Form 6-K SHOPIFY INC. For: Apr 17

April 17, 2019 7:38 AM

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934



For the month of	April	2019
Commission File Number	001-37400
Shopify Inc.
(Translation of registrant’s name into English)
150 Elgin Street, 8th Floor Ottawa, Ontario, Canada K2P 1L4
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:



Form 20-F	Form 40-F	X

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

DOCUMENTS INCLUDED AS PART OF THIS REPORT

Exhibit




99.1	Shopify Inc. – 2018 Year In Review

99.2	Shopify Inc. – Financial Statements for the year ended December 31, 2018

99.3	Shopify Inc. – Management’s Discussion and Analysis for the year ended December 31, 2018

SIGNATURES

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



		Shopify Inc.
		(Registrant)
Date:	April 17, 2019	By:	/s/ Joseph A. Frasca
			Name: Joseph A. Frasca Title: Chief Legal Officer and Corporate Secretary

EXHIBIT 99.1 Over the years we’ve also helped foster a large ecosystem 2015 Letter to Shareholders, continued A Year of that has grown up around Shopify. App developers, design Achievements agencies, and theme designers have built businesses of The irst Shopify store was our own. In 2004, we took their own by creating value for merchants on the Shopify First one billion dollars in revenue. something we loved, snowboarding, and built a business platform. Instead of stiling this enthusiastic pool of talent around it. The idea was to set up an online store and and carving out the proits for ourselves, we’ve made a create a snowboarding empire. But there was a problem: point of supporting our partners and aligning their First one billion orders on the the software landscape we encountered seemed to work interests with our own. In order to build long-term value, Shopify platform cumulatively. against our ambitions at every step. Back then, online we decided to forgo short-term revenue opportunities and store software was built for existing big businesses that nurture the people who were putting their trust in Shopify. Fastest-growing software-as- were transitioning online. It was incredibly expensive, As a result, today there are thousands of partners that a-service company in history unnecessarily complex, and infuriatingly inlexible. have built businesses around Shopify by creating custom to achieve $1B in revenue, apps, custom themes, or any number of other services for growing revenue 59% over Shopify merchants. Existing software was not designed with the new 2017. entrepreneur in mind, so we rejected the existing models 2018 and created our own. Our custom software met our needs This is a prime example of how we approach value and so well that we decided to take everything we learned and something that potential investors must understand: we Year in Review shift our business away from snowboards and towards do not chase revenue as the primary driver of our ixing the glaring hole in the ecommerce market. We knew business. Shopify has been about empowering merchants that many future businesses would be created online irst, since it was founded, and we have always prioritized We are achieving what we and software needed to support the irst steps of long-term value over short- term revenue opportunities. entrepreneurship, not just the established big guys. We We don’t see this changing. committed to do four years ago, set out to create the software that we wished would have when we became a public company: existed, and we launched it in 2006 under the name In terms of the value we create, we think that the most make commerce better for everyone. Shopify. important thing that we deliver to our merchants is simplicity. Simplicity isn’t simple. It takes tremendous Original Letter from Tobi, 2015 Tobi, from Original Letter Shopify is exactly this: the only platform you need to build care, discipline, and craftsmanship to take something your empire. Shopify is the irst thing our merchants log inherently complex like commerce and make it intuitive. into in the morning and the last thing they log out of in the We have spent the last decade democratizing commerce, evening. It’s at the heart of their business—a responsibility simplifying it, and making it accessible for businesses of that we take very seriously. Chances are that you’ve all sizes. already bought products through stores that use Shopify and you didn’t even realize it. More than 165,000 stores Today, businesses sell through dozens of dierent use Shopify today. Yet, as a brand, we are virtually channels: online stores, retail stores, wholesale, at pop-up invisible to consumers. This is by design, as our job is to shops, on social networks, through mobile apps or any make our merchants look their very best in every number of other ways. Merchants often hack together interaction they have with consumers. dierent applications and technologies in order to try to address their multi-channel requirements. We’re now showing them that they don’t have to; that their complex Over $8 billion of GMV has already been transacted Revenue $1,073.2M through our platform, with the most recent quarter setup can be reduced to a single, simple platform. By the +59% coming in at over $1 billion. We’ve proven that there’s time we’re done, we think Shopify will have established incredible potential in early-stage entrepreneurs when the “new normal”. they are empowered with great technology. Focusing on inspiring entrepreneurship and helping people iterate I want Shopify to be a company that sees the next their ideas, launch new stores and scale their businesses century. To get us there we not only have to correctly predict future commerce trends and technology, but be creates a sense of solidarity: we did it together. We $673.3M believe that by giving merchants an aordable, easy to the ones that push the entire industry forward. Shopify +73% use solution that helps them sell and run their business, was initially built in a world where merchants were simply Shopify will share in their success as they grow. We’ve looking for a homepage for their business. By accurately shown that it was possible to build a single platform that predicting how the commerce world would be changing, and building what our merchants would need next, we works from the very beginning—an entrepreneur with an $389.3M idea—to a business with millions of orders. And while taught them to expect so much more from their software. +90% many of our larger merchants switched to Shopify based on the quality of our platform, a large number of our These underlying aspirations and values drive our mission: make commerce better for everyone. I hope you’ll join us. $205.3M merchants are “homegrown” and started their businesses +95% with us. I’m incredibly proud of this. Merchant solutions $105M $50.3M +109% Subscriptions solutions $23.7M +112% - Tobi May 2015 2012 2013 2014 2015 2016 2017 2018

Taking the Path that Leads to More Entrepreneurs cohort osetscohort thedeclineinrevenue from merchants leaving theplatform. model: theincrease inrevenue from remaining merchants growing withina growth comingfrom illustratesthestrength eachcohort ofourbusiness platformthe Shopify atdierent inourhistory. times Theconsistent revenue The above displays chart theannualrevenue for merchant thatjoined cohorts Revenue By AnnualCohort Monthly Recurring Revenue Merchant Growth Count By In2018 Continent Global Growth Africa 45% 2015 $1.1M 2012 Q1 48% Asia 2016 2013 Q1 Europe 44% 2017 2014 America Q1 North 31% 2018 70% CAGR Oceania 2015 Q1 27% America Pre-2016 2016 2017 2018 2016 South 69% Q1 2017 Q1 December31, 2018 * Revenue andmerchants asat for ourmerchants. objectivesaccomplish these -- are undertaken to partnerships, orinacquisitions platform development, in -- whetherinproduct and Allofourinvestmentsbusiness. and grow ontheir sales operate,making iteasiertostart, empowering merchants, by better for everyone by We are makingcommerce room for learnings. these modelmakesand ourbusiness something thatdidn’t work, discoverythe successful of failure canalsobeviewed as At Shopify, we know that on theirjourney to success. failoften -more thanonce- entrepreneurssuccessful come great but success, With entrepreneurship can We encourage entrepreneurship. USA Canada W Rest ofthe 24% Merchants 12% Reven ue 55% Merchants 70% Revenue 7% Merchants 7% Revenue orld 2018 Q1 $40.9M 7% Merchants 4% Revenue 8% Merchants 6% Revenue Australia UK Simplifying Merchant Operations Orders OnShopify New Products AndFeatures 2018 As ofDecember31, 2018 Portugese. andBrazilian Japanese, German, Italian, * Languagesinclude:French, Spanish, Dashboard Marketing Mobile Languages* 66% +6 methods Payment Local Locations Desktop 34% Protect Fraud 2019 into acompetitive advantage. all helpmerchants turn mobile card reader andmobilephone, in-person payments with a sale (POS) app, whichenables andourpointof businesses; for(AR) accessible small selling withAugmented Reality AR,Shopify whichmakes Pay, ApplePay andGooglePay accelerators suchasShopify since. Ourintegrated checkout to track aheadof the industry desktop, andhave continued devices surpassedthosefrom to merchants from mobile devices. Inearly2016, orders their storefronts viamobile easy for merchants tomanage app in2010, whichmakes it We Mobile launchedtheShopify playbook for nearlyadecade. ofShopify’s part important Mobile deviceshave beenan and securingworking capital. accepting payments, shipping, commonly require, including functionality merchants the broad array ofother Merchant Solutionsaddress platform. Inaddition,our fromaccessible withinthe anddomainseasily themes, also makes apps,custom in-person, Shopify’s platform channels, marketplaces, and social other onlinespaces, over anonlinestore, blogsand mobile, andenablingselling merchants, optimized for feature-rich platform. Builtfor running onanincredibly merchants togetupand subscription packagesenable they love. Shopify’s that aspects oftheirbusiness resources tofocus onthe they canfree upmore time, money, andeort, so platform tosave merchants continually improving the Central toourmissionis ; Catalyzing Merchants’ Sales Buyers From Stores Shopify online shoppers 163 millionin2017 to218millionin2018. merchants’ stores grew onShopify 34% from The numberofconsumers buying from GMV 28 million 2014 $0.7B 2012 online shoppers 57 million 2015 $1.6B +128% 2013 online shoppers 100 million 2016 $3.8B +133% 2014 online shoppers 163 million 2017 $7.7B +105% 2015 online shoppers 218 million 2018 $15.4B +99% 2016 among entrepreneurs. and community-building for education, engagement, new spaceinLos built Angeles Shop Classprograms, andour communityforums,Shopify through blogs, Shopify their brands and businesses our merchants onhow togrow plans. Assuch,we educate and upgrade their Shopify growth Capital, withShopify Shipping,fundtheir Shopify ship more products with process more transactions, revenue we generate asthey on ourplatform, themore The more ourmerchants sell with thoseofourmerchants. Our goalsare closelyaligned $26.3B 2017 +71% $41.1B +56% 2018

EXHIBIT 99.2

Consolidated Financial Statements

December 31, 2018

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, 2018. 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, 2018.

The effectiveness of the Company's internal control over financial reporting as at December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.

February 12, 2019

/s/ Tobias Lütke

Tobias Lütke

Chief Executive Officer

/s/ Amy Shapero

Amy Shapero

Chief Financial Officer

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, (the “Company”) as of December 31, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2018.

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.

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.

/s/ PricewaterhouseCoopers LLP

Chartered Professional Accountants, Licensed Public Accountants

Ottawa, Canada

February 12, 2019

We have served as the Company’s auditor since 2011, which includes periods before the Company became subject to SEC reporting requirements.

Shopify Inc.

Consolidated Balance Sheets

Expressed in US $000’s except share amounts



		As at
		December 31, 2018		December 31, 2017
	Note	$		$
Assets
Current assets
Cash and cash equivalents	4	410,683		141,677
Marketable securities	5	1,558,987		796,362
Trade and other receivables, net	6	41,347		21,939
Merchant cash advances and loans receivable, net	7	91,873		47,101
Other current assets	8	26,192		18,598
		2,129,082		1,025,677
Long-term assets
Property and equipment, net	9	61,612		50,360
Intangible assets, net	10	26,072		17,210
Goodwill	11	38,019		20,317
		125,703		87,887
Total assets		2,254,785		1,113,564
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities	12	96,956		62,576
Current portion of deferred revenue	13	39,180		30,694
Current portion of lease incentives	14	2,552		1,484
		138,688		94,754
Long-term liabilities
Deferred revenue	13	1,881		1,352
Lease incentives	14	22,316		14,970
Deferred tax liability	20	1,132		1,388
		25,329		17,710
Commitments and contingencies	16
Shareholders’ equity
Common stock, unlimited Class A subordinate voting shares authorized, 98,081,889 and 87,067,604 issued and outstanding; unlimited Class B multiple voting shares authorized, 12,310,800 and 12,810,084 issued and outstanding	17	2,215,936		1,077,477
Additional paid-in capital		74,805		43,392
Accumulated other comprehensive income (loss)	18	(12,216	)	3,435
Accumulated deficit		(187,757	)	(123,204	)
Total shareholders’ equity		2,090,768		1,001,100
Total liabilities and shareholders’ equity		2,254,785		1,113,564

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

Shopify Inc.

Consolidated Statements of Operations and Comprehensive Loss

Expressed in US $000’s, except share and per share amounts



		Years ended
		December 31, 2018			December 31, 2017
	Note	$			$
Revenues
Subscription solutions	21	464,996			310,031
Merchant solutions	21	608,233			363,273
		1,073,229			673,304
Cost of revenues
Subscription solutions		100,990			61,267
Merchant solutions		375,972			231,784
		476,962			293,051
Gross profit		596,267			380,253
Operating expenses
Sales and marketing		350,069			225,694
Research and development		230,674			135,997
General and administrative		107,444			67,719
Total operating expenses		688,187			429,410
Loss from operations		(91,920		)	(49,157		)
Other income
Interest income, net		29,436			7,850
Foreign exchange gain (loss)		(2,069		)	1,312
		27,367			9,162
Net loss		(64,553		)	(39,995		)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on cash flow hedges	18	(15,651		)	5,253
Comprehensive loss		(80,204		)	(34,742		)

Basic and diluted net loss per share attributable to shareholders	19	$	(0.61	)	$	(0.42	)
Weighted average shares used to compute basic and diluted net loss per share attributable to shareholders	19	105,671,839			95,774,897

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

Shopify Inc.

Statements of Changes in Shareholders’ Equity

Expressed in US $000’s except share amounts



		Common Stock		Additional Paid-In Capital $		Accumulated Other Comprehensive Income (Loss) $		Accumulated Deficit $		Total $
	Note	Shares	Amount $	Additional Paid-In Capital $		Accumulated Other Comprehensive Income (Loss) $		Accumulated Deficit $		Total $
As at December 31, 2016		89,405,480	468,494	27,009		(1,818	)	(83,209	)	410,476
Exercise of stock options		3,322,993	24,959	(10,185	)	—		—		14,774
Stock-based compensation		—	—	50,535		—		—		50,535
Vesting of restricted share units		824,215	23,967	(23,967	)	—		—		—
Issuance of Class A subordinate voting shares, net of offering costs of $15,518	17	6,325,000	560,057	—		—		—		560,057
Net loss and comprehensive loss for the year		—	—	—		5,253		(39,995	)	(34,742	)
As at December 31, 2017		99,877,688	1,077,477	43,392		3,435		(123,204	)	1,001,100
Exercise of stock options		2,179,999	48,408	(17,914	)	—		—		30,494
Stock-based compensation		—	—	97,690		—		—		97,690
Vesting of restricted share units		935,002	48,363	(48,363	)	—		—		—
Issuance of Class A subordinate voting shares, net of offering costs of $16,312	17	7,400,000	1,041,688	—		—		—		1,041,688
Net loss and comprehensive loss for the year		—	—	—		(15,651	)	(64,553	)	(80,204	)
As at December 31, 2018		110,392,689	2,215,936	74,805		(12,216	)	(187,757	)	2,090,768

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

Shopify Inc.

Consolidated Statements of Cash Flows

Expressed in US $000’s



		Years ended
		December 31, 2018	December 31, 2017
	Note	$	$
Cash flows from operating activities
Net loss for the year		(64,553)	(39,995)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation		27,052	23,382
Stock-based compensation		95,720	49,163
Provision for uncollectible receivables related to merchant cash advances and loans receivable	7	5,922	2,606
Unrealized foreign exchange (gain) loss		1,272	(1,604)
Changes in operating assets and liabilities:
Trade and other receivables		(32,649)	(13,037)
Merchant cash advances and loans receivable		(50,694)	(37,811)
Other current assets		(10,816)	(3,706)
Accounts payable and accrued liabilities		20,641	15,428
Deferred revenue		9,015	10,960
Lease incentives		8,414	2,515
Net cash provided by operating activities		9,324	7,901
Cash flows from investing activities
Purchase of marketable securities		(2,447,955)	(1,129,263)
Maturity of marketable securities		1,698,264	642,073
Acquisitions of property and equipment		(27,950)	(20,043)
Acquisitions of intangible assets		(13,595)	(4,219)
Acquisition of businesses, net of cash acquired	22	(19,397)	(15,718)
Net cash used by investing activities		(810,633)	(527,170)
Cash flows from financing activities
Proceeds from the exercise of stock options		30,494	14,774
Proceeds from public offering, net of issuance costs	17	1,041,688	560,057
Net cash provided by financing activities		1,072,182	574,831
Effect of foreign exchange on cash and cash equivalents		(1,867)	2,102
Net increase in cash and cash equivalents		269,006	57,664
Cash and cash equivalents – Beginning of Year		141,677	84,013
Cash and cash equivalents – End of Year		410,683	141,677

Non-cash investing activities:
Acquired property and equipment remaining unpaid		1,931	1,764
Acquired intangible assets remaining unpaid		322	—
Capitalized stock-based compensation		1,970	1,372

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

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. 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, source products, leverage analytics and reporting, and access financing, all from one integrated back office.

The Company’s headquarters and principal place of business are in Ottawa, Canada.


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; and Shopify LLC, Shopify Payments (USA) Inc. and Shopify Holdings (USA) Inc., incorporated in the state of Delaware in the United States. 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: key judgments related to revenue recognition in determining whether the Company is the principal or an agent to the arrangements with merchants, and the estimated period over which contract costs should be amortized; provision for uncollectible receivables related to merchant cash advances and loans; recoverability of deferred tax assets; and fair value of acquired intangible assets. 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. The Company principally generates subscription solutions revenue through the sale of subscriptions to the platform. The Company also generates additional subscription solutions revenues from the sale of themes and apps, the registration of domain names, and the collection of variable platform fees. The Company generates merchant solutions revenue by providing additional services to merchants to increase their use of the platform. The majority of the Company's merchant solutions revenue is from fees earned from merchants based on their customer orders processed through Shopify Payments. The Company also earns 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. 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

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

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 to depict the transfer of promised services to merchants in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services by applying the following steps:

•Identify the contract with a merchant;

•Identify the performance obligations in the contract;

•Determine the transaction price;

•Allocate the transaction price; and

•Recognize revenue when, or as, the Company satisfies a performance obligation.

The Company follows the guidance provided in ASC 606-10, Principal versus 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 the Company is not primarily responsible for the fulfillment and does not have control of the promised service, and therefore 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.

Sales taxes collected from merchants and remitted to government authorities are excluded from revenue.

The Company's arrangements with merchants can include multiple services or performance obligations, which may consist of some or all of the Company's subscription solutions. When contracts involve various performance obligations, the Company evaluates whether each performance obligation is distinct and should be accounted for as a separate unit of accounting under Topic 606. In the case of subscription solutions, the Company has determined that merchants can benefit from the service on its own, and that the service being provided to the merchant is separately identifiable from other promises in the contract. Specifically, the Company considers the distinct performance obligations to be the subscription solution, custom themes, feature-enhancing apps and unique domain names. The total transaction price is determined at the inception of the contract and allocated to each performance obligation based on their relative standalone selling prices. In the case of merchant solutions, the transaction price for each performance obligation is based on an observable standalone selling price that is never bundled, therefore the relative allocation is not required.

The Company determined the standalone selling price by considering its 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 standalone selling prices 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 standalone selling prices.

The Company generally receives payment from its merchants at the time of invoicing. In all other cases, payment terms and conditions vary by contract type, although terms generally include a requirement for payment within 30 days of the invoice date. In instances where timing of revenue recognition differs from the timing of invoicing and subsequent payment, we have determined our contracts generally do not include a significant financing component.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

Subscription Solutions

Subscription revenue is recognized over time on a ratable basis over the contractual term. The contract terms are monthly, annual or multi-year subscription terms. Revenue recognition begins on the date that the Company’s service is made available to the merchant. Certain subscription contracts have a transaction price that includes a variable component that is based on the merchants' volume of sales. In such cases, the Company uses the practical expedient that allows it to determine the transaction price and recognize revenue in the amount to which the Company has a right to invoice. Payments received in advance of services being rendered are recorded as deferred revenue and recognized ratably over time, over the requisite service period.

Revenue from the sale of separately priced themes and apps is recognized at the time of the sale. The right to use domain names is also sold separately and is recognized ratably over time, 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

Revenues earned from Shopify Payments, Shopify Shipping, other transaction services, and referral fees are recognized at a point in time, at the time of the transaction. For the sale of POS hardware, revenue is recognized at a point in time, based on when ownership passes to the merchant, in accordance with the shipping terms. The Company earns revenue from Shopify Capital, a merchant cash advance (MCA) and loan program for eligible merchants. The Company evaluates identified underwriting criteria such as, but not limited to, historical sales data prior to purchasing the eligible merchant's future receivables, or making a loan, to help ensure collectibility. Under Shopify Capital, the Company purchases a designated amount of future receivables at a discount or makes a loan, and the merchant remits a fixed percentage of their daily sales to the Company, until the outstanding balance has been fully remitted. For Shopify Capital MCA's, the Company applies a percentage of the remittances collected against the merchant's receivable balance, and a percentage, which is related to the discount, as merchant solutions revenue. For Shopify Capital loans, because there is a fixed maximum repayment term, the Company calculates an effective interest rate based on the merchant's expected future payment volume to determine how much of a merchant's repayment to recognize as revenue and how much to apply against the merchant's receivable balance.

Capitalized Contract Costs

As part of obtaining contracts with certain merchants, the Company incurs upfront costs such as sales commissions. The Company capitalizes these contract costs, which are subsequently amortized on a systematic basis consistent with the pattern of the transfer of the good or service to which the contract asset relates, which is generally on a straight-line basis over the estimated life of the merchant relationship. In some instances, the Company applies the practical expedient that allows it to determine this estimate for a portfolio of contracts that have similar characteristics in terms of type of service, contract term and pricing. This estimate is reviewed by management at the end of each reporting period as additional information becomes available. For certain contracts where the amortization period of the contract costs would have been one year or less, the Company uses the practical expedient that allows it to recognize the incremental costs of obtaining those contracts as an expense when incurred and not consider the time value of money.

Cost of Revenues

The Company’s cost of revenues consists of payments for Themes and Domain registration, credit card fees, third-party infrastructure and hosting 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.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

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.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs included in sales and marketing expenses during the years ended December 31, 2018 and 2017 were $131,434 and $92,031 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 expected 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 (Legacy Option Plan), the Amended and Restated Stock Option Plan (Stock Option Plan), and the Amended and Restated Long Term Incentive Plan (Long Term Incentive 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

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

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.

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.

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 USD. Monetary assets and liabilities denominated in foreign currencies are re-measured to USD using the exchange rates at the consolidated balance sheet dates. Non-monetary assets and liabilities denominated in foreign currencies are measured in USD 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.

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, loans, 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.

Derivatives and Hedging

The majority of the Company's derivative products are foreign exchange forward contracts, which are designated as cash flow hedges of foreign currency forecasted 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.

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.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

Provision for Uncollectible Receivables Related to Merchant Cash Advances and Loans

Merchant cash advance receivables and loans represent the aggregate amount of Shopify Capital 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 merchant cash advances and loans 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 fifteen 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 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

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

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 quantitative test for impairment of goodwill. This is done by comparing 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, an impairment loss would be recognized in the Consolidated Statements of Operations and Comprehensive Loss in an amount equal to that difference, limited to the total amount of goodwill allocated to that reporting unit. 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 and loans 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 and loans receivable. Trade and other receivables and merchant cash advances and loans 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.

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 CAD and the USD. The Company is exposed to foreign exchange fluctuations on the revaluation of foreign currency

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

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 and cost of 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, 2018									December 31, 2017
	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	$	1,073,229		$	1,857		$	1,075,086		$	673,304		$	1,104		$	674,408
Cost of revenues	(476,962		)	(3,302		)	(480,264		)	(293,051		)	(2,131		)	(295,182		)
Operating expenses	(688,187		)	(30,275		)	(718,462		)	(429,410		)	(19,068		)	(448,478		)
Loss from operations	$	(91,920	)	$	(31,720	)	$	(123,640	)	$	(49,157	)	$	(20,095	)	$	(69,252	)

(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, excluding the impact of our hedging program and without factoring in any potential changes in demand for the Company's solutions as a result of changes in the CAD-USD exchange rates.

Accounting Pronouncements Adopted in the Year

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, 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.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

The Company adopted this new revenue standard effective January 1, 2018, using the full retrospective method. There was no impact on previously reported results.

The most significant impact of adoption of the new revenue standard in the current year relates to the Company's accounting for incremental costs of obtaining a contract. Specifically, the Company is required to recognize as an asset the incremental sales commission costs of obtaining a contract with a merchant, if the Company expects to recover these costs. The contract assets are subsequently amortized on a systematic basis consistent with the pattern of the transfer of the good or service to which the asset relates to, which in the Company's case, is on a straight-line basis over the estimated life of the related merchant relationship. The adoption of the new revenue standard did not have an impact on the timing and amount of revenue recognition, or on cash from or used in operating, investing, or financing activities.

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 but the Company opted for early adoption for the goodwill impairment test that was completed as of September 30, 2018. The adoption of this standard did not have an impact on the Company's annual goodwill impairment test because the estimated fair value of the reporting unit was greater than its carrying amount.

Recent Accounting Pronouncements Not Yet Adopted

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. In July 2018, the Financial Accounting Standards Board issued ASU No. 2018-11, Leases - Targeted Improvements, which provides an additional transition method. The Company will adopt the standard effective January 1, 2019 using a modified retrospective approach and applying the transition method that does not require adjustments to comparative periods nor require modified disclosures in the comparative periods. The Company will elect the package of practical expedients to not reassess whether a contract is or contains a lease, lease classification and initial direct costs for contracts that expired or existed prior to the effective date. As the lessee to material operating leases, the standard will have a material impact on the Company's consolidated balance sheets, but will not have an impact on its consolidated statements of operations. While the adoption remains in progress, the Company expects that the most significant impact will be the recognition of right-of-use assets and lease liabilities for the Company's operating leases. The Company has completed its process to identify the population of lease arrangements and it is nearing the completion of applying the new leasing standard to each arrangement. The Company has also determined the incremental borrowing rate for each arrangement.

In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which will replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates on loans, trade and other receivables, held-to-maturity debt securities, and other instruments. The update is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. Early adoption is permitted. The Company is currently assessing the impact of this new standard.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

use software. The update is effective for annual periods beginning after December 15, 2019 including interim periods within those periods and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.


4.	Cash and Cash Equivalents

As at December 31, 2018 and 2017, the Company’s cash and cash equivalents balance was $410,683 and $141,677, respectively. These balances included $292,290 and $61,263, respectively, of money market funds, repurchase agreements and commercial paper.


5.	Financial Instruments

As at December 31, 2018, the carrying amount and fair value of the Company’s financial instruments were as follows:



	Level 1 $		Level 2 $		Level 3 $
	Carrying Amount	Fair Value	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Assets:
Cash equivalents:
Commercial paper	—	—	4,994	4,994	—	—
Repurchase agreements	—	—	60,000	60,005	—	—
Marketable securities:
U.S. term deposits	127,500	128,241	—	—	—	—
U.S. federal bonds	230,898	231,299	—	—	—	—
Canadian federal bonds	19,967	19,962	—	—	—	—
Corporate bonds and commercial paper	—	—	1,180,622	1,182,437	—	—

Liabilities:
Derivative liabilities:
Foreign exchange forward contracts	—	—	12,216	12,216	—	—

The fair values above include accrued interest of $5,109, which is excluded from the carrying amounts. The accrued interest is included in Trade and other receivables in the Consolidated Balance Sheets.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

As at December 31, 2017, the carrying amount and fair value of the Company’s financial instruments were as follows:



	Level 1 $		Level 2 $		Level 3 $
	Carrying Amount	Fair Value	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Assets:
Cash equivalents:
Corporate bonds and commercial paper	—	—	9,965	9,965	—	—
Marketable securities:
U.S. term deposits	65,000	65,284	—	—	—	—
U.S. federal bonds	119,074	119,057	—	—	—	—
Canadian federal bonds	19,945	19,940	—	—	—	—
Corporate bonds and commercial paper	—	—	592,343	593,554	—	—
Derivative assets:
Foreign exchange forward contracts	—	—	4,503	4,503	—	—

Liabilities:
Derivative liabilities:
Foreign exchange forward contracts	—	—	795	795	—	—

The fair values above include accrued interest of $2,015, which is excluded from the carrying amounts. The accrued interest is included in Trade and other receivables in the Consolidated Balance Sheets.

All cash equivalents and marketable securities mature within one year of the consolidated balance sheet date.

As at December 31, 2018 the Company held foreign exchange forward contracts to convert USD into CAD, with a total notional value of $276,696 (December 31, 2017 - $182,464), 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, 2018 and December 31, 2017.

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, 2018, $12,216 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 loss and current liabilities, on the consolidated balance sheet. This amount is expected to be reclassified into earnings over the next twelve months. In the year ended December 31, 2018, $4,170 of realized losses (December 31, 2017 - realized gains of $3,398) 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.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

6. Trade and Other Receivables



	December 31, 2018 $	December 31, 2017 $	December 31, 2016 $
Unbilled revenues	12,653	7,616	2,293
Trade receivables	11,191	7,073	2,818
Accrued interest	5,109	2,015	896
Leasehold incentives receivable	4,411	1,607	1,452
Other receivables	7,983	3,628	2,140
	41,347	21,939	9,599

Unbilled revenues represent amounts not yet billed to merchants related to subscription fees for Plus merchants, transaction fees and shipping charges, as at the Consolidated Balance Sheet date.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in our unbilled revenues and trade receivables accounts. The Company determined the allowance based on historical experience and other currently available evidence. Activity in the allowance for doubtful accounts was as follows:



	Years ended
	December 31, 2018 $		December 31, 2017 $
Balance, beginning of the year	1,642		113
Provision for uncollectible receivables	1,355		1,529
Write-offs	(1,974	)	—
Balance, end of the year	1,023		1,642

7. Merchant Cash Advances and Loans Receivable



	December 31, 2018		December 31, 2017		December 31, 2016
	$		$		$
Merchant cash advances and loans receivable, gross	94,612		49,143		12,924
Allowance for uncollectible merchant cash advances and loans receivable	(2,739	)	(2,042	)	(1,028	)
Merchant cash advances and loans receivable, net	91,873		47,101		11,896

The following table summarizes the activities of the Company’s allowance for uncollectible merchant cash advances and loans receivable:



	Years ended
	December 31, 2018		December 31, 2017
	$		$
Balance, beginning of the year	2,042		1,028
Provision for uncollectible merchant cash advances and loans receivable	5,922		2,606
Merchant cash advances and loans receivable charged off, net of recoveries	(5,225	)	(1,592	)
Balance, end of the year	2,739		2,042

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

8. Other Current Assets



	December 31, 2018 $	December 31, 2017 $
Prepaid expenses	12,912	7,239
Deposits	9,599	5,240
Other current assets	3,681	1,616
Foreign exchange contracts	—	4,503
	26,192	18,598


9.	Property and Equipment



	December 31, 2018
	Cost $	Accumulated depreciation $	Net book value $
Leasehold improvements	63,402	16,498	46,904
Computer equipment	14,293	7,540	6,753
Office furniture and equipment	14,092	6,137	7,955
	91,787	30,175	61,612

In the year ended December 31, 2018, the Company retired and disposed of computer equipment with an original cost of $26,201. There was no gain or loss recognized in the Consolidated Statements of Operations and Comprehensive Loss as a result of the disposal of these assets.



	December 31, 2017
	Cost $	Accumulated depreciation $	Net book value $
Leasehold improvements	43,058	10,541	32,517
Computer equipment	34,644	20,592	14,052
Office furniture and equipment	7,660	3,869	3,791
	85,362	35,002	50,360

The following table illustrates the classification of depreciation in the Consolidated Statements of Operations and Comprehensive Loss:



	Years ended
	December 31, 2018 $	December 31, 2017 $
Cost of revenues	5,950	8,055
Sales and marketing	4,087	2,405
Research and development	4,900	4,654
General and administrative	1,968	1,466
	16,905	16,580

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

10. Intangible Assets



	December 31, 2018
	Cost $	Accumulated amortization $	Net book value $
Software development costs	24,963	9,226	15,737
Acquired technology and customer relationships	16,051	8,221	7,830
Purchased software	6,973	4,503	2,470
Domain names	591	556	35
	48,578	22,506	26,072



	December 31, 2017
	Cost $	Accumulated amortization $	Net book value $
Software development costs	12,297	5,394	6,903
Acquired technology and customer relationships	12,935	3,382	9,553
Purchased software	3,752	3,080	672
Domain names	591	509	82
	29,575	12,365	17,210

Internal software development costs of $12,666 and $5,547 were capitalized during the years ended December 31, 2018 and 2017, respectively, and are classified within software development costs as an intangible asset. Amortization expense related to the capitalized internally developed software was $3,832 and $2,837 for the years ended December 31, 2018 and 2017, 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:



	Years ended
	December 31, 2018 $	December 31, 2017 $
Cost of revenues	9,720	5,983
Sales and marketing	252	312
Research and development	60	299
General and administrative	109	208
	10,141	6,802

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

Estimated future amortization expense related to intangible assets, as at December 31, 2018 is as follows:



Fiscal Year	Amount $
2019	13,296
2020	9,508
2021	3,053
2022	215
Total	26,072

11. Goodwill

In the year ended December 31, 2018, the Company acquired Solutions Alveo Inc. and Tictail, Inc. resulting in additions to goodwill of $2,577 and $15,125, respectively. The remainder of the Company's goodwill relates to previous acquisitions of various companies including, but not limited to, Oberlo UAB, which was acquired on April 28, 2017. Goodwill is attributable to the Company’s single reporting unit.

The Company completed its annual impairment test of goodwill as of September 30, 2018. 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, determined using market capitalization, was greater than its carrying amount.

No goodwill impairment was recognized in the years ended December 31, 2018 or December 31, 2017.

The gross changes in the carrying amount of goodwill as of December 31, 2018 and December 31, 2017 are as follows:



	December 31, 2018	December 31, 2017
	$	$
Balance, beginning of the year	20,317	15,504
Acquisition of Tictail, Inc.	15,125	—
Acquisition of Solutions Alveo Inc.	2,577	—
Acquisition of Oberlo UAB	—	4,813
Balance, end of the year	38,019	20,317


12.	Accounts Payable and Accrued Liabilities



	December 31, 2018 $	December 31, 2017 $
Trade accounts payable and trade accruals	61,271	44,333
Employee related accruals	14,321	10,610
Foreign exchange forward contracts	12,216	795
Other payables and accruals	9,148	6,838
	96,956	62,576

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

13. Deferred Revenue



	Years ended
	December 31, 2018 $		December 31, 2017 $
Balance, beginning of the year	32,046		21,086
Deferral of revenue	37,563		29,111
Recognition of deferred revenue	(28,548	)	(18,151	)
Balance, end of the year	41,061		32,046



	December 31, 2018 $	December 31, 2017 $
Current portion	39,180	30,694
Long term portion	1,881	1,352
	41,061	32,046

The opening balances of current and long-term deferred revenue were $20,164 and $922, respectively, as of January 1, 2017.

14. Lease Incentives

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.

The Company also maintains other offices in Canada, the United States, Germany, Lithuania, Sweden, 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, 2018 and 2017:



	December 31, 2018 $	December 31, 2017 $
Current portion	2,552	1,484
Long term portion	22,316	14,970
	24,868	16,454


15.	Credit Facility

The Company has a revolving credit facility with Royal Bank of Canada for $8,000 CAD. The credit facility bears interest at the Royal Bank Prime Rate plus 0.30%. As at December 31, 2018 the effective rate was 4.25%, and no cash amounts have been drawn under this credit facility.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts


16.	Commitments and Contingencies

Operating Leases and Unconditional Purchase Obligations

The Company has entered into various non-cancellable operating leases for certain offices with contractual lease periods expiring between 2019 and 2037. Rent expense was $22,123 and $11,744 for the years ended December 31, 2018 and 2017, respectively. The Company has also entered into agreements where it commits to certain usage levels related to outsourced hosting.

Amounts of minimum future annual payments under non-cancellable operating leases and purchase obligations in each of the next five years and thereafter as at December 31, 2018 are as follows:



Fiscal Year	Amount $
2019	43,972
2020	58,555
2021	47,443
2022	34,378
2023	38,788
Thereafter	346,367
Total future minimum payments	569,503

Litigation and Loss Contingencies

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.

17. Shareholders’ Equity

Public Offerings

In December 2018, the Company completed a public offering in which it issued and sold 2,600,000 Class A subordinate voting shares at a public offering price of $154.00 per share. The Company received total net proceeds of $394,704 after deducting offering fees and expenses of $5,696.

In February 2018, the Company completed a public offering in which it issued and sold 4,800,000 Class A subordinate voting shares at a public offering price of $137.00 per share. The Company received total net proceeds of $646,984 after deducting offering fees and expenses of $10,616.

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.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

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 stock option plan ("Stock Option Plan"), as well as a Long Term Incentive Plan ("LTIP"), each of which became effective upon the closing of the Company's IPO on May 27, 2015. On May 30, 2018, the Company’s Board of Directors and shareholders amended both the Stock Option Plan and the LTIP.

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 were 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

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

the service or employment of any of the Company’s affiliates from the date of grant until such PSU vesting 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 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, 2019 there were 15,047,030 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, 2018 and 2017:



	Shares Subject to Options Outstanding						Outstanding RSUs
	Number of Options⁽¹⁾		Weighted Average Exercise Price $	Remaining Contractual Term (in years)	Aggregate Intrinsic Value ⁽²⁾$	Weighted Average Grant Date Fair Value $	Outstanding RSUs		Weighted Average Grant Date Fair Value $
December 31, 2016	9,899,393		9.74	6.78	328,003	—	2,360,817		29.97
Stock options granted	1,061,478		74.80	—	—	37.51	—		—
Stock options exercised	(3,322,993	)	4.45	—	—	—	—		—
Stock options forfeited	(284,332	)	31.65	—	—	—	—		—
RSUs granted	—		—	—	—	—	1,172,707		81.89
RSUs settled	—		—	—	—	—	(824,215	)	28.85
RSUs forfeited	—		—	—	—	—	(210,631	)	40.21
December 31, 2017	7,353,546		20.67	6.81	590,700	—	2,498,678		53.84
Stock options granted	486,434		138.12	—	—	69.81	—
Stock options exercised	(2,179,999	)	13.99	—	—	—	—
Stock options forfeited	(183,191	)	44.58	—	—	—	—
RSUs granted	—		—	—	—	—	1,127,094		139.58
RSUs settled	—		—	—	—	—	(935,002	)	51.72
RSUs forfeited	—		—	—	—	—	(217,105	)	68.70
December 31, 2018	5,476,790		32.96	6.23	577,731	—	2,473,665		92.40

Stock options exercisable as of December 31, 2018	3,517,755		12.19	5.22	444,159

(1) As at December 31, 2018, 2,790,681 of the outstanding stock options were granted under the Company's Legacy Option Plan and are exercisable for Class B multiple voting shares, and 2,686,109 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 Class A subordinate voting shares as of December 31, 2018 and December 31, 2017.

As at December 31, 2018 the Company had issued 347 Deferred Share Units under its Long Term Incentive Plan.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

The total intrinsic value of stock options exercised and RSUs settled during the years ended December 31, 2018 and 2017 was $409,029 and $311,354 respectively. The aggregate intrinsic value of options exercised 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, 2018 and 2017, there was $227,523 and $157,175, 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 2.24 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 five-day 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.

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:



	Years ended
	December 31, 2018		December 31, 2017
Expected volatility	54.2	%	56.0	%
Risk-free interest rate	2.72	%	1.85	%
Dividend yield	Nil		Nil
Average expected life	5.31		5.15

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:



	Years ended
	December 31, 2018	December 31, 2017
	$	$
Cost of revenues	2,232	1,102
Sales and marketing	21,928	8,986
Research and development	55,164	31,338
General and administrative	16,396	7,737
	95,720	49,163

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts


18.	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, 2018 and 2017:



	Gains and Losses on Cash Flow Hedges (all amounts net of tax)
	Years ended
	December 31, 2018		December 31, 2017
	$		$
Balance, beginning of the year	3,435		(1,818	)

Other comprehensive income (loss) before reclassifications	(19,821	)	8,651
Amounts reclassified from accumulated other comprehensive income (loss) to earnings	4,170		(3,398	)
Other comprehensive income (loss), net of tax	(15,651	)	5,253
Balance, end of the year	(12,216	)	3,435


19.	Net Loss per Share

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:



	December 31, 2018	December 31, 2017
Basic and diluted weighted average number of shares outstanding	105,671,839	95,774,897
The following items have been excluded from the diluted weighted average number of shares outstanding because they are anti-dilutive:
Stock options	5,476,790	7,353,546
Restricted share units	2,473,665	2,498,678
	7,950,455	9,852,224

In the years ended December 31, 2018 and 2017, the Company was in a loss position and therefore diluted loss per share is equal to basic loss per share.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

20. Income Taxes

The domestic and foreign components of comprehensive loss before income taxes were as follows:



	Years ended
	December 31, 2018 $		December 31, 2017 $
Domestic	(71,188	)	(31,056	)
Foreign	(9,016	)	(3,686	)
	(80,204	)	(34,742	)

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, 2018 and 2017 is as follows:



	Years ended
	December 31, 2018 $		December 31, 2017 $
Comprehensive loss	(80,204	)	(34,742	)
Expected income tax expense at Canadian statutory income tax rate of 26.51% (2017 - 26.51%)	(21,269	)	(9,211	)
Permanent differences	16,057		13,015
Share issuance costs	(6,599	)	(4,502	)
Stock-based compensation benefits	(3,132	)	(4,722	)
State tax losses	(659	)	(4,875	)
Other items	(88	)	367
Foreign tax rate differential	1,726		711
Increase in valuation allowance	13,964		9,217
Provision for income tax (recovery) expense	—		—

During the years ended December 31, 2018 and 2017, the comprehensive loss before income taxes includes foreign income loss of $9,016 and $3,686, respectively.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

The significant components of the Company’s deferred income tax assets and liabilities as of December 31, 2018 and 2017 are as follows:



	December 31, 2018 $		December 31, 2017 $
Deferred tax assets
State tax loss carryforwards	7,493		6,839
Share issuance costs	8,011		6,662
Lease accruals and reserves	8,384		5,747
Tax loss carryforwards	12,047		4,283
Scientific Research & Experimental Development (SR&ED) expenditure carryforwards	2,539		3,486
Temporary differences on capital and intangible assets	2,366		3,236
Investment tax credits	3,294		3,046
Stock based compensation expense	6,427		237
Valuation allowance	(46,343	)	(31,653	)
Total deferred tax assets	4,218		1,883

Deferred tax liabilities
Capitalized software development costs	5,350		3,271
Total deferred tax liabilities	5,350		3,271

Net deferred tax liability	1,132		1,388

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of December 31, 2018, a valuation allowance continues to be recorded against all of our deferred tax assets as we believe that it is not more likely than not that our deferred tax assets will be realized.

The Company does not 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, 2018 and 2017, 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 U.S. subsidiaries file federal and state income tax returns in the U.S. and 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 2011 through 2018.

The Company was subject to a corporate income tax audit by the Canadian Revenue Agency (CRA) for tax years ending December 31, 2015. During the year ending December 31, 2018, the CRA concluded its audit with no reassessment and, thus, no interest or penalties. There is no impact to the consolidated financial statements for the year ending December 31, 2018.

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 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 investment tax credits and amounts ultimately received is recorded when the amount becomes known.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

As at December 31, 2018 and 2017, the Company had unused non-capital tax losses of approximately $169,967 and $96,495 respectively. $17,210 of the non-capital tax losses as at December 31, 2018 do not expire, while the $152,757 remaining non-capital tax losses are due to expire between 2032 and 2038. U.S. state losses of $116,026 are included in the balance at December 31, 2018. In addition, at December 31, 2018 and 2017, the Company has a SR&ED expenditure pool balance totaling $9,575 and $13,148, respectively, which does not expire, and investment tax credits of $4,179 and $3,762, respectively. The investment tax credits are due to expire between 2030 and 2038.

21. 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:



	Years ended
	December 31, 2018			December 31, 2017
	$	%		$	%
Canada	70,774	6.6	%	48,107	7.2	%
United States	755,454	70.4	%	478,286	71.0	%
United Kingdom	69,596	6.5	%	44,590	6.6	%
Australia	47,937	4.5	%	31,625	4.7	%
Rest of World	129,468	12.0	%	70,696	10.5	%
	1,073,229	100.0	%	673,304	100.0	%

The following table presents the total net book value of the Company’s long-lived physical assets by geographic location:



	December 31, 2018			December 31, 2017
	$	%		$	%
Canada	58,460	94.9	%	40,309	80.0	%
United States	1,593	2.6	%	9,633	19.2	%
Rest of World	1,559	2.5	%	418	0.8	%
	61,612	100.0	%	50,360	100.0	%


22.	Business Acquisitions

Solutions Alveo Inc.

On June 22, 2018, the Company completed the acquisition of Solutions Alveo Inc., a company based in Montreal, Canada, which developed an app that helps automate the return process for Shopify merchants. The Company acquired 100 percent of the outstanding shares of Solutions Alveo Inc. The transaction was accounted for as a business combination. The operations of Solutions Alveo Inc. have been consolidated into the Company's results as of the acquisition date.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

Tictail, Inc.

On November 19, 2018, the Company completed the acquisition of Tictail, Inc. and all of its subsidiaries (Tictail), a Delaware corporation based in Stockholm, Sweden, which operates an e-commerce platform. The Company acquired 100 percent of the outstanding shares of Tictail in exchange for cash consideration of $17,144. The transaction was accounted for as a business combination. The operations of Tictail have been consolidated into the Company's results as of the acquisition date.

The following table summarizes the final purchase price allocation of the Tictail assets acquired and liabilities assumed at the acquisition date:



	Amount $
Net closing working capital:
Cash	1,465
Trade and other receivables	156
Other current assets	1,054
Accounts payable and accrued liabilities	(207	)
Other current liabilities	(1,640	)
Estimated fair value of identifiable assets acquired:
Acquired technology	1,400
Customer relationships	100
Goodwill	15,125
Deferred tax liability on acquired intangibles	(309	)
Total purchase price	17,144

The acquired technology was valued at $1,400 and customer relationships were valued at $100 using a cost approach. The acquired intangibles are being amortized over periods ranging from 1 to 3 years. Goodwill from the Tictail acquisition is primarily attributable to the 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.

Shopify Inc.

Notes to the Consolidated Financial Statements

Expressed in US $000's except share and per share amounts

Oberlo UAB

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.

The following table summarizes the final purchase price allocation of the Oberlo assets acquired and liabilities assumed at the acquisition date:



	Amount $
Net closing working capital:
Cash	1,521
Trade and other receivables	1,603
Accounts payable and accrued liabilities	(885	)
Estimated fair value of identifiable assets acquired:
Acquired technology	11,590
Customer relationships	395
Goodwill	4,813
Deferred tax liability on acquired intangibles	(1,798	)
Total purchase price	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.

23. Comparative Figures

Certain comparative figures have been reclassified in order to conform to the current period presentation.

EXHIBIT 99.3

MANAGEMENT’S DISCUSSION AND ANALYSIS

February 12, 2019

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, 2018, 2017, and 2016, and our financial position as of December 31, 2018. You should read this MD&A together with our audited consolidated financial statements and the accompanying notes for the fiscal years ended December 31, 2018, 2017, and 2016. Additional information regarding Shopify, including our 2018 annual information form and our annual report on Form 40-F for the year ended December 31, 2018, 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:


•	the continued expansion of the number of channels for merchants to transact through;


•	the achievement of innovations and enhancements to, and expansion of, our platform and our solutions;


•	our exploration of new ways to accelerate checkout;


•	our ability to make it easier for merchants to manage their storefronts via their mobile devices;


•	whether a merchant using Shopify will ever need to re-platform;


•	the continued growth of our app developer, theme designer and partner ecosystem;


•	our revenue growth objectives and expectations about future profitability;


•	plans to continue making investments to drive future growth;


•	our expectation that the continued growth of merchant solutions may cause a decline in our overall gross margin percentage;


•	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 subscription solutions gross margin percentage will fluctuate modestly based on the mix of subscription plans that our merchants select;


•	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;


•	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 expectation that our results of operations will be adversely impacted by an increase in the value of the Canadian dollar ("CAD") relative to the USD;


•	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; 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:


•	our ability to increase the functionality of our platform;


•	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;


•	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 contribute to revenues and 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 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, 2018 and elsewhere in this MD&A, including but not limited to risks relating to:


•	sustaining our rapid growth;


•	managing our growth;


•	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 buyers, as well as buyers 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;


•	international sales and the use of our platform in various countries;


•	our potential inability to compete successfully against current and future competitors;


•	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 buyers;


•	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;


•	acquisitions and investments;


•	seasonal fluctuations;


•	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;


•	Shopify Capital and offering financing;


•	our pricing decisions for our solutions;


•	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;


•	our tax loss carryforwards;


•	our dependence upon buyers’ 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.

Overview

Shopify is the leading cloud-based, multi-channel commerce platform. 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, source products, leverage analytics and reporting, and access financing, 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, native mobile apps, buy buttons, and marketplaces. 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 buyers across these multiple sales channels. Merchants use their Shopify dashboard to manage products and inventory, process orders and payments, ship orders, build customer relationships, source products, 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. With each new transaction processed, we grow our data proficiency. This cloud-based infrastructure not only relieves merchants from running and securing their own hardware, it also consolidates data generated by the interactions between buyers 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. Shopify is designed to help our merchants own their brand, develop a direct relationship with their buyers, and make their buyer experience memorable and distinctive. We recognize that in a world where buyers have more choices than ever before, a merchant’s brand is increasingly important. The Shopify platform is designed to allow a merchant to keep their brand present in every interaction to help build buyer loyalty and competitive advantage against traditional retailers. While our platform is designed to empower merchants first, merchants benefit when buyers are confident that their payments are secure. We believe that an increasing awareness among buyers that Shopify provides a superior and secure checkout experience is an additional advantage for our merchants in an increasingly competitive market. For merchants using Shopify Payments, buyers are already getting a superior experience, and with our investments in additional customer touchpoints such as retail and shipping, brands that sell on Shopify can offer buyers an end-to-end, managed shopping experience that previously was only available to much larger businesses.

Mobile. As ecommerce expands as a percentage of overall retail transactions, today’s buyers 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 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 buyers. 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’ buyers to more easily buy products over mobile websites. Our merchants are able to offer their buyers the ability to quickly and securely check out by using Shopify Pay, Apple Pay, and Google 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.

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 18,000 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 2,500 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, from aspirational entrepreneurs to large enterprises, and all retail verticals realize their potential at all stages of their business life cycle. While our platform can scale to meet the needs of large merchants, we focus on selling to small and medium-sized businesses 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, 2018, our platform facilitated Gross Merchandise Volume ("GMV") of $41.1 billion, representing an increase of 56.2% from the year ended December 31, 2017. 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, 2018 our total revenue was $1,073.2 million, an increase of 59.4% versus the year ended December 31, 2017. 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, 2018, subscription solutions revenues accounted for 43.3% of our total revenues (46.0% in the year ended December 31, 2017). 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 standard Shopify plans. Shopify Plus caters to merchants with higher-volume sales and offers additional functionality, scalability and support requirements, including a dedicated Merchant Success Manager. Unilever, Kylie Cosmetics, Allbirds, and MVMT 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, including variable platform fees, and from the sale of themes, apps, and the registration of domain names. Our merchants typically enter into monthly subscription agreements. The revenue from these agreements is recognized over time on a ratable basis over the contractual term 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 $310.0 million in the year ended December 31, 2017 to $465.0 million in the year ended December 31, 2018, representing an increase of 50.0%. As of December 31, 2018, MRR totaled $40.9 million, representing an increase of 37.0% relative to MRR at December 31, 2017. Subscription solutions revenue has been growing at a faster rate than

MRR due to apps and platform fees increasing as a percentage of total subscription solutions. 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 609,000 as at December 31, 2017 to approximately 820,000 as at December 31, 2018.

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, 2018, merchant solutions revenues accounted for 56.7% of total revenues (54.0% in the year ended December 31, 2017). 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, referral fees from partners, Shopify Capital, Shopify Shipping, 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 $363.3 million in the year ended December 31, 2017 to $608.2 million in the year ended December 31, 2018, representing an increase of 67.4%.

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 expand our merchant base, retain merchants as they grow their businesses on our platform, offer more sales channels that connect merchants with their specific target audience, develop new solutions to extend our platform’s functionality and catalyze merchants’ sales growth, enhance our ecosystem and partner programs, provide a high level of merchant support, hire, retain and motivate qualified personnel, 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.

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") and Gross Merchandise Volume ("GMV"). Our key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies.

The following table shows MRR and GMV for the years ended December 31, 2018 and 2017.



	Years ended December 31,
	2018		2017
	(in thousands)
Monthly Recurring Revenue	$	40,932	$	29,877
Gross Merchandise Volume	$	41,103,238	$	26,320,150

Monthly Recurring Revenue

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, which excludes variable platform fees, 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 $40.9 million of MRR as at December 31, 2018 compared to $29.9 million as at December 31, 2017.

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, 2018 and 2017, we facilitated GMV of $41.1 billion and $26.3 billion, respectively. For merchants on the platform for 12 months or more, the average monthly year-over-year GMV growth was 24% (2017 - 29%).

Factors Affecting the Comparability of Our Results

Change in Revenue Mix

As a result of the continued growth of Shopify Payments, transaction fees, revenue sharing agreements, Shopify Capital, and Shopify Shipping, 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 this solution. 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 may cause a decline in our overall gross margin percentage.

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 USD, a significant portion of our operating expenses are incurred in CAD. As a result, our results of operations will be adversely impacted by an increase in the value of the CAD relative to the USD. 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-USD 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, including variable platform fees. 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 for all plans, except Shopify Plus, are paid to us at the start of the applicable subscription period, regardless of the length of the subscription period. Shopify Plus plans are billed in arrears. For subscription fees that are received in advance of providing the related services, we record deferred revenue on our consolidated balance sheet for the unearned revenue and recognize revenue over time on a ratable basis over the contractual term. 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. Revenues from variable platform fees are based on the merchants' volume of sales and recognized as revenue when we have a right to invoice. They are classified within subscription solutions because they represent a variable component of the merchants' subscription fee.

Merchant Solutions

We generate merchant solutions revenues from payment processing fees from Shopify Payments, transaction fees, referral fees from partners, Shopify Capital, Shopify Shipping, 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.

We also generate merchant solutions revenues in the form of referral fees from partners to which we direct business and with which 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.

Shopify Capital, a merchant cash advance ("MCA") and loan program for eligible merchants, is offered in the United States 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 or making a loan to help ensure collectibility. Under Shopify Capital, we purchase a designated

amount of future receivables at a discount or make a loan. The advance, or the loan, is forwarded to the merchant at the time the related agreement is entered into, and the merchant remits a fixed percentage of their daily sales until the outstanding balance has been remitted. For Shopify Capital MCA's, we apply a percentage of the remittances collected against the merchant's receivable balance, and a percentage, which is related to the discount, as merchant solutions revenue. For Shopify Capital loans, because there is a fixed maximum repayment term, we calculate an effective interest rate based on the merchant's expected future payment volume to determine how much of a merchant's repayment to recognize as revenue and how much to apply against the merchant's receivable balance. We have mitigated some of the risks associated with Shopify Capital by entering into an agreement with a third party to insure MCA's offered by Shopify Capital.

Shopify Shipping allows merchants to buy and print outbound and return 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.

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 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 billing processing fees and operations and merchant support expenses. Operations and merchant support expenses include third-party infrastructure and hosting costs, 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 third-party infrastructure and hosting costs 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, the volume processed also grows, and we continue to expand Shopify Payments internationally. 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.

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, contract costs associated with Plus merchants are 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, sales and use and other value added taxes, insurance, 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.

Results of Operations

The following table sets forth our consolidated statement of operations for the years ended December 31, 2018, 2017, and 2016.



	Years ended December 31,
	2018			2017			2016
	(in thousands, except share and per share data)
Revenues:
Subscription solutions	$	464,996		$	310,031		$	188,606
Merchant solutions	608,233			363,273			200,724
	1,073,229			673,304			389,330
Cost of revenues⁽¹⁾:
Subscription solutions	100,990			61,267			39,478
Merchant solutions	375,972			231,784			140,357
	476,962			293,051			179,835
Gross profit	596,267			380,253			209,495
Operating expenses:
Sales and marketing⁽¹⁾	350,069			225,694			129,214
Research and development⁽¹⁾	230,674			135,997			74,336
General and administrative⁽¹⁾	107,444			67,719			43,110
Total operating expenses	688,187			429,410			246,660
Loss from operations	(91,920		)	(49,157		)	(37,165		)
Other income	27,367			9,162			1,810
Net loss	$	(64,553	)	$	(39,995	)	$	(35,355	)
Basic and diluted net loss per share attributable to shareholders	$	(0.61	)	$	(0.42	)	$	(0.42	)
Weighted average shares used to compute net loss per share attributable to shareholders	105,671,839			95,774,897			83,988,597

(1) Includes stock-based compensation expense and related payroll taxes as follows:



	Years ended December 31,
	2018		2017		2016
	(in thousands)
Cost of revenues	$	2,441	$	1,281	$	718
Sales and marketing	24,056		9,876		4,444
Research and development	59,575		34,560		15,364
General and administrative	17,690		9,485		4,495
	$	103,762	$	55,202	$	25,021

The following table sets forth our consolidated statement of operations as a percentage of total revenues for the years ended December 31, 2018, 2017, and 2016.



	Years ended December 31,
	2018		2017		2016
Revenues
Subscription solutions	43.3	%	46.0	%	48.4	%
Merchant solutions	56.7	%	54.0	%	51.6	%
	100.0	%	100.0	%	100.0	%
Cost of revenues
Subscription solutions	9.4	%	9.1	%	10.1	%
Merchant solutions	35.0	%	34.4	%	36.1	%
	44.4	%	43.5	%	46.2	%
Gross profit	55.6	%	56.5	%	53.8	%
Operating expenses
Sales and marketing	32.6	%	33.5	%	33.2	%
Research and development	21.5	%	20.2	%	19.1	%
General and administrative	10.0	%	10.1	%	11.1	%
Total operating expenses	64.1	%	63.8	%	63.4	%
Loss from operations	(8.5	)%	(7.3	)%	(9.5	)%
Other income	2.5	%	1.4	%	0.5	%
Net loss	(6.0	)%	(5.9	)%	(9.1	)%

The following table sets forth our consolidated revenues by geographic location for the years ended December 31, 2018, 2017, and 2016.



	Years ended December 31,
	2018		2017		2016
	(in thousands)
Revenues:
Canada	$	70,774	$	48,107	$	26,893
United States	755,454		478,286		284,095
United Kingdom	69,596		44,590		25,958
Australia	47,937		31,625		18,163
Rest of World	129,468		70,696		34,221
Total Revenues	$	1,073,229	$	673,304	$	389,330

The following table sets forth our consolidated revenues by geographic location as a percentage of total revenues for the years ended December 31, 2018, 2017, and 2016.



	Years ended December 31,
	2018		2017		2016
Revenues:
Canada	6.6	%	7.2	%	6.9	%
United States	70.4	%	71.0	%	72.9	%
United Kingdom	6.5	%	6.6	%	6.7	%
Australia	4.5	%	4.7	%	4.7	%
Rest of World	12.0	%	10.5	%	8.8	%
Total Revenues	100.0	%	100.0	%	100.0	%

Discussion of the Results of Operations for the years ended December 31, 2018, 2017, and 2016

Revenues



	Years ended December 31,									2018 vs 2017		2017 vs 2016
	2018			2017			2016			% Change		% Change
	(in thousands, except percentages)
Revenues:
Subscription solutions	$	464,996		$	310,031		$	188,606		50.0	%	64.4	%
Merchant solutions	608,233			363,273			200,724			67.4	%	81.0	%
	$	1,073,229		$	673,304		$	389,330		59.4	%	72.9	%
Percentage of revenues:
Subscription solutions	43.3		%	46.0		%	48.4		%
Merchant solutions	56.7		%	54.0		%	51.6		%
Total revenues	100.0		%	100.0		%	100.0		%

Subscription Solutions

Subscription solutions revenues increased $155.0 million, or 50.0%, for the year ended December 31, 2018 compared to the same period in 2017. Subscription solutions revenues increased $121.4 million, or 64.4%, for the year ended December 31, 2017 compared to the same period in 2016. 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 $245.0 million, or 67.4%, for the year ended December 31, 2018 compared to the same period in 2017. The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue growing by $176.0 million, or 64.4%, in 2018 compared to the same period in 2017. 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 $6.6 billion of additional GMV facilitated using Shopify Payments in 2018 compared to the same period in 2017. As at December 31, 2018 Shopify Payments adoption among our merchants was as follows: United States, 91%; Canada, 90%; Australia, 85%; United Kingdom, 84%; Ireland, 75%; New Zealand, 65%; and other countries where Shopify Payments is available, 46%. Additionally, revenue from transaction fees and referral fees from partners increased by $22.5 million, or 59.6%, and $20.1 million, or 78.9%, respectively, during the year ended December 31, 2018 as a result of the increase in non-Payments GMV facilitated through our platform compared to the same period in 2017. Shopify Capital grew by $14.9 million, or 117.6%, driven by the increase in number and amounts of advances and loans, and Shopify Shipping grew by $10.1 million, or 100.5%, driven by the increase in the number of merchants using this service, during the year ended December 31, 2018.

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%, transaction fees growing by $18.0 million, or 91.6%, referral fees from partners growing by $16.1 million, or 172.2%, and Shopify Capital and Shopify Shipping combining for growth of $17.1 million, or 304.0%.

Cost of Revenues



	Years ended December 31,									2018 vs 2017		2017 vs 2016
	2018			2017			2016			% Change		% Change
	(in thousands, except percentages)
Cost of revenues:
Cost of subscription solutions	$	100,990		$	61,267		$	39,478		64.8	%	55.2	%
Cost of merchant solutions	375,972			231,784			140,357			62.2	%	65.1	%
Total cost of revenues	$	476,962		$	293,051		$	179,835		62.8	%	63.0	%
Percentage of revenues:
Cost of subscription solutions	9.4		%	9.1		%	10.1		%
Cost of merchant solutions	35.0		%	34.4		%	36.1		%
	44.4		%	43.5		%	46.2		%

Cost of Subscription Solutions

Cost of subscription solutions increased $39.7 million, or 64.8%, for the year ended December 31, 2018 compared to the same period in 2017. The increase was primarily due to higher third-party infrastructure and hosting costs. The increase was also due to an increase in costs necessary to support a greater number of merchants using our platform, resulting in an increase in: employee-related costs, credit card fees for processing merchant billings, payments to third-party partners for the registration of domain names, and payments to third-party theme developers. As a percentage of revenues, costs of subscription solutions increased from 9.1% in 2017 to 9.4% in 2018 due to increasing the functionality and flexibility of our hosting infrastructure by outsourcing it to a third-party.

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.

Cost of Merchant Solutions

Cost of merchant solutions increased $144.2 million, or 62.2%, for the year ended December 31, 2018 compared to the same period in 2017. The increase was primarily due to the increase in GMV facilitated through Shopify Payments, which resulted in higher payment processing and interchange fees. The increase was also due to higher product costs associated with expanding our product offerings. The overall increase in sales of merchant solutions also resulted in higher credit card fees for processing merchant billings. Cost of merchant solutions as a percentage of revenues increased from 34.4% in 2017 to 35.0% in 2018, mainly as a result of Shopify Payments representing a larger percentage of total revenue.

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 the same period in 2016.

Gross Profit



	Years ended December 31,									2018 vs 2017		2017 vs 2016
	2018			2017			2016			% Change		% Change
	(in thousands, except percentages)
Gross profit	$	596,267		$	380,253		$	209,495		56.8	%	81.5	%
Percentage of total revenues	55.6		%	56.5		%	53.8		%

Gross profit increased $216.0 million, or 56.8%, for the year ended December 31, 2018 compared to the same period in 2017. As a percentage of total revenues, gross profit decreased from 56.5% in the year ended December 31, 2017 to 55.6% in the year ended December 31, 2018, due to Shopify Payments representing a larger percentage of total revenue, increasing the functionality and flexibility of our hosting infrastructure, and higher product costs associated with expanding our product offerings. This was partly offset by the relative growth of higher-margin merchant solutions products, namely referral fees from partners, Shopify Capital, and Shopify Shipping.

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 higher-margin merchant solutions products, namely referral fees from partners, Shopify Capital, and Shopify Shipping.

Operating Expenses

Sales and Marketing



	Years ended December 31,									2018 vs 2017		2017 vs 2016
	2018			2017			2016			% Change		% Change
	(in thousands, except percentages)
Sales and marketing	$	350,069		$	225,694		$	129,214		55.1	%	74.7	%
Percentage of total revenues	32.6		%	33.5		%	33.2		%

Sales and marketing expenses increased $124.4 million, or 55.1%, for the year ended December 31, 2018 compared to the same period in 2017, due to an increase of $80.7 million in employee-related costs ($14.1 million of which related to stock-based compensation and related payroll taxes) to support the growth of the business including in Shopify Plus and International. Expenditures on marketing programs to support the growth of our business, such as advertisements on search engines and social media, as well as payments to partners, increased by $39.7 million. Computer hardware and software costs increased by $4.0 million, largely due to the growth in sales and marketing headcount.

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. In addition to external marketing spending, employee-related costs increased by $42.8 million.

Research and Development



	Years ended December 31,									2018 vs 2017		2017 vs 2016
	2018			2017			2016			% Change		% Change
	(in thousands, except percentages)
Research and development	$	230,674		$	135,997		$	74,336		69.6	%	82.9	%
Percentage of total revenues	21.5		%	20.2		%	19.1		%

Research and development expenses increased $94.7 million, or 69.6%, for the year ended December 31, 2018 compared to the same period in 2017, due to an increase of $89.6 million in employee-related costs ($24.7 million of which related to stock-based compensation and related payroll taxes), a $3.1 million increase in computer hardware and software costs, and a $2.0 million increase in professional services fees, all as a result of growth in our research and development employee base and expanded development programs.

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 $57.6 million in employee-related costs and an increase of $3.5 million in software license costs as a result of the growth in both our business and headcount.

General and Administrative



	Years ended December 31,									2018 vs 2017		2017 vs 2016
	2018			2017			2016			% Change		% Change
	(in thousands, except percentages)
General and administrative	$	107,444		$	67,719		$	43,110		58.7	%	57.1	%
Percentage of total revenues	10.0		%	10.1		%	11.1		%

General and administrative expenses increased $39.7 million, or 58.7%, for the year ended December 31, 2018 compared to the same period in 2017, due to an increase of $30.3 million in employee-related costs ($8.6 million of which related to stock-based compensation and related payroll taxes), a $4.5 million increase in professional services fees for legal and tax services, including those related to our international expansion and the growth of our business, a $4.0 million increase in finance costs, which includes insurance, sales and use and other value added taxes, and bank fees, and a $1.7 million increase in computer and software costs. These increases were offset by a $0.8 million decrease in MCA, loans and Shopify Payments costs due to improved operational performance around underwriting.

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 $13.6 million in employee-related costs, a $4.9 million increase in actual and expected losses associated with Shopify Payments and Shopify Capital, a $4.8 million increase in finance costs, which includes insurance, listing fees, and board expenses, and a $1.0 million increase in professional services fees.

Other Income (Expenses)



	Years ended December 31,						2018 vs 2017	2017 vs 2016
	2018		2017		2016		% Change	% Change
	(in thousands, except percentages)
Other income (expenses), net	$	27,367	$	9,162	$	1,810	*	*


*	Not a meaningful comparison

In the year ended December 31, 2018 we had other income of $27.4 million compared to other income of $9.2 million in the same period in 2017, a positive change of $18.2 million. The increase was driven primarily by $21.6 million higher interest income from investments due to our higher cash, cash equivalents, and marketable securities balances. The remaining difference is from foreign exchange losses.

Other income increased by $7.4 million in the year ended December 31, 2017 compared to the same period in 2016. The increase was driven primarily by an increase in interest income from investments of $6.4 million. The remainder of the increase came from foreign exchange gains.

Profit (Loss)



	Years ended December 31,									2018 vs 2017	2017 vs 2016
	2018			2017			2016			% Change	% Change
	(in thousands, except share and per share data)
Net loss	$	(64,553	)	$	(39,995	)	$	(35,355	)	*	*
Basic and diluted net loss per share attributable to shareholders	$	(0.61	)	$	(0.42	)	$	(0.42	)
Weighted average shares used to compute basic and diluted net loss per share attributable to shareholders	105,671,839			95,774,897			83,988,597


*	Not a meaningful comparison

Basic and diluted net loss per share attributable to shareholders for the year ended December 31, 2018 increased by $(0.19) compared to the same period in 2017. This is due to our continued investments, which aim to increase our revenue base, improve the retention of this base, and strengthen our ability to increase sales to our merchants in order to drive future growth. Basic and diluted net loss per share attributable to shareholders was consistent for the years ended December 31, 2017 and 2016.

Quarterly Results of Operations

The following table sets forth our results of operations for the three months ended December 31, 2018 and 2017.



	Three months ended December 31,
	2018			2017
	(in thousands, except share and per share data)
Revenues:
Subscription solutions	$	133,560		$	93,918
Merchant solutions	210,302			128,896
	343,862			222,814
Cost of revenues⁽¹⁾:
Subscription solutions	26,706			19,867
Merchant solutions	131,413			81,802
	158,119			101,669
Gross profit	185,743			121,145
Operating expenses:
Sales and marketing⁽¹⁾	95,163			67,174
Research and development⁽¹⁾	67,024			40,339
General and administrative⁽¹⁾	33,014			19,745
Total operating expenses	195,201			127,258
Loss from operations	(9,458		)	(6,113		)
Other income:
Interest income, net	9,265			2,966
Foreign exchange gain (loss)	(1,321		)	160
	7,944			3,126
Net loss	$	(1,514	)	$	(2,987	)
Basic and diluted net loss per share attributable to shareholders	$	(0.01	)	$	(0.03	)
Weighted average shares used to compute basic and diluted net loss per share attributable to shareholders	107,734,499			99,551,791

(1) Includes stock-based compensation expense and related payroll taxes as follows:



	Three months ended December 31,
	2018		2017
	(in thousands)
Cost of revenues	$	660	$	370
Sales and marketing	6,641		3,182
Research and development	16,769		10,843
General and administrative	5,356		3,302
	$	29,426	$	17,697

Revenues



	Three months ended December 31,						2018 vs. 2017
	2018			2017			% Change
	(in thousands, except percentages)
Revenues:
Subscription solutions	$	133,560		$	93,918		42.2	%
Merchant solutions	210,302			128,896			63.2	%
	$	343,862		$	222,814		54.3	%
Percentage of revenues:
Subscription solutions	38.8		%	42.2		%
Merchant solutions	61.2		%	57.8		%
Total revenues	100.0		%	100.0		%

Subscription Solutions

Subscription solutions revenues increased $39.6 million, or 42.2%, for the three months ended December 31, 2018 compared to the same period in 2017. 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 $81.4 million, or 63.2%, for the three months ended December 31, 2018 compared to the same period in 2017. The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue growing in the three months ended December 31, 2018 compared to the same period in 2017. 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 our Shopify Payments penetration rate, which was 41.5%, resulting in GMV of $5.8 billion that was facilitated using Shopify Payments for the three months ended December 31, 2018. This compares to a penetration rate of 38.5% resulting in GMV of $3.5 billion that was facilitated using Shopify Payments in the same period in 2017.

In addition to the increase in revenue from Shopify Payments, revenue from transaction fees, referral fees from partners, Shopify Capital, and Shopify Shipping increased during the three months ended December 31, 2018 compared to the same periods in 2017, as a result of the increase in GMV facilitated through our platform compared to the same period in 2017.

Cost of Revenues



	Three months ended December 31,						2018 vs. 2017
	2018			2017			% Change
	(in thousands, except percentages)
Cost of revenues:
Cost of subscription solutions	$	26,706		$	19,867		34.4	%
Cost of merchant solutions	131,413			81,802			60.6	%
Total cost of revenues	$	158,119		$	101,669		55.5	%
Percentage of revenues:
Cost of subscription solutions	7.8		%	8.9		%
Cost of merchant solutions	38.2		%	36.7		%
	46.0		%	45.6		%

Cost of Subscription Solutions

Cost of subscription solutions increased $6.8 million, or 34.4%, for the three months ended December 31, 2018 compared to the same period in 2017. The increase was primarily due to higher third-party infrastructure and hosting costs. The increase was also due to an increase in the costs necessary to support a greater number of merchants using our platform, resulting in an increase in: employee-related costs, credit card fees for processing merchant billings, amortization related to newly launched platform enhancements, payments to third-party partners for the registration of domain names, and payments to third-party theme developers. As a percentage of revenues, cost of subscription solutions decreased from 8.9% in the three months ended December 31, 2017 to 7.8% in the three months ended December 31, 2018 due to a decrease in employee-related costs relative to subscription solutions revenue.

Cost of Merchant Solutions

Cost of merchant solutions increased $49.6 million, or 60.6%, for the three months ended December 31, 2018 compared to the same period in 2017. The increase was primarily due to the increase in GMV facilitated through Shopify Payments, which resulted in higher payment processing and interchange fees. The increase was also due to an increase in credit card fees for processing merchant billings. Cost of merchant solutions as a percentage of revenues increased from 36.7% in the three months ended December 31, 2017 to 38.2% in the three months ended December 31, 2018, mainly as a result of Shopify Payments representing a larger percentage of total revenue.

Gross Profit



	Three months ended December 31,						2018 vs. 2017
	2018			2017			% Change
	(in thousands, except percentages)
Gross profit	$	185,743		$	121,145		53.3	%
Percentage of total revenues	54.0		%	54.4		%

Gross profit increased $64.6 million, or 53.3%, for the three months ended December 31, 2018 compared to the same period in 2017. As a percentage of total revenues, gross profit decreased from 54.4% in the three months ended December 31, 2017 to 54.0% in the three months ended December 31, 2018, principally due to Shopify Payments representing a larger percentage of total revenue, which was partly offset by the relative growth of higher-margin merchant solutions products, namely referral fees from partners, Shopify Capital, and Shopify Shipping as well as lower third-party infrastructure and hosting costs relative to our revenues resulting from optimization efforts and lower employee-related costs.

Operating Expenses

Sales and Marketing



	Three months ended December 31,						2018 vs. 2017
	2018			2017			% Change
	(in thousands, except percentages)
Sales and marketing	$	95,163		$	67,174		41.7	%
Percentage of total revenues	27.7		%	30.1		%

Sales and marketing expenses increased $28.0 million, or 41.7%, for the three months ended December 31, 2018 compared to the same period in 2017, due to an increase of $18.1 million in employee-related costs ($3.4 million of which related to stock-based compensation and related payroll taxes), an increase of $10.2 million in marketing programs, such as advertisements on search engines and social media, as well as payments to partners, all of which support the growth of our business, and an increase of $0.8 million related to computer hardware and software. These increases were offset by a $1.1 million decrease in consulting services.

Research and Development



	Three months ended December 31,						2018 vs. 2017
	2018			2017			% Change
	(in thousands, except percentages)
Research and development	$	67,024		$	40,339		66.2	%
Percentage of total revenues	19.5		%	18.1		%

Research and development expenses increased $26.7 million, or 66.2%, for the three months ended December 31, 2018 compared to the same period in 2017, due to an increase of $25.0 million in employee-related costs ($5.8 million of which related to stock-based compensation and related payroll taxes), a $1.1 million increase in computer hardware and software costs, and a $0.6 million increase in professional services fees, all as a result of the growth in our employee base and expanded development programs.

General and Administrative



	Three months ended December 31,						2018 vs. 2017
	2018			2017			% Change
	(in thousands, except percentages)
General and administrative	$	33,014		$	19,745		67.2	%
Percentage of total revenues	9.6		%	8.9		%

General and administrative expenses increased $13.3 million, or 67.2%, for the three months ended December 31, 2018 compared to the same period in 2017, due to an increase of $7.9 million in employee-related costs ($2.1 million of which related to stock-based compensation and related payroll taxes), a $1.9 million increase in professional services fees for legal and tax services, a $1.6 million increase in finance costs, which includes insurance, sales and use and other value added taxes, and bank fees, a $1.5 million increase in losses and insurance costs related to Shopify Payments and Shopify Capital, and a $0.4 million increase in computer and software costs.

Other Income (Expenses)



	Three months ended December 31,				2018 vs. 2017
	2018		2017		% Change
	(in thousands, except percentages)
Other income (expenses), net	$	7,944	$	3,126	*


*	Not a meaningful comparison

In the three months ended December 31, 2018 we had other income of $7.9 million, compared to other income of $3.1 million in the same period in 2017. The increase was driven mainly by an increase in interest income of $6.3 million, primarily as a result of our increased cash, cash equivalents and marketable securities balances. This was slightly offset by the fact that the foreign exchange gain of $0.2 million in 2017 changed to a foreign exchange loss of $1.3 million in 2018, resulting in a decrease of $1.5 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, 2018. 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.



	Three months ended
	Dec 31, 2018			Sep 30, 2018			June 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017			June 30, 2017			Mar 31, 2017
	(in thousands, except per share data)
Revenues:
Subscription solutions	$	133,560		$	120,517		$	110,721		$	100,198		$	93,918		$	82,435		$	71,598		$	62,080
Merchant solutions	210,302			149,547			134,242			114,142			128,896			89,021			80,057			65,299
	343,862			270,064			244,963			214,340			222,814			171,456			151,655			127,379
Cost of revenues:⁽¹⁾
Subscription solutions	26,706			$	26,600		$	24,524		23,160			19,867			15,458			13,688			12,254
Merchant solutions	131,413			93,737			83,484			67,338			81,802			55,971			51,127			42,884
	158,119			120,337			108,008			90,498			101,669			71,429			64,815			55,138
Gross profit	185,743			149,727			136,955			123,842			121,145			100,027			86,840			72,241
Operating expenses:
Sales and marketing⁽¹⁾	95,163			91,635			87,487			75,784			67,174			58,314			54,872			45,334
Research and development⁽¹⁾	67,024			61,629			54,305			47,716			40,339			36,350			32,714			26,594
General and administrative⁽¹⁾	33,014			27,831			25,924			20,675			19,745			18,039			15,161			14,774
Total operating expenses	195,201			181,095			167,716			144,175			127,258			112,703			102,747			86,702
Loss from operations	(9,458		)	(31,368		)	(30,761		)	(20,333		)	(6,113		)	(12,676		)	(15,907		)	(14,461		)
Other income	7,944			8,184			6,808			4,431			3,126			3,296			1,877			863
Net loss	$	(1,514	)	$	(23,184	)	$	(23,953	)	$	(15,902	)	$	(2,987	)	$	(9,380	)	$	(14,030	)	$	(13,598	)
Basic and diluted net loss per share attributable to shareholders	$	(0.01	)	$	(0.22	)	$	(0.23	)	$	(0.16	)	$	(0.03	)	$	(0.09	)	$	(0.15	)	$	(0.15	)

(1) Includes stock-based compensation expense and related payroll taxes as follows:



	Three months ended
	Dec 31, 2018		Sep 30, 2018		June 30, 2018		Mar 31, 2018		Dec 31, 2017		Sep 30, 2017		June 30, 2017		Mar 31, 2017
	(in thousands)
Cost of revenues	$	660	$	655	$	637	$	489	$	370	$	355	$	307	$	249
Sales and marketing	6,641		6,397		6,249		4,769		3,182		2,729		2,305		1,660
Research and development	16,769		15,669		15,221		11,916		10,843		9,324		8,075		6,318
General and administrative	5,356		5,007		4,386		2,941		3,302		1,981		2,282		1,920
	$	29,426	$	27,728	$	26,493	$	20,115	$	17,697	$	14,389	$	12,969	$	10,147

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, 2018.



	Three months ended
	Dec 31, 2018		Sep 30, 2018		June 30, 2018		Mar 31, 2018		Dec 31, 2017		Sep 30, 2017		June 30, 2017		Mar 31, 2017
Revenues
Subscription solutions	38.8	%	44.6	%	45.2	%	46.7	%	42.2	%	48.1	%	47.2	%	48.7	%
Merchant solutions	61.2	%	55.4	%	54.8	%	53.3	%	57.8	%	51.9	%	52.8	%	51.3	%
	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues
Subscription solutions	7.8	%	9.8	%	10.0	%	10.8	%	8.9	%	9.0	%	9.0	%	9.6	%
Merchant solutions	38.2	%	34.7	%	34.1	%	31.4	%	36.7	%	32.6	%	33.7	%	33.7	%
	46.0	%	44.5	%	44.1	%	42.2	%	45.6	%	41.6	%	42.7	%	43.3	%
Gross profit	54.0	%	55.4	%	55.9	%	57.8	%	54.4	%	58.4	%	57.3	%	56.7	%
Operating expenses:
Sales and marketing	27.7	%	33.9	%	35.7	%	35.4	%	30.1	%	34.0	%	36.2	%	35.6	%
Research and development	19.5	%	22.8	%	22.2	%	22.3	%	18.1	%	21.2	%	21.6	%	20.9	%
General and administrative	9.6	%	10.3	%	10.6	%	9.6	%	8.9	%	10.5	%	10.0	%	11.6	%
	56.8	%	67.0	%	68.5	%	67.3	%	57.1	%	65.7	%	67.8	%	68.1	%
Loss from operations	(2.8	)%	(11.6	)%	(12.6	)%	(9.5	)%	(2.7	)%	(7.4	)%	(10.5	)%	(11.4	)%
Other income	2.3	%	3.0	%	2.8	%	2.1	%	1.4	%	1.9	%	1.2	%	0.7	%
Net loss	(0.4	)%	(8.6	)%	(9.8	)%	(7.4	)%	(1.3	)%	(5.5	)%	(9.3	)%	(10.7	)%

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

Revenues experienced a seasonal decrease in our first quarters as buyers typically reduce their spending following the holiday season resulting in a seasonal decrease in GMV per merchant, which was not completely offset by merchant and MRR growth. Subsequently, revenues have increased each remaining quarter as a result of merchant, MRR, and overall GMV growth. Our merchants have processed additional GMV during the fourth quarter holiday seasons, and as a result we have generated higher merchant solutions revenues in our fourth quarters compared to 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.

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 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



	December 31, 2018		December 31, 2017
	(in thousands)
Cash, cash equivalents and marketable securities	$	1,969,670	$	938,039
Total assets	2,254,785		1,113,564
Total liabilities	164,017		112,464
Total non-current liabilities	25,329		17,710

Total assets increased $1,141.2 million as at December 31, 2018 compared to December 31, 2017, principally due to our two offerings of Class A subordinate voting shares, which closed in February and December 2018. The offerings raised, net of commissions and offering expenses, $1,041.7 million of cash, which has been subsequently used to purchase marketable securities. The increase in total assets was also driven by a $44.8 million increase in merchant cash advances and loans receivable. Total liabilities increased by $51.6 million, principally as a result of an increase in accounts payable and accrued liabilities of $34.4 million, which was due to an increase in foreign exchange forward contract liabilities, payment processing and interchange fees, payroll liabilities, third-party infrastructure costs, and costs related to marketing. The growth in sales of our subscription solutions offering resulted in an increase of deferred revenue of $9.0 million. Construction related to our new offices led to an increase in lease incentive liabilities of $8.4 million.

Liquidity and Capital Resources

To date, we have financed our operations primarily through the sale of equity securities, raising approximately $2.0 billion, net of issuance costs, from investors.

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.

In February 2018, the Company completed a public offering, in which it issued and sold 4,800,000 Class A subordinate voting shares at a public offering price of $137.00 per share. The Company received total net proceeds of $647.0 million after deducting offering fees and expenses of $10.6 million.

In July 2018, due to the expiry of our previous short-form base shelf prospectus, we filed a new 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 registration statement allow Shopify to offer up to $5.0 billion 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.

In December 2018, the Company completed a public offering, in which it issued and sold 2,600,000 Class A subordinate voting shares at a public offering price of $154.00 per share. The Company received total net proceeds of $394.7 million after deducting offering fees and expenses of $5.7 million.

Our principal cash requirements are for working capital and capital expenditures. Excluding current deferred revenue, working capital at December 31, 2018 was $2,029.6 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 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 $1,031.6 million to $1,969.7 million as at December 31, 2018 from $938.0 million as at December 31, 2017, primarily as a result of our February and December 2018 public offerings.

Cash equivalents and marketable securities include money market funds, repurchase agreements, term deposits, U.S. and Canadian federal bonds, corporate bonds, and commercial paper, all maturing within the 12 months from December 31, 2018.

The following table summarizes our total cash, cash equivalents and marketable securities as at December 31, 2018 and 2017 as well as our operating, investing and financing activities for the twelve months ended December 31, 2018 and 2017:



	Years ended December 31,
	2018			2017
	(in thousands)
Cash, cash equivalents and marketable securities (end of year)	$	1,969,670		$	938,039
Net cash provided by (used in):
Operating activities	$	9,324		$	7,901
Investing activities	(810,633		)	(527,170		)
Financing activities	1,072,182			574,831
Effect of foreign exchange on cash and cash equivalents	(1,867		)	2,102
Net increase in cash and cash equivalents	269,006			57,664
Change in marketable securities	762,625			487,961
Net increase in cash, cash equivalents and marketable securities	$	1,031,631		$	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, advancing funds to merchants through Shopify Capital, marketing programs, third-party shipping partners, outsourced hosting costs, and leased facilities.

For the year ended December 31, 2018, cash provided by operating activities was $9.3 million. This was primarily as a result of our net loss of $64.6 million, which once adjusted for $95.7 million of stock-based compensation expense, $27.1 million of amortization and depreciation, a $5.9 million increase of our provision for uncollectible merchant cash advances and loans, and an unrealized foreign exchange loss of $1.3 million, contributed $65.4 million of positive cash flows. Additional cash of $38.1 million resulted from the following increases in operating liabilities: $20.6 million in accounts payable and accrued liabilities due to foreign exchange forward contract liabilities, payment processing and interchange fees, payroll liabilities, third-party infrastructure costs, and costs related to marketing; $9.0 million in deferred revenue due to the growth in sales of our subscription solutions; and $8.4 million in lease incentives related to ongoing construction at our new offices. These were offset by $94.2 million of cash used resulting from the following increases in operating assets: $50.7 million in merchant cash advances and loans as we continue to grow Shopify Capital; $32.6 million in trade and other receivables, and $10.8 million in other current assets driven primarily by an increase in deposits and prepaid expenses.

For the year ended December 31, 2017, cash provided by operating activities was $7.9 million. This was primarily as a result of our net loss of $40.0 million, which once adjusted for $49.2 million of stock-based compensation expense, $23.4 million of amortization and depreciation, a $2.6 million increase of our provision for uncollectible merchant cash advances, and an unrealized foreign exchange gain of $1.6 million, contributed $33.6 million of positive cash flows. Additional cash of $28.9 million resulted from the following increases in operating liabilities: $15.4 million in accounts payable and accrued liabilities; $11.0 million in deferred revenue; and $2.5 million in lease incentives. These were offset by $54.6 million of cash used resulting from the following increases in operating assets: $37.8 million in merchant cash advances; $13.0 million in trade and other receivables; and $3.7 million in other current assets.

Cash Flows From Investing Activities

Cash flows used in investing activities are primarily related to the purchase and sale of marketable securities, purchases of computer 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, 2018 was $810.6 million, which was driven by net purchases of $749.7 million in marketable securities, $28.0 million used to purchase property and equipment, which primarily consisted of expenditures on leasehold improvements, $13.6 million used for purchasing and developing software to add functionality to our platform and support our expanding merchant base, and $19.4 million used to make business acquisitions.

Net cash used in investing activities in the year ended December 31, 2017 was $527.2 million, reflecting net purchases of $487.2 million in marketable securities. Cash used in investing activities also included $20.0 million used to purchase property and equipment, which primarily consisted of expenditures on leasehold improvements and equipment used in our data centers, $4.2 million used towards the development of software, and $15.7 million used to make a business acquisition.

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, 2018 was $1,072.2 million driven by the $1,041.7 million raised by our February and December 2018 public offerings, and $30.5 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 $574.8 million for the same period in 2017 of which $560.1 million was raised by our May 2017 public offering while the remaining $14.8 million related to stock option exercises.

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, 2018:



	Payments Due by Period
	Less Than 1 Year		1 to 3 Years		3 to 5 Years		More Than 5 Years		Total
	(in thousands)
Bank indebtedness	$	—	$	—	$	—	$	—	$	—
Operating lease and unconditional purchase obligations⁽¹⁾	43,972		105,998		73,166		346,367		569,503
Total contractual obligations	$	43,972	$	105,998	$	73,166	$	346,367	$	569,503

(1) Consists of payment obligations under our office leases as well as other unconditional purchase obligations.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, other than operating leases and other unconditional purchase obligations (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 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.

Effect of Foreign Exchange Rates

The following non-GAAP financial measure converts our revenues, cost of revenues, operating expenses, and loss from operations using the comparative period's monthly average exchange rates:



	Years ended December 31,
	2018									2017
	GAAP Amounts As Reported			Exchange Rate Effect⁽¹⁾			At Prior Year Monthly Rates⁽²⁾			GAAP Amounts As Reported
	(in thousands)
Revenues	$	1,073,229		$	153		$	1,073,382		$	673,304
Cost of revenues	(476,962		)	(36		)	(476,998		)	(293,051		)
Operating expenses	(688,187		)	(2,220		)	(690,407		)	(429,410		)
Loss from operations	$	(91,920	)	$	(2,103	)	$	(94,023	)	$	(49,157	)

(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 if monthly CAD-USD market rates from the prior reported period are applied to the current reporting period.

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.

Interest Rate Sensitivity

We had cash, cash equivalents and marketable securities totaling $1,969.7 million as of December 31, 2018. 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

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.

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, 2018 and have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2018.

Management's Annual Report on Internal Control Over Financial Reporting

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, 2018. 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, 2018.

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, 2018, 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.

Changes in Internal Control Over Financial Reporting

During the year ended December 31, 2018, 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 significant 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 hosting platform at any time and are therefore accounted for as service contracts. Our subscription service contracts do not provide for refunds or any other rights of return to merchants in the event of cancellations.

We recognize revenue to depict the transfer of promised services to merchants in an amount that reflects the consideration to which we expect to be entitled in exchange for those services by applying the following steps:


•	Identify the contract with a merchant;


•	Identify the performance obligations in the contract;


•	Determine the transaction price;


•	Allocate the transaction price; and


•	Recognize revenue when, or as, we satisfy a performance obligation.

We follow the guidance provided in ASC 606-10, Principal versus 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 we are not primarily responsible for the fulfillment and do not have control of the promised service, and therefore are the agent in the arrangement with merchants. All other revenue is reported on a gross basis, as we has determined we are the principal in the arrangement.

Capitalized Contract Costs

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.

Provision for Uncollectible Receivables Related to Merchant Cash Advances and Loans

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 merchant cash advances and loans when the recovery occurs.

Accounting Pronouncements Adopted in the Year

The Company adopted this new revenue standard effective January 1, 2018, using the full retrospective method. There was no impact on previously reported results.

Recent Accounting Pronouncements Not Yet Adopted

leases. The Company has completed its process to identify the population of lease arrangements and it is nearing the completion of applying the new leasing standard to each arrangement. The Company has also determined the incremental borrowing rate for each arrangement.

In August 2018, the Financial Accounting Standards Board issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for annual periods beginning after December 15, 2019 including interim periods within those periods and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

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 7, 2019 there were 98,352,852 Class A subordinate voting shares issued and outstanding, and 12,283,365 Class B multiple voting shares issued and outstanding.

As of February 7, 2019 there were 2,555,692 options outstanding under the Company’s Fourth Amended and Restated Incentive Stock Option Plan, of which 2,478,520 were vested as of such date. Each such option is or will become exercisable for one Class B multiple voting share. As of February 7, 2019 there were 2,660,426 options outstanding under the Company’s Amended and Restated Stock Option Plan, of which 859,845 were vested as of such date. Each such option is or will become exercisable for one Class A subordinate voting share.

As of February 7, 2019 there were 2,442,335 RSUs and 478 DSUs outstanding under the Company’s Amended and Restated Long Term Incentive Plan. Each such RSU or DSU will vest as one Class A subordinate voting share.

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Form 6-K SHOPIFY INC. For: Apr 17

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