company bases the expected term assumptions on its historical behavior combined with estimates of post-vesting holding period.
• Expected Volatility. The Company determines the price volatility factor based on a weighted combination of the Company's historical volatility and
the historical volatility of publicly traded industry peers. To determine its peer group of companies, the Company considers public companies in the
technology industry and selects those that are similar to us in size, stage of life cycle, and financial leverage. The Company intends to continue to
consistently apply this methodology using the same or similar public companies until a sufficient amount of historical information regarding the
volatility of its own common stock price becomes available, or unless circumstances change such that the identified companies are no longer similar,
in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
• Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the yield available on U.S.
Treasury zero-coupon issues with an equivalent remaining term of the stock options for each stock option group.
• Expected Dividend. The Company has not paid and does not anticipate paying any cash dividends in the foreseeable future and, therefore, uses an
expected dividend yield of zero in the option pricing model.
Accounting Pronouncements Adopted in the Year
In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting", which simplifies the accounting for stock based compensation, including forfeitures and the classification of
employee taxes paid on the statement of cash flows. The standard was effective for annual periods beginning after December 15, 2016. This standard did not have
a material impact on the Company's consolidated financial statements because under this standard the Company continued to account for forfeitures based on the
estimated forfeiture rate and the tax implications are currently not applicable to the Company.
32
Recently Issued Accounting Pronouncements not yet Adopted
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-9 “Revenue from Contracts with Customers.” The
new accounting standards update requires an entity to apply a five step model to recognize revenue to depict the transfer of promised goods and services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, as well as a cohesive set of
disclosure requirements that would result in an entity providing comprehensive information about the nature, timing, and uncertainty of revenue and cash flows
arising from an entity’s contracts with customers. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-08, “Revenue from Contracts
with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, updating the implementation guidance on principal
versus agent considerations in the new revenue recognition standard. This update clarifies that an entity is a principal if it controls the specified good or service
before that good or service is transferred to a customer. The update also includes indicators to assist an entity in determining whether it controls a specified good or
service before it is transferred to the customer. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients”, which
provides clarification on how to assess collectibility, present sales taxes, treat non-cash consideration, and account for completed and modified contracts at the time
of transition. ASU 2016-12 also clarifies that an entity retrospectively applying the guidance in Topic 606 is not required to disclose the effect of the accounting
change in the period of adoption. All of these accounting standard updates become effective for reporting periods beginning after December 15, 2017.
The Company is finalizing its assessment of the impact of the adoption of this new revenue standard on the consolidated financial statements and related
disclosures. The Company has determined that it will be required to capitalize certain sales commissions and expense these contract costs on a straight-line basis
over the expected life of the related customer relationship. The Company will also need to provide expanded disclosures relating to the nature, amount, timing, and
uncertainty of revenues and cash flows arising from contracts with customers. The Company is implementing financial reporting system changes and related
controls that are necessary to implement the new revenue standard. The Company has transitioned to the standard effective January 1, 2018 using the full
retrospective approach.
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, "Leases", which requires a lessee to record a right-of-use asset and a
corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as
well as the disclosure of key information about leasing arrangements. The standard requires recognition in the statement of operations of a single lease cost,
calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This standard also requires classification of all cash
payments within operating activities in the statement of cash flows. A modified retrospective transition approach is required for operating leases existing at, or
entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The standard is
effective for annual periods beginning after December 15, 2018. Early adoption is permitted. The Company believes that this standard will have a material impact
on its consolidated balance sheets and continues to assess the impact that adoption of this standard will have on the statement of operations and comprehensive
loss.
In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment", which simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The standard is
effective for annual periods beginning after December 15, 2019 including interim periods within those periods and should be applied prospectively. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017.
In August 2017, the Financial Accounting Standards Board issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities", which will make more financial and non-financial hedging strategies eligible for hedge accounting while also amending the
presentation and disclosure requirements. The standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company
does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
33
Shares Outstanding
Shopify is a publicly traded company listed on the New York Stock Exchange (NYSE: SHOP) and on the Toronto Stock Exchange (TSX: SHOP). As of
February 9, 2018 there were 87,291,228 Class A subordinate voting shares issued and outstanding, and 12,821,800 Class B multiple voting shares issued and
outstanding.
As of February 9, 2018 there were 4,144,607 options outstanding under the Company’s Fourth Amended and Restated Incentive Stock Option Plan, of which
3,637,864 were vested as of such date. Each such option is or will become exercisable for one Class B multiple voting share. As of February 9, 2018 there were
2,966,329 options outstanding under the Company’s Stock Option Plan, of which 582,422 were vested as of such date. Each such option is or will become
exercisable for one Class A subordinate voting share.
As of February 9, 2018 there were 2,494,840 RSUs outstanding under the Company’s Long Term Incentive Plan. Each such RSU will vest as one Class A
subordinate voting share.
34
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in this Annual Report on Form 40-F for the year ended December 31, 2017 of Shopify Inc. of our report dated
February 15, 2018, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in the Exhibit
incorporated by reference in this Annual Report on Form 40-F.
We also consent to the incorporation by reference in the Registration Statements on Form F-10 (File No. 333-218049) and Form S-8 (File Nos. 333-204568 and
333-211305) of Shopify Inc. of our report dated February 15, 2018 referred to above. We also consent to the reference to us under the heading “Interests of
Experts”, which appears in the Annual Information Form included in the Exhibit incorporated by reference in this Annual Report on Form 40-F, which is
incorporated by reference in such Registration Statements.
Chartered Professional Accountants, Licensed Public Accountants
Ottawa, Ontario, Canada
February 15, 2018
PricewaterhouseCoopers LLP
99 Bank Street, Suite 710, Ottawa, Ontario, Canada K1P 1E4
T: +1 613 237 3702, F: +1 613 237 3963, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Tobias Lütke, certify that:
1. I have reviewed this annual report on Form 40-F of Shopify Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the issuer's internal control over financial reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors
and the audit committee of the issuer's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the issuer's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over
financial reporting.
Date: February 15, 2018
/s/ Tobias Lütke
Tobias Lütke
Chief Executive Officer
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Russell Jones, certify that:
1. I have reviewed this annual report on Form 40-F of Shopify Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the issuer's internal control over financial reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors
and the audit committee of the issuer's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the issuer's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over
financial reporting.
Date: February 15, 2018
/s/ Russell Jones
Russell Jones
Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Shopify Inc. (the "Company") on Form 40-F for the year ended December 31, 2017, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Tobias Lütke, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 15, 2018
/s/ Tobias Lütke
Tobias Lütke
Chief Executive Officer
This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley
Act of 2002, be deemed "filed" by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of
that section.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Shopify Inc. (the "Company") on Form 40-F for the year ended December 31, 2017, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Russell Jones. Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 15, 2018
/s/ Russell Jones
Russell Jones
Chief Financial Officer
This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley
Act of 2002, be deemed "filed" by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of
that section.