Shopify Inc 6-K, filed Apr 22, 2021
Shopify Inc. (SHOP)
6-K
2021-04-22
For: 2021-04-22
View Original
Added on
April 06, 2026
About this 6-K
Shopify Inc filed this 6-K on April 22, 2021.
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 | 2021 | |||||||||
Commission File Number | 001-37400 | ||||||||||
Shopify Inc. | |||||||||||
| (Translation of registrant’s name into English) | |||||||||||
151 O’Connor Street, Ground Floor Ottawa, Ontario, Canada K2P 2L8 | |||||||||||
| (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. – 2020 Year In Review
99.2 Shopify Inc. – Financial Statements for the year ended December 31, 2020
99.3 Shopify Inc. – Management’s Discussion and Analysis for the year ended December
31, 2020
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 22, 2021 | By: | /s/ Joseph A. Frasca | ||||||||||||||
| Name: Joseph A. Frasca Title: Chief Legal Officer and Corporate Secretary | |||||||||||||||||
When we launched Shopify in 2006, we set out to answer one question: What would the world look like if entrepreneurship was easier? The tools that existed at the time were made for big businesses with vast resources, and even those tools were not built very well. So we began our 100-year mission to level the playing field, to let entrepreneurs unleash their ideas into the world and thrive in any future that emerged. And it’s working. Five years ago, we invited you to join us on the journey when Shopify entered the public markets. Since then, our shareholders and our partner ecosystem have helped us empower more entrepreneurs reaching for economic independence. The combination of their energy and our innovation has propelled Shopify and small businesses to encouraging new heights. Our merchants Shopify merchants get to keep more of their profits, to reinvest back into their businesses and create economic prosperity in their communities. They can create their own brands and their own relationships with their customers. As we build the one platform merchants need to start and scale their businesses, more entrepreneurs are choosing Shopify to launch their own rocket ships. Because merchant trust is our most valuable currency, we take great care building for them. Each year, we plan what new features to focus on for the next 12 months with an eye to the future. At first, 2020 was no different, but we all know what happened next. Virtually overnight, the lives and livelihoods of entrepreneurs around the world were turned upside down: physical storefronts were shut down, supply chains disrupted, and cash flows dried up. A humanitarian crisis had begun, and an economic crisis was brewing. Our pivot In March, we threw out our plans and hit the reset button. While healthcare heroes on the frontlines were battling an unknown foe in COVID-19, Shopify had an urgent obligation to help businesses stay alive. Merchant survival was our top priority so we pulled forward our product roadmap, moving fast to ship the features our merchants needed to stay afloat. With stay-at-home mandates in place around the world, we saw a quantum leap in the digitalization of commerce. More consumers than ever before turned to online, and businesses had to meet them there, fast. So we lengthened our free trial, expanded Shopify Capital beyond the United States, and showed our merchants how to use Shopify’s local pickup and delivery feature. No one had predicted that commerce’s shift to online would happen as quickly as it did in 2020. But our big, long-term bets paid off—we had already built software infrastructure and commerce capabilities that could withstand the most unpredictable retail landscape. Our progress The speed at which stores launched, by large and small businesses alike, spoke to the simplicity of our software. Multiple sales channels got brick-and-mortar merchants in front of new audiences, blending online and offline commerce. Shopify’s checkout converted browsers into buyers faster and more easily. And merchants leaned into solutions like Shopify Payments and Shopify Shipping, saving them time and money on the back end. Entrepreneurship soared in 2020 and ecommerce accelerated to new highs. Our merchants adapted and thrived. Today, more than 1.7 million merchants worldwide trust us with their livelihoods. They have cumulatively sold $277+ billion on our platform. Nearly half of those sales came in 2020 alone. Our merchant base is getting more diverse as we localize Shopify’s platform for different countries, with our admin now available in 20 languages. More large-volume brands are choosing Shopify in their quest to be faster and more agile, to act more like entrepreneurs. 2020 / YEAR IN REVIEW Mission- Driven Exhibit 99.1
And yet, entrepreneurship is still harder than it should be. We are tackling high-barrier problems like fast and affordable fulfillment and access to financial solutions. As we make strides here, Shopify businesses are becoming not only easy to start, but far less complex to run every step of the way. With nearly a half-billion consumers shopping with Shopify merchants in 2020, we are harnessing our growing scale and building features that strengthen relationships between merchants and buyers. Our accelerated checkout Shop Pay, our online shopping assistant Shop, and our buy-now-pay- later product Shop Pay Installments all play a role here. Our ecosystem We are expanding the pie of opportunity for those who put their trust in us. While Shopify made $2.9 billion in revenue in 2020, our partner ecosystem generated ~$12.5 billion, as our merchants’ selling drove massive volumes of economic activity. Alongside our partners, we seek to build simple commerce solutions for complex problems, so that merchants can spend their time on what’s most important to them—their products and their customers. Our team The version of Shopify that exists today is the best one yet. More than 7,000 Shopifolk rallied around our merchants in 2020. We plan to work remotely going forward, opening us up to talent from anywhere, like our merchants themselves. We are taking great care to keep building high trust and solidarity within our teams as we evolve this new way of working. In 2021, we plan to hire more than 2,000 engineers to help us innovate and build. As we add new talent, and as our long- time team members keep leveling up, our culture evolves for the better. Our planet We keep a pulse on the present but our eyes are on the horizon—and future-proofing our business means future- proofing our planet, too. Shopify’s Sustainability Fund commits at least $5 million annually to combat climate change, most of which is going to groundbreaking technologies. We buy carbon credits from innovators whose solutions at scale could materially reduce the CO2 that’s accumulated in our atmosphere over the past 200 years. Our research in this space has been illuminating, leading us to entrepreneurs capturing carbon with trees, soil, rocks, and oceans, as well as through engineered solutions such as concrete and Direct Air Capture. While the pandemic has changed our lives permanently, much remains the same for us. The world still needs more entrepreneurs, now more than ever; we still optimize for long-term growth over short-term revenue; we are merchant- obsessed and mission-driven. Together, with the support of you, our shareholders, and eager technologists around the world, let’s keep building a future where anyone can reach for economic independence – where commerce is better for everyone. Soul Roasters soulroasters.com Bookhou bookhou.com ChocoSol chocosoltraders.com Printed in Canada on recycled paper using soy-based inks. 2020 / YEAR IN REVIEW Success for Everyone
2020 / YEAR IN REVIEW Commerce as a Force for Good Shopify Capital expansion to UK, Canada 2020 2021 Shop launch All-new Shopify POS launch Shop Pay Installments early access Shopify Payments expansion to Austria, Belgium Shopify Shipping expansion to Australia Walmart, Facebook Shops, TikTok, Pinterest channel integrations Alipay partnership Deployed $5M to combat climate change through the Shopify Sustainability Fund Increased visibility for local shops and Black-owned businesses through Shop app Launched collaboration with Operation Hope to help create 1M new Black-owned businesses by 2030 Partnered with governments in Canada, New York State, and Australia to help bring more small businesses online 2020 Key Achievements $2.9B Revenue up 86% from 2019 $120B GMV up 96% from 2019 ~42,200 Partners who have referred at least one merchant to Shopify in the past 12 months, up 72% from 2019 ~6,000 Apps in the Shopify App Store, up 62% from 2019
Help Entrepreneurs Get Online Fast and Start Selling Easily The growth of buyers shopping online with a Shopify merchant accelerated in 2020, supported by the rapid adoption of digital commerce. We expanded our multichannel offering to help merchants reach more buyers. All-new Shopify POS software And we launched Shop, our online shopping assistant, which includes features that help strengthen the relationship between merchants and their buyers. More than 7,000 employees around the world are helping to catalyze entrepreneurship everywhere. 2020 / YEAR IN REVIEW The Year of the Entrepreneur Help Merchants Get Discovered by New Buyers Help Merchants Get Their Products To Buyers, Responsibly In 2020, we urgently introduced several features to help merchants adapt quickly at the onset of the global pandemic. And, a record number of merchants launched their businesses on Shopify worldwide. • Buy-Online-Curbside-Pickup • Online Tipping • Shopify Email • Extended Free Trial to 90-Days • Additional Funding for Shopify Capital • Gift Card Capabilities Merchants leveraged Shopify’s capabilities to get more of their orders to their buyers. Shopify Shipping Eligible Merchant Adoption in the U.S. and Canada Launched Shopify Shipping in Australia Continued to build Shopify Fulfillment Network to democratize fulfillment for merchants of all sizes North America 73% Revenue 56% Merchants EMEA 16% Revenue 25% Merchants APAC 10% Revenue 15% Merchants LATAM 1% Revenue 4% Merchants Made deliveries carbon neutral every time a buyer uses Shop Pay Launched Offset app, allowing merchants to make shipments carbon neutral Offset nearly 62,000 tonnes in carbon emissions during the Black Friday Cyber Monday shopping weekend 2018 216 million online shoppers 2019 300 million online shoppers +38% +52% 2020 457 million online shoppers 45% 52% Q4 2019 Q4 2020 Order Tracking
2020 / YEAR IN REVIEW The first Shopify store was our own. In 2004, we took something we loved, snowboarding, and built a business around it. The idea was to set up an online store and create a snowboarding empire. But there was a problem: the software landscape we encountered seemed to work against our ambitions at every step. Back then, online store software was built for existing big businesses that were transitioning online. It was incredibly expensive, unnecessarily complex, and infuriatingly inflexible. Existing software was not designed with the new entrepreneur in mind, so we rejected the existing models and created our own. Our custom software met our needs so well that we decided to take everything we learned and shift our business away from snowboards and towards fixing the glaring hole in the ecommerce market. We knew that many future businesses would be created online first, and software needed to support the first steps of entrepreneurship, not just the established big guys. We set out to create the software that we wished would have existed, and we launched it in 2006 under the name Shopify. Shopify is exactly this: the only platform you need to build your empire. Shopify is the first thing our merchants log into in the morning and the last thing they log out of in the evening. It’s at the heart of their business—a responsibility that we take very seriously. Chances are that you’ve already bought products through stores that use Shopify and you didn’t even realize it. More than 165,000 stores use Shopify today. Yet, as a brand, we are virtually invisible to consumers. This is by design, as our job is to make our merchants look their very best in every interaction they have with consumers. Over $8 billion of GMV has already been transacted through our platform, with the most recent quarter coming in at over $1 billion. We’ve proven that there’s incredible potential in early- stage entrepreneurs when they are empowered with great technology. Focusing on inspiring entrepreneurship and helping people iterate their ideas, launch new stores and scale their businesses creates a sense of solidarity: we did it together. We believe that by giving merchants an affordable, easy to use solution that helps them sell and run their business, Shopify will share in their success as they grow. We’ve shown that it was possible to build a single platform that works from the very beginning—an entrepreneur with an idea—to a business with millions of orders. And while many of our larger merchants switched to Shopify based on the quality of our platform, a large number of our merchants are “homegrown” and started their businesses with us. I’m incredibly proud of this. Over the years we’ve also helped foster a large ecosystem that has grown up around Shopify. App developers, design agencies, and theme designers have built businesses of their own by creating value for merchants on the Shopify platform. Instead of stifling this enthusiastic pool of talent and carving out the profits for ourselves, we’ve made a point of supporting our partners and aligning their interests with our own. In order to build long-term value, we decided to forgo short-term revenue opportunities and nurture the people who were putting their trust in Shopify. As a result, today there are thousands of partners that have built businesses around Shopify by creating custom apps, custom themes, or any number of other services for Shopify merchants. This is a prime example of how we approach value and something that potential investors must understand: we do not chase revenue as the primary driver of our business. Shopify has been about empowering merchants since it was founded, and we have always prioritized long-term value over short- term revenue opportunities. We don’t see this changing. In terms of the value we create, we think that the most important thing that we deliver to our merchants is simplicity. Simplicity isn’t simple. It takes tremendous care, discipline, and craftsmanship to take something inherently complex like commerce and make it intuitive. We have spent the last decade democratizing commerce, simplifying it, and making it accessible for businesses of all sizes. Today, businesses sell through dozens of different channels: online stores, retail stores, wholesale, at pop-up shops, on social networks, through mobile apps or any number of other ways. Merchants often hack together different 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 setup can be reduced to a single, simple platform. By the time we’re done, we think Shopify will have established the “new normal”. I want Shopify to be a company that sees the next century. To get us there we not only have to correctly predict future commerce trends and technology, but be the ones that push the entire industry forward. Shopify was initially built in a world where merchants were simply looking for a homepage for their business. By accurately predicting how the commerce world would be changing, and building what our merchants would need next, we taught them to expect so much more from their software. These underlying aspirations and values drive our mission: make commerce better for everyone. I hope you’ll join us. — Tobi, Founder, Chief Executive Officer 2015 Letter from Tobi
2020 / YEAR IN REVIEW Make Commerce Better For Everyone TAMGA Designs Yellow Beauty BLK & Bold Brightland
EXHIBIT 99.2
Consolidated Financial Statements
December 31, 2020
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, 2020. 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, 2020.
The effectiveness of the Company's internal control over financial reporting as at December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.
February 17, 2021
/s/ Tobias Lütke | ||
| Tobias Lütke | ||
| Chief Executive Officer | ||
/s/ Amy Shapero | ||
| Amy Shapero | ||
| Chief Financial Officer | ||
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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 (together, the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income (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, 2020, 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, 2020 and 2019, 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, 2020, 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 leases in 2019.
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
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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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition - Principal versus Agent Considerations
As described in note 3 to the consolidated financial statements, management follows the guidance provided in ASC 606, Revenue from Contracts with Customers, for determining whether the Company is the principal or an agent in arrangements with customers that involve another party that contributes to providing a specified service to a customer. In these instances, management determines whether the Company has promised to provide the service itself (as principal) or to arrange for the specified service to be provided by another party (as an agent). As disclosed by management, this determination depends on the facts and circumstances of each arrangement and, in some instances involves significant judgment. The Company recognizes revenue from Shopify Shipping, the sales of apps and Shop Pay Installments on a net basis (as an agent) as the Company is not primarily responsible for the fulfillment, does not have control of the promised service, and does not have full discretion in establishing prices and therefore is the agent in the arrangement with merchants. All other revenue is reported on a gross basis, as management has determined it is the principal in each arrangement. Revenue reported on a gross basis makes up a significant portion of total revenues of $2,929 million.
The principal considerations for our determination that performing procedures relating to Revenue recognition – Principal versus Agent Considerations is a critical audit matter are 1) that there was significant judgment applied by management, in some instances, in assessing the indicators that the Company controls the promised service before it was transferred to the customer, including assessing whether the Company was primarily responsible for fulfilling the promised service and whether the Company had full discretion in establishing the prices for the promised service, and 2) a high degree of auditor judgment, subjectivity and effort in performing audit procedures and evaluating the results of those procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s assessment of indicators that the Company controls the promised service before it is transferred to the customer. These procedures also included, among others, testing the reasonableness of management’s assessment of the indicators of control over the promised service, which included determining whether the Company was primarily responsible for fulfilling the promised service and has full discretion in establishing pricing by considering the contractual terms with merchants and agreements with service providers, where applicable, and considering whether these conclusions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Ottawa, Canada
February 17, 2021
We have served as the Company’s auditor since 2011.
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Shopify Inc.
Consolidated Balance Sheets
Expressed in US $000’s except share amounts
As at | |||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||
| Note | $ | $ | |||||||||||||||
| Assets | |||||||||||||||||
| Current assets | |||||||||||||||||
| Cash and cash equivalents | 4 | 2,703,597 | 649,916 | ||||||||||||||
| Marketable securities | 5 | 3,684,370 | 1,805,278 | ||||||||||||||
| Trade and other receivables, net | 7 | 120,752 | 90,529 | ||||||||||||||
| Merchant cash advances, loans and related receivables, net | 8 | 244,723 | 150,172 | ||||||||||||||
| Income taxes receivable | 21 | 56,067 | — | ||||||||||||||
| Other current assets | 9 | 68,247 | 46,333 | ||||||||||||||
| 6,877,756 | 2,742,228 | ||||||||||||||||
| Long-term assets | |||||||||||||||||
| Property and equipment, net | 10 | 92,104 | 111,398 | ||||||||||||||
| Intangible assets, net | 11 | 135,676 | 167,282 | ||||||||||||||
| Right-of-use assets, net | 12 | 119,373 | 134,774 | ||||||||||||||
| Deferred tax assets | 21 | 52,677 | 19,432 | ||||||||||||||
| Equity and other investments | 6 | 173,454 | 2,500 | ||||||||||||||
| Goodwill | 13 | 311,865 | 311,865 | ||||||||||||||
| 885,149 | 747,251 | ||||||||||||||||
| Total assets | 7,762,905 | 3,489,479 | |||||||||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||
| Current liabilities | |||||||||||||||||
| Accounts payable and accrued liabilities | 14 | 300,795 | 181,193 | ||||||||||||||
| Income taxes payable | 21 | 19,677 | 69,432 | ||||||||||||||
| Deferred revenue | 15 | 107,809 | 56,691 | ||||||||||||||
| Lease liabilities | 12 | 10,051 | 9,066 | ||||||||||||||
| 438,332 | 316,382 | ||||||||||||||||
| Long-term liabilities | |||||||||||||||||
| Deferred revenue | 15 | 21,006 | 5,969 | ||||||||||||||
| Lease liabilities | 12 | 144,836 | 142,641 | ||||||||||||||
| Convertible senior notes | 16 | 758,008 | — | ||||||||||||||
| Deferred tax liabilities | 21 | — | 8,753 | ||||||||||||||
| 923,850 | 157,363 | ||||||||||||||||
| Commitments and contingencies | 12, 18 | ||||||||||||||||
| Shareholders’ equity | |||||||||||||||||
Common stock, unlimited Class A subordinate voting shares authorized, 110,929,570 and 104,518,173 issued and outstanding; unlimited Class B multiple voting shares authorized, 11,599,301 and 11,910,802 issued and outstanding | 19 | 6,115,232 | 3,256,284 | ||||||||||||||
| Additional paid-in capital | 261,436 | 62,628 | |||||||||||||||
| Accumulated other comprehensive income | 20 | 8,770 | 1,046 | ||||||||||||||
| Retained earnings (accumulated deficit) | 15,285 | (304,224) | |||||||||||||||
| Total shareholders’ equity | 6,400,723 | 3,015,734 | |||||||||||||||
| Total liabilities and shareholders’ equity | 7,762,905 | 3,489,479 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
On Behalf of the Board:
"/s/ Tobias Lütke" | "/s/ Colleen Johnston" | |||||||
Tobias Lütke | Colleen Johnston | |||||||
Chair, Board of Directors | Chair, Audit Committee | |||||||
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Shopify Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Expressed in US $000’s, except share and per share amounts
| Years ended | |||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||
| Note | $ | $ | |||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Subscription solutions | 23 | 908,757 | 642,241 | ||||||||||||||||||||||||||
| Merchant solutions | 23 | 2,020,734 | 935,932 | ||||||||||||||||||||||||||
| 2,929,491 | 1,578,173 | ||||||||||||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||||||||
| Subscription solutions | 193,532 | 128,155 | |||||||||||||||||||||||||||
| Merchant solutions | 1,194,439 | 584,375 | |||||||||||||||||||||||||||
| 1,387,971 | 712,530 | ||||||||||||||||||||||||||||
| Gross profit | 1,541,520 | 865,643 | |||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||
| Sales and marketing | 602,048 | 472,841 | |||||||||||||||||||||||||||
| Research and development | 552,127 | 355,015 | |||||||||||||||||||||||||||
| General and administrative | 10, 12, 25 | 245,343 | 153,765 | ||||||||||||||||||||||||||
| Transaction and loan losses | 3, 25 | 51,849 | 25,169 | ||||||||||||||||||||||||||
| Total operating expenses | 1,451,367 | 1,006,790 | |||||||||||||||||||||||||||
| Income (loss) from operations | 90,153 | (141,147) | |||||||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||||||||
| Interest income | 23,434 | 48,182 | |||||||||||||||||||||||||||
| Interest expense | 16 | (9,085) | — | ||||||||||||||||||||||||||
| Unrealized gain on equity and other investments | 6 | 135,193 | — | ||||||||||||||||||||||||||
| Foreign exchange gain (loss) | 669 | (2,850) | |||||||||||||||||||||||||||
| Total other income, net | 150,211 | 45,332 | |||||||||||||||||||||||||||
| Income (loss) before income taxes | 240,364 | (95,815) | |||||||||||||||||||||||||||
| Recovery of (provision for) income taxes | 21 | 79,145 | (29,027) | ||||||||||||||||||||||||||
| Net income (loss) | 319,509 | (124,842) | |||||||||||||||||||||||||||
| Net income (loss) per share attributable to shareholders: | |||||||||||||||||||||||||||||
| Basic | 22 | $ | 2.67 | $ | (1.10) | ||||||||||||||||||||||||
| Diluted | 22 | $ | 2.59 | $ | (1.10) | ||||||||||||||||||||||||
| Shares used to compute net income (loss) per share attributable to shareholders: | |||||||||||||||||||||||||||||
| Basic | 22 | 119,569,705 | 113,026,424 | ||||||||||||||||||||||||||
| Diluted | 22 | 123,463,274 | 113,026,424 | ||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges | 20 | 10,510 | 18,046 | ||||||||||||||||||||||||||
| Tax effect on unrealized gain on cash flow hedges | 20 | (2,786) | (4,784) | ||||||||||||||||||||||||||
| Comprehensive income (loss) | 327,233 | (111,580) | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Shopify Inc.
Consolidated 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) $ | Retained Earnings (Accumulated Deficit) $ | Total $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note | Shares | Amount $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As at December 31, 2018 | 110,392,689 | 2,215,936 | 74,805 | (12,216) | (187,757) | 2,090,768 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment related to the transition to Topic 842, Leases | 3 | — | — | — | — | 8,375 | 8,375 | |||||||||||||||||||||||||||||||||||||||||||||||||
| As at January 1, 2019 | 110,392,689 | 2,215,936 | 74,805 | (12,216) | (179,382) | 2,099,143 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 2,084,063 | 75,296 | (26,959) | — | — | 48,337 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 159,310 | — | — | 159,310 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units | 1,252,250 | 106,408 | (106,408) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to business acquisitions | 24 | 514,973 | 170,630 | (38,120) | — | — | 132,510 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A subordinate voting shares, net of offering costs of $5,724, net of tax of $1,541 | 19 | 2,185,000 | 688,014 | — | — | — | 688,014 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss and comprehensive loss for the year | — | — | — | 13,262 | (124,842) | (111,580) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| As at December 31, 2019 | 116,428,975 | 3,256,284 | 62,628 | 1,046 | (304,224) | 3,015,734 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 1,530,759 | 115,331 | (44,522) | — | — | 70,809 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 246,940 | — | — | 246,940 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units | 1,176,637 | 162,420 | (162,420) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A subordinate voting shares, net of offering costs of $46,553, net of tax of $2,606 | 19 | 3,392,500 | 2,581,197 | — | — | — | 2,581,197 | |||||||||||||||||||||||||||||||||||||||||||||||||
Equity component of the convertible senior notes, net of offering costs of $1,994, net of tax of $112 | 16 | — | — | 158,810 | — | — | 158,810 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income and comprehensive income for the year | — | — | — | 7,724 | 319,509 | 327,233 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| As at December 31, 2020 | 122,528,871 | 6,115,232 | 261,436 | 8,770 | 15,285 | 6,400,723 | ||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
Shopify Inc.
Consolidated Statements of Cash Flows
Expressed in US $000’s
| Years ended | |||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||
| Note | $ | $ | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income (loss) for the year | 319,509 | (124,842) | |||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||
| Amortization and depreciation | 70,060 | 35,651 | |||||||||||||||
| Stock-based compensation | 246,940 | 158,456 | |||||||||||||||
| Amortization of debt discount and offering costs | 16 | 8,756 | — | ||||||||||||||
| Impairment of right-of-use assets and leasehold improvements | 10, 12 | 31,623 | — | ||||||||||||||
| Provision for transaction and loan losses | 27,282 | 17,946 | |||||||||||||||
| Deferred income taxes | (41,998) | (37,918) | |||||||||||||||
| Unrealized gain on equity and other investments | 6 | (135,193) | — | ||||||||||||||
| Unrealized foreign exchange (gain) loss | (1,689) | 3,181 | |||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Trade and other receivables | (29,146) | (56,181) | |||||||||||||||
| Merchant cash advances, loans and related receivables | (112,721) | (74,211) | |||||||||||||||
| Other current assets | (11,404) | (12,401) | |||||||||||||||
| Non-cash consideration received in exchange for services | (24,710) | — | |||||||||||||||
| Accounts payable and accrued liabilities | 118,588 | 82,529 | |||||||||||||||
| Income tax assets and liabilities | (105,890) | 64,648 | |||||||||||||||
| Deferred revenue | 66,155 | 12,305 | |||||||||||||||
| Lease assets and liabilities | (1,204) | 1,452 | |||||||||||||||
| Net cash provided by operating activities | 424,958 | 70,615 | |||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Purchase of marketable securities | (5,600,207) | (2,718,604) | |||||||||||||||
| Maturity of marketable securities | 3,721,405 | 2,477,038 | |||||||||||||||
| Purchase of equity and other investments | (11,051) | — | |||||||||||||||
| Acquisitions of property and equipment | (41,733) | (56,759) | |||||||||||||||
| Acquisitions of intangible assets | (262) | (5,638) | |||||||||||||||
| Acquisition of businesses, net of cash acquired | 24 | — | (265,512) | ||||||||||||||
| Net cash used in investing activities | (1,931,848) | (569,475) | |||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Proceeds from public equity offerings, net of issuance costs | 19 | 2,578,591 | 688,014 | ||||||||||||||
| Proceeds from convertible senior notes, net of underwriting fees and offering costs | 16 | 907,950 | — | ||||||||||||||
| Proceeds from the exercise of stock options | 70,809 | 48,337 | |||||||||||||||
| Net cash provided by financing activities | 3,557,350 | 736,351 | |||||||||||||||
| Effect of foreign exchange on cash and cash equivalents | 3,221 | 1,742 | |||||||||||||||
| Net increase in cash and cash equivalents | 2,053,681 | 239,233 | |||||||||||||||
| Cash and cash equivalents – Beginning of Year | 649,916 | 410,683 | |||||||||||||||
| Cash and cash equivalents – End of Year | 2,703,597 | 649,916 | |||||||||||||||
| Supplemental cash flow information: | |||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities included in cash flows from operating activities | 21,753 | 15,611 | |||||||||||||||
| Lease liabilities arising from obtaining right-of-use assets | 29,820 | 153,053 | |||||||||||||||
| Acquired property and equipment remaining unpaid | 1,881 | 7,878 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
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. Shopify is a leading global commerce company, providing trusted tools to start, grow, market, and manage a retail business of any size. Shopify makes commerce better for everyone with a platform and services that are engineered for reliability, while delivering a better shopping experience for buyers everywhere. 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, fulfill and 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 held wholly owned subsidiaries including, but not limited to: Shopify International Limited, incorporated in Ireland; Shopify Commerce Singapore Pte. Ltd., incorporated in Singapore; 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; estimates of expected credit losses related to financial assets measured at amortized cost, including contract balances and merchant cash advances and loans; inputs used to fair value acquired intangible assets and equity and other investments; estimates involved in evaluating the recoverability of our right-of-use assets and leasehold improvements, including, but not limited to, the estimated useful lives of right-of-use assets and leasehold improvements; and the incremental borrowing rate applied to lease payments. 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 subscriptions to the Point-of-Sale (POS) Pro offering for brick and mortar merchants, 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 Company earns merchant solutions revenue relating to Shopify Payments, Shopify Shipping,
9
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
other transaction services, referral fees, the sale of POS hardware, advertising revenue on the Shopify App Store, Shopify Email, Shopify Capital, Shop Pay Installments, Shopify Fulfillment Network, and collaborative warehouse fulfillment solutions. Arrangements with merchants do not provide the merchants with the right to take possession of the software supporting the Company’s hosting platform at any time and are therefore accounted for as service contracts. The Company’s subscription service contracts do not provide for refunds or any other rights of return to merchants in the event of cancellations.
The Company recognizes revenue 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, Revenue from Contracts with Customers, for determining whether the Company is the principal or an agent in arrangements with customers that involve another party that contributes to providing a specified service to a customer. In these instances, the Company determines whether it has promised to provide the specified service itself (as principal) or to arrange for the specified service to be provided by another party (as an agent). This determination depends on the facts and circumstances of each arrangement and, in some instances, involves significant judgment. The Company recognizes revenue from Shopify Shipping, the sales of apps and Shop Pay Installments on a net basis as the Company is not primarily responsible for the fulfillment, does not have control of the promised service, and does not have full discretion in establishing prices 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 performance obligations, which may consist of some or all of the Company's subscription solutions. When contracts involve multiple 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 the observable standalone selling price for each performance obligation. The transaction price for multiple merchant solutions is never a bundled price, therefore a 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-
10
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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 do not include a significant financing component.
Subscription Solutions
Subscription revenue from the sale of subscriptions to the platform 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 exception to the general principles for accounting for variable consideration, which allows it to recognize revenue when the sale occurs and the performance obligation has been satisfied. Subscription revenue from the sale of POS Pro subscriptions is recognized over time on a ratable basis over the monthly contractual term. 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 a point in time, when control transfers. Revenue from the sale of rights to use a domain name that is sold separately, is recognized ratably over time, over the contractual term, which is generally an annual term. Revenue from themes, apps and domains have been classified within subscription solutions on the basis that they are products sold at the time the merchant initially enters into the subscription services arrangement or because the customer purchases the right to use the product over the term of the contract, similar to a subscription.
Merchant Solutions
Revenues earned from Shopify Payments, Shopify Shipping related to the sale of shipping labels, 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. Advertising revenue on the Shopify App Store is recognized at a point in time as merchants click on the advertised apps. Shopify Email revenue is recognized at a point in time based on the merchants' volume of emails sent.
The Company also 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.
Revenues earned from Shop Pay Installments, a "buy now pay later" product, are recognized at a point in time when a merchant makes a sale using this product, and is based on a percentage of the total order value. The Company earns and recognizes a portion of the revenue from each merchant sale, with the majority of
11
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
revenue earned and recognized by our third-party provider that bears the buyer underwriting and buyer credit risk associated with the product.
Revenues earned from Shopify Fulfillment Network related to warehouse storage and outbound shipping are recognized over time, as merchants receive and consume the benefits obtained from the warehouse storage service and shipping service, respectively. Revenues related to picking, packaging, and preparing orders for shipment are recognized once the services have been rendered.
Revenues earned from offering cloud-based software on collaborative warehouse fulfillment solutions are recognized over time, over the contractual term, which can be up to five years. Payments received in advance of services being rendered are recorded as deferred revenue and recognized ratably over time, over the requisite service period.
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 related to subscription solutions consist of third-party infrastructure and hosting costs, an allocation of costs incurred by both the operations and support functions, credit card fees related to billing our merchants, payments for themes and domain registration, and acquired intangible assets.
The Company's cost of revenues related to merchant solutions include payment processing and interchange fees related to Shopify Payments, credit card fees related to billing its merchants, product costs associated with expanding our product offerings, amortization of acquired intangible assets relating mostly to the acquired 6 River Systems, LLC (6RS) technology, POS hardware costs, third-party infrastructure and hosting costs, and an allocation of costs incurred by both the operations and support functions. Merchant solutions cost of revenues also include costs associated with warehouse storage, outbound shipping, picking, packaging, and the preparation of orders for shipment as part of the Shopify Fulfillment Network offering, and materials and third-party manufacturing costs associated with 6RS for those fulfillment robots sold to customers rather than leased to customers, which are capitalized and depreciated into cost of revenues.
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
12
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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, 2020 and 2019 were $240,555 and $177,607 respectively.
Leases
The Company accounts for leases by first determining if an arrangement is a lease at inception. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company's leases do not provide an implicit rate, therefore, the incremental borrowing rate based on the information available at commencement date was used to determine the present value of lease payments. The right-of-use assets exclude lease incentives, which are accounted as a reduction of lease liabilities if they have not yet been received. The Company's lease terms may include options to extend or terminate the lease. These options are included in the lease terms when it is reasonably certain they will be exercised. Lease expense related to lease components is recognized on a straight-line basis over the lease term.
The carrying values of right-of-use 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 an asset or asset group to their net carrying value. If the estimated undiscounted future cash flows associated with the asset or asset group are less than the carrying value, an impairment loss will be recorded based on the estimated fair value. For right-of-use assets that are impaired, the remaining carrying value of the right-of-use assets are amortized on a straight line basis over the remaining term of the lease.
The Company's lease agreements include lease and non-lease components, which are accounted for separately under Topic 842, Leases. Variable lease components and non-lease components are excluded from the lease payments used to calculate the right-of-use assets and lease liabilities, and are recorded in the period in which the obligation for the payment is incurred.
The Company adopted the new leasing standard effective January 1, 2019, using the modified retrospective approach. As the Company previously included non-lease components in the calculation of lease incentives under Topic 840, the transition to Topic 842 resulted in an $8,375 cumulative adjustment to reduce opening accumulated deficit on January 1, 2019.
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 income (loss) as an operating expense over the requisite service period.
13
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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), and 6 River Amended and Restated Stock Option and Grant 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
Income tax expense includes Canadian, U.S., and foreign 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. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative loss experience and expectations of future earnings, capital gains and investment in the applicable jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors.
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.
The Company uses the treasury stock method for calculating the effect of dilutive potential common stock from employee stock options and employee RSUs. This method requires that dilutive effect be calculated 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.
The Company uses the if-converted method for calculating the effect of dilutive potential common stock from its 0.125% convertible senior notes due 2025 (the "Notes"). If the effect of the if-converted method is dilutive, net earnings are adjusted for the after tax effect of debt interest relating to the Notes and the amount of dilutive potential common stock are included in the total number of shares used to compute diluted earnings per share. If the effect of the if-converted method is anti-dilutive, no adjustments are made to net earnings or the total number of shares used to compute diluted earnings per share. The Company
14
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
applies this method by using the common stock issuable upon conversion determined by the end-of-period conversion price.
Foreign Currency Translation and 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 income (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 that are readily convertible into known amounts of cash, 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, and corporate bonds and commercial paper, 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 positive intent and ability to hold to maturity and are carried at amortized cost. Interest on these securities, as well as amortization/accretion of premiums/discounts, are included in interest income. Marketable securities 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 would be required to sell the securities before the recovery of their remaining amortized cost basis. Realized gains and losses 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 income (loss).
Investments
The Company has minority equity and other investments in private companies without readily determinable fair values that it carries at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative).
Fair Value Measurements
The carrying amounts for cash and cash equivalents, marketable securities, trade and other receivables, merchant cash advances receivable, loans, 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.
15
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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 counterparties. 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.
Provision for Credit Losses 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 balance sheet date, net of an allowance for expected credit losses. The Company estimates the provision based on an assessment of various factors, including historical trends, merchants' gross merchandise volume, supportable forecasted information and other factors, including the potential impact of the novel coronavirus ("COVID-19"), that may affect the merchants' ability to make future payments on the receivables. Additions to the provision are reflected in current operating results, while charges against the provision are made when losses are incurred. These additions are classified within transaction and loan losses on the consolidated statements of operations and comprehensive income (loss). Recoveries are reflected as a reduction in the allowance for credit losses related to merchant cash advances and loans when the recovery occurs.
16
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
Provision for Transaction Losses Related to Shopify Payments and Shop Pay Installments
Shopify Payments and Shop Pay Installments losses arise when refunded merchant transactions cannot be recovered. The Company estimates the provision based on an assessment of various factors, including historical trends, gross merchandise volume facilitated using Shopify Payments and Shop Pay Installments, supportable forecasted information and other factors, including the potential impact of COVID-19, that may increase the volume of refunded transactions. Additions to the provision are reflected in current operating results, while charges against the provision are made when losses are incurred. These additions are classified within transaction and loan losses on the consolidated statements of operations and comprehensive income (loss).
Convertible Senior Notes
The Company accounts for the Notes as separate liability and equity components. The Company determined the carrying amount of the liability component as the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the conversion option was calculated by deducting the fair value of the liability component from the principal amount of the Notes. This difference represents a debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
The offering costs incurred related to the issuance of the Notes were allocated to the liability and equity components based on their relative initial carrying values. Offering costs attributable to the liability component are being amortized to interest expense over the respective terms of the Notes, and offering costs attributable to the equity component are netted against the equity component of the Notes in shareholders' equity.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and impairment. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Computer equipment and fulfillment robots are depreciated over the lesser of three years and 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 one 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 an asset or asset group to their net carrying value. If the estimated undiscounted future cash flows associated with the asset or asset group 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 and impairment. Amortization is calculated using the straight-line method over the estimated useful lives of the related assets. Purchased software is amortized over a three year period, acquired technology is amortized over a two to nine year period, acquired customer relationships are amortized over a two to five year period, capitalized software development costs are amortized over a two to three year period, and other intangible assets are amortized over a three to ten year period. Amortization is recorded into cost of revenues and operating expenses, depending on the nature of the asset.
17
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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 or asset group to their net carrying value. If the estimated undiscounted future cash flows associated with the asset or asset group 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 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 the reporting unit that includes goodwill. If the fair value of the reporting unit is greater than its carrying value, including goodwill, no impairment results. If the fair value of the reporting unit is less than its carrying value, including goodwill, an impairment loss would be recognized in the consolidated statements of operations and comprehensive income (loss) in an amount equal to that difference, limited to the total amount of goodwill allocated to that reporting unit. The Company has an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period.
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 income (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, loans and related receivables, and foreign exchange derivative products subject the
18
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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 creditworthy. 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 that insures a portion of the merchant cash advances and loans offered by Shopify Capital. The receivable related to insurance recoveries is included in the merchant cash advances, loans and related receivables balance. There are no receivables from individual merchants accounting for 10% or more of revenues or receivables. Potential ongoing effects from COVID-19 on the Company's credit risk have been considered and have resulted in adjustments to the Company's allowances for expected credit losses on contract balances and merchant cash advances and loans, as discussed in notes 7 and 8, respectively. The Company continues its assessment given the fluidity of COVID-19's global impact.
Interest Rate Risk
Certain of the Company’s cash, cash equivalents and marketable securities and loans earn interest. The Company’s trade and other receivables, accounts payable and accrued liabilities and lease liabilities do not bear interest. The Company's Notes have a fixed annual interest rate and thus, the Company does not have economic interest rate exposure on the Notes. 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 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.
19
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The following table summarizes the effects on revenues, cost of revenues, operating expenses, and income (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, 2020 | December 31, 2019 | ||||||||||||||||||||||
| 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) $ | ||||||||||||||||||
| Revenues | $ | 2,929,491 | $ | 7,367 | $ | 2,936,858 | $ | 1,578,173 | $ | 3,148 | $ | 1,581,321 | |||||||||||
| Cost of revenues | (1,387,971) | (7,900) | (1,395,871) | (712,530) | (4,283) | (716,813) | |||||||||||||||||
| Operating expenses | (1,451,367) | (47,292) | (1,498,659) | (1,006,790) | (39,505) | (1,046,295) | |||||||||||||||||
| Income (loss) from operations | $ | 90,153 | $ | (47,825) | $ | 42,328 | $ | (141,147) | $ | (40,640) | $ | (181,787) | |||||||||||
(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 income (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 June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which replaces 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. In May 2019, the Financial Accounting Standards Board issued ASU No. 2019-05, Financial Instruments - Credit Losses, which provides transition relief that is optional for, and available to, all reporting entities within the scope of Topic 326. The updates are effective for annual periods beginning after December 15, 2019 including interim periods within those periods. The Company adopted the standard effective January 1, 2020 using a modified retrospective approach. Upon adoption, the Company changed its approach to estimating its expected credit losses, which did not have a material impact on any of its existing allowances at that time.
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the Financial Accounting Standards Board issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which eliminates certain models associated with accounting for convertible instruments, makes targeted improvements to the disclosures for convertible instruments and earnings per share guidance, and amends the guidance for the derivative scope exception for contracts in an entity's own equity. The updates are effective for annual periods beginning after December 15, 2021 including interim periods within those periods. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those periods. The Company will early adopt this ASU effective January 1, 2021. The Company is currently in the process of finalizing its assessment of the impact of this ASU. Upon adoption, the Company will no longer separately account for the liability and equity components of its Notes, which exist under current accounting guidance. As a result of the adoption, non-cash interest expense related to its currently outstanding Notes will be eliminated.
20
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
4.Cash and Cash Equivalents
As at December 31, 2020 and 2019, the Company’s cash and cash equivalents balance was $2,703,597 and $649,916, respectively. These balances included $1,927,013 and $423,443, respectively, of money market funds, repurchase agreements, U.S. federal bonds and corporate bonds and commercial paper.
5.Financial Instruments
As at December 31, 2020, 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: | ||||||||||||||||||||||||||
| U.S. federal bonds | 174,397 | 174,399 | — | — | — | — | ||||||||||||||||||||
| Corporate bonds and commercial paper | 134,056 | 134,396 | — | — | — | — | ||||||||||||||||||||
| Repurchase agreements | — | — | 290,000 | 290,001 | — | — | ||||||||||||||||||||
| Marketable securities: | ||||||||||||||||||||||||||
| U.S. term deposits | 885,000 | 887,102 | — | — | — | — | ||||||||||||||||||||
| U.S. federal bonds | 1,224,052 | 1,226,657 | — | — | — | — | ||||||||||||||||||||
| Canadian federal bonds | 24,988 | 24,987 | — | — | — | — | ||||||||||||||||||||
| Corporate bonds and commercial paper | — | — | 1,550,330 | 1,552,907 | — | — | ||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
| Foreign exchange forward contracts | — | — | 16,340 | 16,340 | — | — | ||||||||||||||||||||
The fair values above include accrued interest of $7,563, which is excluded from the carrying amounts. The accrued interest is included in Trade and other receivables in the consolidated balance sheets.
As at December 31, 2019, 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: | ||||||||||||||||||||||||||
| Repurchase agreements | — | — | 200,000 | 200,009 | — | — | ||||||||||||||||||||
| Marketable securities: | ||||||||||||||||||||||||||
| U.S. term deposits | 300,000 | 301,354 | — | — | — | — | ||||||||||||||||||||
| U.S. federal bonds | 222,713 | 223,403 | — | — | — | — | ||||||||||||||||||||
| Canadian federal bonds | 69,922 | 69,919 | — | — | — | — | ||||||||||||||||||||
| Corporate bonds and commercial paper | — | — | 1,212,643 | 1,216,822 | — | — | ||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
| Foreign exchange forward contracts | — | — | 5,830 | 5,830 | — | — | ||||||||||||||||||||
21
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The fair values above include accrued interest of $5,754, 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. There were no transfers between Levels 1, 2 and 3 during the years ended December 31, 2020 and 2019.
As at December 31, 2020, the Company held foreign exchange forward contracts to convert USD into CAD, with a total notional value of $340,843 (December 31, 2019 - $285,700), 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.
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, 2020, $16,340 of unrealized gains related to changes in the fair value of foreign exchange forward contracts designated as cash flow hedges were included in accumulated other comprehensive income and current assets on the consolidated balance sheet. These amounts are expected to be reclassified into earnings over the next twelve months. In the year ended December 31, 2020, $2,985 of realized losses (December 31, 2019 - $5,181 of realized losses) related to the maturity of foreign exchange forward contracts designated as cash flow hedges were included in cost of revenues and operating expenses. Under the current hedging program, the Company is hedging cash flows associated with payroll and facility costs.
Convertible Senior Notes
As at December 31, 2020, the estimated fair value of the Company's 0.125% convertible senior notes, as further described in note 16 below, was approximately $1,098,342. The estimated fair value was determined based on the last executed trade for the Notes of the reporting period in an over-the-counter market, which is considered as Level 2 in the fair value hierarchy.
22
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
6.Investments
The Company holds equity and other investments in private companies without readily determinable fair values that it carries at cost less impairments, with subsequent adjustments for observable changes (referred to as the measurement alternative). The carrying amount of such investments as at December 31, 2020 was $173,454 (December 31, 2019 - $2,500). For the year ended December 31, 2020, unrealized gains of $135,193 relating to these investments were recorded within other income in the statement of operations and comprehensive income (loss).
In July 2020, the Company received an investment in Affirm Holdings, Inc. ("Affirm") in conjunction with its strategic partnership for Shop Pay Installments. The Level 3 fair value measurement of this investment at July 2020 was $24,710, which was determined based on an income approach for which the Company developed certain key assumptions, including revenue growth rates and a discount rate. In September 2020, the Company identified an observable transaction for a similar investment in Affirm, which resulted in a fair value measurement at the date of the observable transaction. As such, as at December 31, 2020, the carrying value of the Company’s investment in Affirm is $158,000. For the year ended December 31, 2020, an unrealized gain of $133,239 was recorded within other income in the statement of operations and comprehensive income (loss). As discussed further in note 26, Subsequent Event, Affirm priced its initial public offering and began trading on the Nasdaq on January 13, 2021. As a result, the fair value of the investment will be readily determinable in future reporting periods and the use of the measurement alternative will no longer be applicable.
7.Trade and Other Receivables
| December 31, 2020 $ | December 31, 2019 $ | January 1, 2019 $ | |||||||||||||||
| Unbilled revenues, net | 50,073 | 31,629 | 12,653 | ||||||||||||||
| Indirect taxes receivable | 45,961 | 36,821 | 3,774 | ||||||||||||||
| Trade receivables, net | 13,449 | 9,660 | 11,191 | ||||||||||||||
| Accrued interest | 7,563 | 5,754 | 5,109 | ||||||||||||||
| Other receivables | 3,706 | 6,665 | 8,620 | ||||||||||||||
| 120,752 | 90,529 | 41,347 | |||||||||||||||
Unbilled revenues represent amounts not yet billed to merchants related to subscription fees for Plus merchants, transaction fees and shipping and fulfillment charges, as at the consolidated balance sheet date.
The allowance for credit losses reflects the Company's best estimate of probable losses inherent in the unbilled revenues and trade receivables accounts. The Company determined the provision based on known troubled accounts, historical experience, supportable forecasts of collectibility, potential impacts of COVID-19 and other currently available evidence.
23
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
Activity in the allowance for credit losses was as follows:
Years ended | |||||||||||
December 31, 2020 $ | December 31, 2019 $ | ||||||||||
| Balance, beginning of the year | 2,894 | 1,023 | |||||||||
Provision for credit losses related to uncollectible receivables (1) | 6,793 | 2,836 | |||||||||
| Write-offs | (3,646) | (965) | |||||||||
| Balance, end of the year | 6,041 | 2,894 | |||||||||
(1) The provision for the year ended December 31, 2020 includes expected losses as a result of macroeconomic factors, including the impact of COVID-19.
8.Merchant Cash Advances, Loans and Related Receivables
| December 31, 2020 | December 31, 2019 | January 1, 2019 | |||||||||||||||
| $ | $ | $ | |||||||||||||||
| Merchant cash advances receivable, gross | 218,840 | 131,227 | 77,653 | ||||||||||||||
Related receivables(1) | 819 | 3,179 | 4,482 | ||||||||||||||
| Allowance for credit losses related to uncollectible merchant cash advances receivable | (15,816) | (10,420) | (6,249) | ||||||||||||||
| Loans receivable, gross | 43,644 | 28,547 | 16,959 | ||||||||||||||
| Allowance for credit losses related to uncollectible loans receivable | (2,764) | (2,361) | (972) | ||||||||||||||
| Merchant cash advances, loans and related receivables, net | 244,723 | 150,172 | 91,873 | ||||||||||||||
(1) Presentation of related receivables represents a comparative figure reclassification referenced in note 25.
The following table summarizes the activities of the Company’s allowance for credit losses related to uncollectible merchant cash advances and loans receivable:
| Years ended | |||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
| Allowance, beginning of the year | 12,781 | 7,221 | |||||||||||||||||||||
Provision for credit losses related to uncollectible merchant cash advances receivable(2) | 13,896 | 11,954 | |||||||||||||||||||||
| Merchant cash advances receivable charged off, net of recoveries | (8,500) | (7,783) | |||||||||||||||||||||
Provision for credit losses related to uncollectible loans receivable(2) | 1,915 | 2,655 | |||||||||||||||||||||
| Loans receivable charged off, net of recoveries | (1,512) | (1,266) | |||||||||||||||||||||
| Allowance, end of the year | 18,580 | 12,781 | |||||||||||||||||||||
Related receivables(1) | (819) | (3,179) | |||||||||||||||||||||
| Allowance, net of related receivables | 17,761 | 9,602 | |||||||||||||||||||||
(1) Presentation of related receivables represents a comparative figure reclassification referenced in note 25.
(2) The provision for the year ended December 31, 2020 includes expected losses as a result of macroeconomic factors, including the impact of COVID-19.
24
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
9.Other Current Assets
| December 31, 2020 $ | December 31, 2019 $ | ||||||||||
| Prepaid expenses | 25,053 | 20,840 | |||||||||
| Other current assets | 17,478 | 6,810 | |||||||||
| Foreign exchange contracts | 16,340 | 5,830 | |||||||||
| Deposits | 9,376 | 12,853 | |||||||||
| 68,247 | 46,333 | ||||||||||
10.Property and Equipment
| December 31, 2020 | |||||||||||||||||
Cost $ | Accumulated depreciation and impairment(1) $ | Net book value $ | |||||||||||||||
| Leasehold improvements | 131,196 | 65,052 | 66,144 | ||||||||||||||
| Computer equipment | 24,387 | 15,056 | 9,331 | ||||||||||||||
| Fulfillment robots | 5,419 | 2,005 | 3,414 | ||||||||||||||
| Office furniture and equipment | 30,716 | 17,501 | 13,215 | ||||||||||||||
| 191,718 | 99,614 | 92,104 | |||||||||||||||
(1) Included in accumulated depreciation is $16,838 of impairment on leasehold improvements in the year.
| December 31, 2019 | |||||||||||||||||
Cost $ | Accumulated depreciation $ | Net book value $ | |||||||||||||||
| Leasehold improvements | 110,477 | 24,675 | 85,802 | ||||||||||||||
| Computer equipment | 18,141 | 10,989 | 7,152 | ||||||||||||||
| Fulfillment robots | 3,220 | 197 | 3,023 | ||||||||||||||
| Office furniture and equipment | 25,821 | 10,400 | 15,421 | ||||||||||||||
| 157,659 | 46,261 | 111,398 | |||||||||||||||
During the year ended December 31, 2020, in light of the COVID-19 pandemic, the Company decided to move from a primarily physical office-centric work model to a primarily digital work-from-home-centric work model. The Company plans to keep, but repurpose certain office locations to support the new model and terminate or sublet other office locations that it ceases to use.
With respect to certain office space the Company has ceased using, for which the lease has been or will be either terminated or sublet, the Company has changed its asset groups, through a change in facts and circumstances, and recorded an impairment charge of $16,838 related to its leasehold improvements in the year ended December 31, 2020. These losses were determined by comparing the asset groups' fair values, made up of the right-of-use assets and leasehold improvements, to their carrying values as of the impairment measurement date, as required under ASC 360, Property, Plant and Equipment. Fair value was determined based on the present value of the estimated future cash flows. These estimates may vary from the actual amounts due to termination or sublease agreements ultimately executed, if at all, which may result in additional charges. These charges were recorded as general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).
25
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
With respect to certain office locations expected to be kept, but repurposed, the Company has recognized accelerated depreciation of certain leasehold improvements and furniture in order to reflect changes that it plans to make to accommodate greater physical distancing and increased team onsite meeting spaces. During the year ended December 31, 2020, the Company identified $40,457 of leasehold improvements and furniture that will be accelerated over a 2 to 3 year period as the Company retrofits its existing offices.
During the years ended December 31, 2020 and 2019, the Company retired and disposed of computer equipment with an original cost of $1,677 and $693, respectively. There was no gain or loss recognized in the consolidated statements of operations and comprehensive income (loss) as a result of the retirement and disposal of these assets.
The following table illustrates the classification of depreciation in the consolidated statements of operations and comprehensive income (loss):
| Years ended | |||||||||||
December 31, 2020 $ | December 31, 2019 $ | ||||||||||
| Cost of revenues | 3,160 | 1,253 | |||||||||
| Sales and marketing | 9,710 | 4,929 | |||||||||
| Research and development | 19,587 | 7,940 | |||||||||
| General and administrative | 5,735 | 2,657 | |||||||||
| 38,192 | 16,779 | ||||||||||
11.Intangible Assets
| December 31, 2020 | |||||||||||||||||
Cost $ | Accumulated amortization $ | Net book value $ | |||||||||||||||
| Acquired technology | 161,643 | 36,953 | 124,690 | ||||||||||||||
| Software development costs | 27,520 | 25,720 | 1,800 | ||||||||||||||
| Acquired customer relationships | 8,435 | 2,677 | 5,758 | ||||||||||||||
| Purchased software | 6,973 | 6,773 | 200 | ||||||||||||||
| Other intangible assets | 4,351 | 1,123 | 3,228 | ||||||||||||||
| 208,922 | 73,246 | 135,676 | |||||||||||||||
| December 31, 2019 | |||||||||||||||||
Cost $ | Accumulated amortization $ | Net book value $ | |||||||||||||||
| Acquired technology | 161,643 | 17,332 | 144,311 | ||||||||||||||
| Software development costs | 27,489 | 16,690 | 10,799 | ||||||||||||||
| Acquired customer relationships | 8,435 | 1,016 | 7,419 | ||||||||||||||
| Purchased software | 6,973 | 5,639 | 1,334 | ||||||||||||||
| Other intangible assets | 4,120 | 701 | 3,419 | ||||||||||||||
| 208,660 | 41,378 | 167,282 | |||||||||||||||
Amortization expense related to the capitalized internally developed software was $9,030 and $7,464 for the years ended December 31, 2020 and 2019, respectively, and is included in cost of revenues, sales and marketing and general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income (loss).
26
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The following table illustrates the classification of amortization expense related to intangible assets in the consolidated statements of operations and comprehensive income (loss):
| Years ended | |||||||||||
December 31, 2020 $ | December 31, 2019 $ | ||||||||||
| Cost of revenues | 28,885 | 17,535 | |||||||||
| Sales and marketing | 2,184 | 998 | |||||||||
| Research and development | 273 | 266 | |||||||||
| General and administrative | 526 | 73 | |||||||||
| 31,868 | 18,872 | ||||||||||
Estimated future amortization expense related to intangible assets, as at December 31, 2020 is as follows:
Fiscal Year | Amount $ | ||||
| 2021 | 20,816 | ||||
| 2022 | 18,088 | ||||
| 2023 | 17,716 | ||||
| 2024 | 17,384 | ||||
| 2025 | 16,186 | ||||
| Thereafter | 45,486 | ||||
| Total | 135,676 | ||||
12.Leases
The Company has office leases in Canada, the United States, Singapore, Ireland and other countries in Europe and Asia. These leases have remaining lease terms of 1 year to 12 years, some of which include options to extend the leases for up to 10 years. Additional office space leases are set to commence between 2021 and 2026, at which point the Company's right-of-use assets and lease liabilities will increase. The Company has entered into various lease agreements for office space that are set to commence after December 31, 2020, which will create significant right-of-use assets and lease liabilities. All of the Company's leases are operating leases.
The components of lease expense were as follows:
| Years ended | |||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
| Operating lease expense | 20,488 | 16,372 | |||||||||||||||||||||
| Variable lease expense, including non-lease components | 15,165 | 12,971 | |||||||||||||||||||||
| Total lease expense | 35,653 | 29,343 | |||||||||||||||||||||
As at December 31, 2020, the weighted average remaining lease term is 9 years and the weighted average discount rate is 4.4% (December 31, 2019 - 9 years and 4.9%, respectively).
During the year ended December 31, 2020, in light of the COVID-19 pandemic, the Company decided to move from a primarily physical office-centric work model to a primarily digital work-from-home-centric work model. The Company plans to keep, but repurpose certain office locations to support the new model and terminate or sublet other office locations that it ceases to use.
27
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
With respect to certain office space the Company has ceased using, for which the lease has been or will be either terminated or sublet, the Company has changed its asset groups, through a change in facts and circumstances, and recorded an impairment charge of $14,785 related to its right-of-use assets in the year ended December 31, 2020. These losses were determined by comparing the asset groups' fair values, made up of the right-of-use assets and leasehold improvements, to their carrying values as of the impairment measurement date, as required under ASC 360, Property, Plant and Equipment. Fair value was determined based on the present value of the estimated future cash flows. These estimates may vary from the actual amounts due to termination or sublease agreements ultimately executed, if at all, which may result in additional charges. These charges were recorded as general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).
Maturities of lease liabilities as at December 31, 2020 were as follows:
| Fiscal Year | Operating Leases $ | ||||
| 2021 | 23,446 | ||||
| 2022 | 43,257 | ||||
| 2023 | 43,183 | ||||
| 2024 | 53,957 | ||||
| 2025 | 53,535 | ||||
Thereafter | 368,014 | ||||
Total future minimum payments | 585,392 | ||||
| Minimum payments related to leases that have not yet commenced | (159,085) | ||||
Minimum payments related to variable lease payments, including non-lease components | (236,607) | ||||
Imputed interest | (34,813) | ||||
Total lease liabilities | 154,887 | ||||
13.Goodwill
The Company's goodwill relates to previous acquisitions of various companies including, but not limited to, 6RS which was acquired on October 17, 2019 (see note 24).
The Company completed its annual impairment test of goodwill as of September 30, 2020. The Company elected its option to bypass the qualitative assessment pursuant to ASC 350, Intangibles - Goodwill and Other, and performed a quantitative assessment. 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.
There were no indicators of impairment between September 30, 2020, the date on which the Company completed its annual impairment test of goodwill, and December 31, 2020. No goodwill impairment was recognized in the years ended December 31, 2020 or December 31, 2019.
28
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The gross changes in the carrying amount of goodwill as of December 31, 2020 and December 31, 2019 are as follows:
| December 31, 2020 | December 31, 2019 | ||||||||||
$ | $ | ||||||||||
| Balance, beginning of the year | 311,865 | 38,019 | |||||||||
| Acquisition of 6 River Systems, Inc. | — | 264,527 | |||||||||
| Other acquisitions | — | 9,319 | |||||||||
| Balance, end of the year | 311,865 | 311,865 | |||||||||
14.Accounts Payable and Accrued Liabilities
| December 31, 2020 | December 31, 2019 | ||||||||||
| $ | $ | ||||||||||
| Trade accounts payable and trade accruals | 168,720 | 90,517 | |||||||||
| Employee related accruals | 61,891 | 32,372 | |||||||||
| Indirect taxes payable | 54,097 | 52,018 | |||||||||
| Other payables and accruals | 16,087 | 6,286 | |||||||||
| 300,795 | 181,193 | ||||||||||
15.Deferred Revenue
| Years ended | |||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
| Balance, beginning of the year | 62,660 | 41,061 | |||||||||||||||||||||
| Deferral of revenue | 119,324 | 46,291 | |||||||||||||||||||||
| Deferred revenue from acquisitions | — | 8,901 | |||||||||||||||||||||
| Recognition of deferred revenue | (53,169) | (33,593) | |||||||||||||||||||||
| Balance, end of the year | 128,815 | 62,660 | |||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
| Current portion | 107,809 | 56,691 | |||||||||||||||||||||
| Long term portion | 21,006 | 5,969 | |||||||||||||||||||||
| 128,815 | 62,660 | ||||||||||||||||||||||
The opening balances of current and long-term deferred revenue were $39,180 and $1,881, respectively, as of January 1, 2019.
29
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
16.Convertible Senior Notes
In September 2020, the Company issued $920,000 aggregate principal amount of 0.125% convertible senior notes due 2025. The net proceeds from the issuance of the Notes were $907,950 after deducting underwriting fees and offering costs.
The interest on the Notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2021. The Notes will mature on November 1, 2025, unless earlier redeemed or repurchased by the Company or converted pursuant to their terms.
The Notes will have an initial conversion rate of 0.6944 Class A subordinate voting shares per one thousand dollars of principal amount of Notes, which is equivalent to an initial conversion price of approximately $1,440.09 per share. The conversion rate is subject to adjustment following the occurrence of certain specified events, as set out or defined in the Trust indenture agreement for the Notes. In addition, upon the occurrence of a make-whole fundamental change prior to the maturity date or upon our issuance of a notice of redemption, as set out or defined in the Trust indenture agreement for the Notes, the Company will, in certain circumstances, increase the conversion rate by a number of additional Class A subordinate voting shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.
Prior to the close of business on the business day immediately preceding August 1, 2025, the Notes may be convertible at the option of the holders only under the following circumstances:
(1) during any calendar quarter commencing after March 31, 2021, and only during such calendar quarter, if the last reported sale price of the Class A subordinate voting shares on the New York Stock Exchange (the "NYSE") for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is more than or equal to 130% of the conversion price for the Notes on each applicable trading day;
(2) during the ten business day period after any ten consecutive trading day period in which, for each trading day of that period, the trading price per one thousand dollars principal amount of Notes for each trading day was less than 98% of the product of the last reported sale price of the Class A subordinate voting shares on the NYSE and the conversion rate for the Notes on each such trading day;
(3) if the Company calls any or all of the Notes for optional redemption, clean-up redemption or tax redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
(4) upon the occurrence of certain specified corporate events.
On or after August 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may, at their option, convert all or any portion of their Notes regardless of the foregoing conditions.
Upon conversion, the Company can elect to settle in cash, Class A subordinate voting shares, or a combination of cash and Class A subordinate voting shares.
On or after September 15, 2023, the Company may, at its option, redeem for cash all or any portion of the Notes if the last reported sale price of the Company's Class A subordinate voting shares on the NYSE has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides
30
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No "sinking fund" is provided for the Notes.
The Company may redeem for cash all, but not less than all, of the Notes at any time if less than $80,000 aggregate principal amount of Notes remains outstanding at such time, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The Company may redeem all, but not less than all, of the Notes if the Company has or would become obligated to pay to the holder of any Note additional amounts (which are more than a de minimis amount) as a result of a change in applicable Canadian tax laws or regulations after September 15, 2020 at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest (including additional interest, if any) to, but excluding, the applicable redemption date but without reduction for applicable Canadian taxes (except in respect of certain excluded holders).
Upon the occurrence of a fundamental change (as set out or defined in the Trust indenture agreement for the Notes) prior to the maturity date of the Notes, the Company, subject to limited exceptions, will be required to offer to purchase all of the Notes for cash at a price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest thereon to, but excluding, the fundamental change purchase date.
The Notes are governed by customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable immediately.
The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future unsecured liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated as the fair value of a similar debt instrument that does not have an associated conversion feature. The net carrying amount of the equity component representing the conversion option was $158,810 and was calculated by deducting the fair value of the liability component and offering costs attributable to the equity component from the principal amount of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate of 4.01% over the contractual terms of the Notes.
In accounting for the offering costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative initial carrying values. Offering costs attributable to the liability component were approximately $9,944, were recorded as an additional debt discount and are amortized to interest expense using the effective interest rate method over the contractual terms of the Notes. Offering costs attributable to the equity component were approximately $2,106 and were netted with the equity component of the Notes in shareholders’ equity.
31
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The net carrying amount of the liability component of the outstanding Notes was as follows:
| December 31, 2020 | |||||
| $ | |||||
| Principal | 920,000 | ||||
| Unamortized discounts | (152,558) | ||||
| Unamortized offering costs | (9,434) | ||||
| Net carrying amount | 758,008 | ||||
The net carrying amount of the equity component of the outstanding Notes was as follows:
| December 31, 2020 | |||||
| $ | |||||
| Proceeds allocated to the conversion option (debt discount) | 160,804 | ||||
Allocated offering costs, net of tax of $112 | (1,994) | ||||
| Net carrying amount | 158,810 | ||||
The following table sets forth the interest expense recognized related to the outstanding Notes:
| Year ended | |||||
| December 31, 2020 | |||||
| $ | |||||
| Contractual interest expense | 329 | ||||
| Amortization of debt discount | 8,246 | ||||
| Amortization of offering costs | 510 | ||||
| Total interest expense related to the outstanding Notes | 9,085 | ||||
17.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, 2020 the effective rate was 2.75%, and no cash amounts have been drawn under this credit facility.
18.Commitments and Contingencies
Unconditional Purchase Obligations
The Company has entered into agreements where it commits to certain usage levels related to third party services. The amount of the minimum fixed and determinable portion of the unconditional purchase obligations over the next five years, as at December 31, 2020, was $223,280.
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.
32
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
19.Shareholders’ Equity
Public Offerings
In September 2020, the Company completed a public offering in which it issued and sold 1,265,000 Class A subordinate voting shares at a public offering price of $900.00 per share, including the 165,000 Class A subordinate voting shares purchased by the underwriters pursuant to the exercise of the over-allotment option. The Company received total net proceeds of $1,117,646 after deducting offering fees and expenses of $20,854.
In May 2020, the Company completed a public offering in which it issued and sold 2,127,500 Class A subordinate voting shares at a public offering price of $700.00 per share, including the 277,500 Class A subordinate voting shares purchased by the underwriters pursuant to the exercise of the over-allotment option. The Company received total net proceeds of $1,460,945 after deducting offering fees and expenses of $28,305.
In September 2019, the Company completed a public offering in which it issued and sold 2,185,000 Class A subordinate voting shares at a public offering price of $317.50 per share, including the 285,000 Class A subordinate voting shares purchased by the underwriters pursuant to the exercise of the over-allotment option. The Company received total net proceeds of $688,014 after deducting offering fees and expenses of $5,724, net of tax of $1,541.
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.
33
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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. On October 17, 2019, the Company approved the issuance of rollover options, from treasury, under the 6 River Systems 2016 Amended and Restated Stock Option and Grant Plan, adopted on closing of the acquisition of 6RS.
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 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, 2021, there were 25,384,187 shares available for issuance under the Company's Stock Option Plan and LTIP.
34
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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, 2020 and 2019:
| 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, 2018 | 5,476,790 | 32.96 | 6.23 | 577,731 | — | 2,473,665 | 92.40 | ||||||||||||||||||||||||||||||||||
| Stock options granted | 488,485 | 165.03 | — | — | 126.93 | — | — | ||||||||||||||||||||||||||||||||||
| Stock options exercised | (2,084,063) | 23.19 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Stock options forfeited | (68,970) | 68.24 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| RSUs granted | — | — | — | — | — | 888,991 | 232.09 | ||||||||||||||||||||||||||||||||||
| RSUs settled | — | — | — | — | — | (1,252,250) | 84.98 | ||||||||||||||||||||||||||||||||||
| RSUs forfeited | — | — | — | — | — | (170,488) | 116.06 | ||||||||||||||||||||||||||||||||||
| December 31, 2019 | 3,812,242 | 54.59 | 6.14 | 1,307,565 | — | 1,939,918 | 159.13 | ||||||||||||||||||||||||||||||||||
| Stock options granted | 258,163 | 505.69 | — | — | 197.26 | — | — | ||||||||||||||||||||||||||||||||||
| Stock options exercised | (1,530,759) | 46.26 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Stock options forfeited | (50,369) | 189.56 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| RSUs granted | — | — | — | — | — | 473,697 | 645.99 | ||||||||||||||||||||||||||||||||||
| RSUs settled | — | — | — | — | — | (1,176,637) | 138.04 | ||||||||||||||||||||||||||||||||||
| RSUs forfeited | — | — | — | — | — | (124,011) | 262.93 | ||||||||||||||||||||||||||||||||||
| December 31, 2020 | 2,489,277 | 103.76 | 5.45 | 2,559,442 | — | 1,112,967 | 377.08 | ||||||||||||||||||||||||||||||||||
| Stock options exercisable as of December 31, 2020 | 1,852,236 | 44.61 | 4.66 | 2,014,011 | |||||||||||||||||||||||||||||||||||||
(1) As at December 31, 2020, 992,376 of the outstanding stock options were granted under the Company's Legacy Option Plan and are exercisable for Class B multiple voting shares, 1,441,791 of the outstanding stock options were granted under the Company's Stock Option Plan and are exercisable for Class A subordinate voting shares, and 55,110 of the outstanding stock options were granted under the 6 River Systems 2016 Amended and Restated Stock Option and Grant 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, 2020 and December 31, 2019.
As at December 31, 2020 the Company had issued 856 Deferred Share Units under its Long Term Incentive Plan.
In connection with the acquisition of 6RS, 122,080 Class A subordinate voting shares were issued with trading restrictions. The restrictions on these shares are lifted over time and are being accounted for as stock-based compensation as the vesting is contingent on continued employment and therefore related to post-combination services. As at December 31, 2020, 91,560 of the Class A subordinate voting shares remained restricted.
The total intrinsic value of stock options exercised and RSUs settled during the years ended December 31, 2020 and 2019 was $2,047,327 and $833,556, 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.
35
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
As of December 31, 2020 and 2019, there was $381,318 and $306,355, 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 2.06 years. Total unamortized compensation cost will be adjusted for future changes in estimated forfeitures.
Stock-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 income (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 the Company's 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 the post-vesting holding period.
•Expected Volatility. The Company determines the price volatility factor based on the Company's historical volatility over the expected life of the stock options.
•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.
The grant weighted average assumptions used to estimate the fair value of stock options granted to employees were as follows:
Years ended | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| Expected volatility | 46.4 | % | 50.7 | % | |||||||
| Risk-free interest rate | 1.04 | % | 2.25 | % | |||||||
| Dividend yield | Nil | Nil | |||||||||
| Average expected life | 4.41 | 4.77 | |||||||||
In addition to the assumptions used in the Black-Scholes option valuation model, the Company also estimates 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
36
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
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 income (loss), which includes both stock-based compensation and restricted share-based compensation expense:
| Years ended | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| $ | $ | ||||||||||
Cost of revenues | 6,483 | 3,572 | |||||||||
Sales and marketing | 40,680 | 33,917 | |||||||||
Research and development | 154,119 | 93,549 | |||||||||
General and administrative | 45,658 | 27,418 | |||||||||
| 246,940 | 158,456 | ||||||||||
20.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, 2020 and 2019:
| Accumulated Other Comprehensive Income (Loss) | |||||||||||
| Years ended | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| $ | $ | ||||||||||
| Balance, beginning of the year | 1,046 | (12,216) | |||||||||
| Other comprehensive income before reclassifications | 7,525 | 12,865 | |||||||||
| Loss on cash flow hedges reclassified from accumulated other comprehensive income to earnings were as follows: | |||||||||||
| Cost of revenues | 151 | 279 | |||||||||
| Sales and marketing | 933 | 1,538 | |||||||||
| Research and development | 1,460 | 2,620 | |||||||||
| General and administrative | 441 | 744 | |||||||||
| Tax effect on unrealized gain on cash flow hedges | (2,786) | (4,784) | |||||||||
| Other comprehensive income, net of tax | 7,724 | 13,262 | |||||||||
| Balance, end of the year | 8,770 | 1,046 | |||||||||
37
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
21.Income Taxes
The domestic and foreign components of income (loss) before income taxes and recovery of (provision for) income taxes were as follows:
| Years ended | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| $ | $ | ||||||||||
| Income (loss) before income taxes | |||||||||||
| Domestic | 133,757 | (55,507) | |||||||||
| Foreign | 106,607 | (40,308) | |||||||||
| 240,364 | (95,815) | ||||||||||
| Current income tax recovery (expense) | |||||||||||
| Domestic | 54,251 | (63,120) | |||||||||
| Foreign | (19,907) | (1,850) | |||||||||
| 34,344 | (64,970) | ||||||||||
| Deferred income tax recovery (expense) | |||||||||||
| Domestic | (12,552) | 14,351 | |||||||||
| Foreign | 57,353 | 21,592 | |||||||||
| 44,801 | 35,943 | ||||||||||
| Recovery of (provision for) income taxes | 79,145 | (29,027) | |||||||||
The reconciliation of the expected income tax (expense) recovery to the actual recovery of (provision for) income taxes reported in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2020 and 2019 is as follows:
| Years ended | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| $ | $ | ||||||||||
| Income (loss) before income taxes | 240,364 | (95,815) | |||||||||
Expected income tax (expense) recovery at Canadian statutory income tax rate of 26.5% (2019 - 26.5%) | (63,711) | 25,400 | |||||||||
| Permanent differences | 138,601 | (74,024) | |||||||||
| Foreign tax rate differential | 16,825 | (1,770) | |||||||||
| Tax credits earned during the year | 1,900 | 1,571 | |||||||||
| Other items | 4,503 | 1,468 | |||||||||
| Change in valuation allowance | (18,973) | 18,328 | |||||||||
| Recovery of (provision for) income taxes | 79,145 | (29,027) | |||||||||
The Company assesses whether valuation allowances should be established or maintained against its deferred tax assets, based on consideration of all available evidence, using a "more-likely-than-not" standard. The factors the Company uses to assess the likelihood of realization are its history of losses, forecasts of future pre-tax income, and tax planning strategies that could be implemented to realize the deferred tax assets.
38
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, 2020 and 2019 are as follows:
| December 31, 2020 | December 31, 2019 | ||||||||||
| $ | $ | ||||||||||
| Deferred tax assets | |||||||||||
| Tax loss carryforwards | 101,209 | 59,407 | |||||||||
| Temporary differences on capital and intangible assets | 50,297 | 44,445 | |||||||||
| Stock-based compensation expense | 16,653 | 11,324 | |||||||||
| Accruals and reserves | 21,926 | 10,397 | |||||||||
| Share issuance costs | 14,423 | 6,590 | |||||||||
| Temporary differences related to lease assets and liabilities | 9,292 | 4,526 | |||||||||
| Investment tax credits | 13,448 | 694 | |||||||||
| Valuation allowance | (123,345) | (89,363) | |||||||||
| Total deferred tax assets | 103,903 | 48,020 | |||||||||
| Deferred tax liabilities | |||||||||||
| Temporary differences on intangible assets | (32,521) | (35,967) | |||||||||
| Temporary differences on investments | (17,917) | — | |||||||||
| Other deferred tax liabilities | (788) | (1,374) | |||||||||
| Total deferred tax liabilities | (51,226) | (37,341) | |||||||||
| Net deferred tax assets | 52,677 | 10,679 | |||||||||
In July 2019, the Company formally established its EMEA headquarters in Ireland and its Asia-Pacific headquarters in Singapore. As a result of these actions, the Company transferred regional relationship and territory rights from its Canadian entity to enable each regional headquarters to develop and maintain merchant and commercial operations within its respective region, while keeping the ownership of all of the Company's current developed technology within Canada. These transfers reflect the growing proportion of the Company's business occurring internationally and resulted in a one-time capital gain.
As a result of the application of the Company's tax rates on the results of ongoing operations, other discrete items, primarily related to tax benefits for share-based compensation, the impairment of right-of-use assets and fixed assets, unrealized gains on equity and other investments, and considering the Company's ability to carry-back losses to prior years in Canada along with the reversal of the valuation allowance related to the deferred tax assets in the United States, Ireland, and Singapore, the Company has a recovery of income taxes of $79,145 in the year ended December 31, 2020.
As a result of the capital gain, ongoing operations, the recognition of deferred tax assets and liabilities, and the utilization of all applicable credits and other tax attributes, including loss carryforwards, the Company had a provision for income taxes of $29,027 in the year ended December 31, 2019.
During the fourth quarter of the year ended December 31, 2020, the Company released the valuation allowance against its deferred income tax assets in Ireland and Singapore due to the Company's recent regional financial results and its ability to carry forward the assets indefinitely.
Comparatively, during the year ended December 31, 2019, the Company released some of its valuation allowance against its deferred tax assets in Canada, the United States, and Sweden. In the third quarter of 2019, the Company released a portion of its valuation allowance against its Canadian deferred tax assets as
39
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
a result of the capital gain from the transfer of the regional relationship and territory rights. In the United States, as a result of the acquisition of 6RS the Company released a portion of its valuation allowance during its fourth quarter against deferred tax assets on its United States net operating losses.
The Company had no material uncertain income tax positions for the years ended December 31, 2020 and 2019. 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, 2020 and 2019, there was no interest or penalties related to uncertain tax positions.
The Company remains subject to audit by the relevant tax authorities for the years ended 2013 through 2020.
Investment tax credits, which are earned as a result of qualifying R&D expenditures, are recognized and applied to reduce income tax expense in the year in which the expenditures are made and their realization is reasonably assured.
As at December 31, 2020 and 2019, the Company had unused non-capital tax losses of approximately $342,308 and $209,759, respectively. Of the December 31, 2020 balance, $273,131 of the non-capital tax losses do not expire, while the remaining non-capital losses of $69,177 are due to expire between 2031 and 2040. As at December 31, 2020 and 2019, the Company had investment tax credits of $14,629 and $2,111, respectively. The investment tax credits are due to expire between 2038 and 2040.
22.Net Income (Loss) per Share
The Company applies the two-class method to calculate its basic and diluted net income (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:
| Years ended | |||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
Numerator: | |||||||||||||||||||||||
Net income (loss) | $ | 319,509 | $ | (124,842) | |||||||||||||||||||
Denominator: | |||||||||||||||||||||||
Basic weighted average number of shares outstanding | 119,569,705 | 113,026,424 | |||||||||||||||||||||
Effect of dilutive securities(1) | 3,893,569 | — | |||||||||||||||||||||
Diluted weighted average number of shares | 123,463,274 | 113,026,424 | |||||||||||||||||||||
Net income (loss) per share: | |||||||||||||||||||||||
Basic | $ | 2.67 | $ | (1.10) | |||||||||||||||||||
Diluted | $ | 2.59 | $ | (1.10) | |||||||||||||||||||
Common stock equivalents excluded from income (loss) per diluted share because they are anti-dilutive | 638,848 | 5,752,833 | |||||||||||||||||||||
(1) Included in the effect of dilutive securities is the assumed conversion of employee stock options and employee RSUs. Convertible senior notes have been excluded as they are anti-dilutive.
40
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
In the year ended December 31, 2019, the Company was in a loss position and therefore diluted loss per share is equal to basic loss per share.
23.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, 2020 | December 31, 2019 | ||||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||
| North America | |||||||||||||||||||||||
| Canada | 192,721 | 6.6 | % | 96,168 | 6.1 | % | |||||||||||||||||
| United States | 1,954,105 | 66.7 | % | 1,079,520 | 68.4 | % | |||||||||||||||||
| EMEA | |||||||||||||||||||||||
| United Kingdom | 199,825 | 6.8 | % | 103,498 | 6.6 | % | |||||||||||||||||
| Other | 254,444 | 8.7 | % | 121,063 | 7.7 | % | |||||||||||||||||
| APAC | |||||||||||||||||||||||
| Australia | 122,007 | 4.2 | % | 68,571 | 4.3 | % | |||||||||||||||||
| Other | 170,233 | 5.8 | % | 88,670 | 5.6 | % | |||||||||||||||||
| Latin America | 36,156 | 1.2 | % | 20,683 | 1.3 | % | |||||||||||||||||
| 2,929,491 | 100.0 | % | 1,578,173 | 100.0 | % | ||||||||||||||||||
The following table presents the total net book value of the Company’s long-lived physical assets by geographic location:
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||
| Canada | 75,283 | 81.7 | % | 104,349 | 93.6 | % | |||||||||||||||||
| United States | 6,141 | 6.7 | % | 4,747 | 4.3 | % | |||||||||||||||||
| Rest of World | 10,680 | 11.6 | % | 2,302 | 2.1 | % | |||||||||||||||||
| 92,104 | 100.0 | % | 111,398 | 100.0 | % | ||||||||||||||||||
24.Business Acquisitions
6 River Systems, Inc.
On October 17, 2019, the Company completed the acquisition of 6RS, a company based in Waltham, Massachusetts, United States, that provides collaborative warehouse fulfillment solutions. The Company acquired 100 percent of the outstanding shares of 6RS in exchange for cash consideration of $261,194, and $132,510 in Shopify Class A Subordinate Voting Shares. In connection with the transaction, a further $64,074 in restricted shares and stock options were issued and are being accounted for as stock-based compensation as they are related to post-combination services. The transaction was accounted for as a business combination. The operations of 6RS have been consolidated into the Company’s results as of the acquisition date.
41
Shopify Inc.
Notes to the Consolidated Financial Statements
Expressed in US $000's except share and per share amounts
The following table summarizes the final purchase price allocation of the 6RS assets acquired and liabilities assumed at the acquisition date:
| Amount $ | |||||
| Net tangible assets and liabilities: | |||||
| Cash | 8,158 | ||||
| Trade and other receivables, net | 2,038 | ||||
| Other current assets | 4,394 | ||||
| Property and equipment, net | 3,551 | ||||
| Accounts payable and accrued liabilities | (4,056) | ||||
| Current and long-term deferred revenue | (8,901) | ||||
| Estimated fair value of identifiable intangible assets: | |||||
| Acquired technology | 142,500 | ||||
| Customer relationships | 7,600 | ||||
| Net deferred tax liability on acquired intangibles | (26,107) | ||||
| Goodwill | 264,527 | ||||
| Total purchase price | 393,704 | ||||
The acquired technology was valued at $142,500 using a discounted cash flow methodology and customer relationships were valued at $7,600 using a cost approach, and are being amortized over 9 and 5 years, respectively. Goodwill from the 6RS acquisition is primarily attributable to the expected synergies that will result from integrating the 6RS collaborative robot technology with Shopify Fulfillment Network, and the acquisition of 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.
25.Comparative Figures
Certain comparative figures have been reclassified in order to conform to the current period presentation.
26.Subsequent Event
As disclosed in note 6, in July 2020, the Company received an investment in Affirm in conjunction with a strategic partnership for Shop Pay Installments. Up to January 12, 2021, the Company carried this investment at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative) as the fair value was not readily determinable. On January 13, 2021, Affirm priced its initial public offering at $49.00 per share of Class A common stock and began trading on the Nasdaq. As a result, Affirm's fair value is now readily determinable and therefore, going forward, the Company will commence accounting for this investment at fair value through earnings, with changes in fair value recorded in other income using the closing share price on the last trading day of the related reporting period, which is considered as Level 1 in the fair value hierarchy.
42
EXHIBIT 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS
February 17, 2021
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, 2020, 2019 and 2018, and our financial position as of December 31, 2020. You should read this MD&A together with our sets of audited consolidated financial statements and the accompanying notes for the fiscal years ended December 31, 2020, 2019 and 2018. Additional information regarding Shopify, including our 2020 annual information form and our annual report on Form 40-F for the year ended December 31, 2020, 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 U.S. 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, as amended, 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 "aim", “may”, “will”, “could”, “expects”, "further", “intends”, “plans”, “anticipates”, “believes”, “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:
•our expectation that we may experience a decrease in gross merchandise volume ("GMV") as a result of lower consumer spending on goods, which decrease would be partially offset by more traditional businesses expanding or migrating online;
•the extent of the impact of the novel coronavirus ("COVID-19") on our business, financial performance, revenues, and results of operations;
1
•our expectation that the majority of Shopify employees will work remotely permanently ("digital-by-default");
•our plan to repurpose or reconfigure our remaining office space and potentially terminate additional leases or sublet other spaces;
•our exploration of new ways to accelerate checkout;
•our ability to make it easier for merchants to manage their storefronts via their mobile devices;
•the achievement of innovations and enhancements to, and expansion of, our platform and our solutions;
•whether a merchant using Shopify will ever need to re-platform;
•the continued growth of our app developer, theme designer and partner ecosystem and the effect on the growth of our merchant base;
•the continued expansion of the number of channels for merchants to transact through;
•our plan to continue making investments to drive future growth;
•our expectation that we will continue to invest in, develop and scale Shopify Fulfillment Network to provide our merchants with fast and affordable fulfillment and our expectation that Shopify Fulfillment Network is well positioned to improve supply chain economics and delivery for merchants;
•our intention to accelerate the development of Shopify Fulfillment Network;
•our expectation that the gross margin percentage of merchant solutions will decline in the short term as we develop Shopify Fulfillment Network and 6 River Systems Inc. ("6RS");
•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;
•the structure of our Shop Pay Installments "buy now pay later" product;
•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 expectation that the cost of subscription solutions will increase and that our subscription solutions gross margin percentage will fluctuate modestly over time;
•our expectation that the cost of merchant solutions will increase in absolute dollars in future periods;
•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 and our expectation that sales and marketing expenses will increase in absolute dollars but decline as a percentage of total revenues over time;
•our expectation that our research and development expenses will increase in absolute dollars as we continue to increase the functionality of our platform, but will eventually decline as a percentage of total revenues;
•our expectation that general and administrative expenses will increase on an absolute dollar basis, but may decrease as a percentage of our 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 transaction and loan losses related to Shopify Payments, Shop Pay Installments and Shopify Capital will increase on an absolute dollar basis over time;
•the change in fair value of certain investments which may fluctuate period to period;
•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 future obligation to purchase outstanding convertible senior notes (the "Notes") on the occurrence of a fundamental change;
•our belief that we have sufficient liquidity to meet our current and planned financial obligations over the next 12 months, including any potential negative impacts to cash that may occur as a result of the impact from COVID-19;
•our future financing requirements and the availability of capital;
•the future value of our investment income, in particular as a result of changes in interest rates, fair value or due to observable changes in price or impairments;
2
•the fair market value of the Notes as a result of changes in interest rates or the price of our Class A subordinate voting shares;
•expected credit losses related to the impact of COVID-19;
•our expectations regarding contractual obligations and contingencies;
•the impact of inflation on our costs and operations;
•our accounting estimates, allowances, provisions, and assumptions made in the preparation of our financial statements; and
•our expectations regarding the impact of recently adopted accounting standards.
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 an increasing awareness among buyers that Shopify provides a superior and secure checkout experience is an additional advantage for our merchants;
•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, including our ability to retain merchants that have moved from physical retail to ecommerce as a result of the COVID-19 pandemic;
•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 and to manage our operations in a digital-by-default model;
•our belief that the near-term costs of reducing our leased footprint and transitioning our remaining spaces to their future intended purposes will yield longer-term benefits;
•our ability to enhance our ecosystem and partner programs, and the assumption that this will drive growth in our merchant base, further accelerating growth of the ecosystem;
•our belief that our investments and acquisitions will increase our revenue base, improve the retention of this base and strengthen our ability to increase sales to our merchants and help drive our growth;
•our ability to achieve our revenue growth objectives while controlling costs and expenses, and our ability to achieve or maintain profitability;
•our belief that Monthly Recurring Revenue ("MRR") is most closely correlated with the long-term value of our merchant relationships;
•our assumptions regarding the principal competitive factors in our markets;
•our ability to predict future commerce trends and technology;
•our assumptions that higher-margin solutions such as Shopify Capital and Shopify Shipping will continue to grow through increased adoption and international expansion;
•our expectation that a portion of increased funding to Shopify Capital will go toward business continuity instead of growth activities;
•our expectation that Shopify Payments will continue to expand internationally;
•our expectation that Shopify Fulfillment Network will continue to scale and grow, and we will continue to invest to support this growth;
3
•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 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, 2020 and elsewhere in this MD&A, including but not limited to risks relating to:
•sustaining our rapid growth;
•managing our growth;
•our potential inability to compete successfully against current and future competitors;
•the security of personal information we store relating to merchants and their buyers, as well as consumers with whom we have a direct relationship including users of our apps;
•our history of losses and our potential inability to maintain profitability;
•a denial of service attack or security breach;
•our limited operating history in new and developing markets and new geographic regions;
•our ability to innovate;
•international sales and operations and the use of our platform in various countries;
•our current reliance on a single supplier to provide the technology we offer through Shopify Payments;
•our potential inability to hire, retain and motivate qualified personnel;
•our use of a single cloud-based platform to deliver our services;
•the COVID-19 pandemic and its impact on our business, financial condition and results of operations including the impact of measures taken to contain the virus and the impact on the global economy and consumer spending and on our merchants' and partners' ecosystem;
•the reliance of our growth in part on the success of our strategic relationships with third parties;
•complex and changing laws and regulations worldwide;
•our dependence on the continued services and performance of our senior management and other key employees;
•our potential failure to effectively maintain, promote and enhance our brand;
•payments processed through Shopify Payments;
•serious errors or defects in our software or hardware or issues with our hardware supply chain;
•our potential inability to achieve or maintain data transmission capacity;
•activities of merchants or partners or the content of merchants' shops;
•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;
•unanticipated changes in tax laws or adverse outcomes resulting from examination of our income or other tax returns;
•being required to collect federal, state, provincial or local business taxes, sales and use taxes or other indirect taxes in additional jurisdictions on transactions by our merchants;
•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;
•acquisitions and investments;
•our ability to successfully scale, optimize and operate Shopify Fulfillment Network;
•Shopify Capital and offering financing to merchants;
4
•the impact of worldwide economic conditions, including the resulting effect on spending by small and medium-sized businesses ("SMBs") or their buyers;
•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;
•potential claims by third parties of intellectual property infringement or other third party or governmental claims, litigation, disputes, or other proceedings;
•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;
•seasonal fluctuations;
•exchange rate fluctuations that may negatively affect our results of operations;
•our potential failure to maintain a consistently high level of customer service;
•our dependence upon buyers’ and merchants’ access to, and willingness to use, the internet for commerce;
•provisions of our financial instruments including the Notes;
•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;
•our tax loss carryforwards;
•our pricing decisions for our solutions;
•ownership of our shares;
•our sensitivity to interest rate fluctuations; and
•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.
COVID-19
In light of the ongoing COVID-19 pandemic, we have continued to focus on the health and well-being of our employees, partners, service providers, and communities. We have also accelerated products that we believe will best serve our merchants as they deal with the challenges of COVID-19.
Throughout 2020, we developed initiatives to support our merchants in this difficult time, including offering an extended 90-day free trial for all new standard plan sign-ups from March 21, 2020 through May 31, 2020; availability of gift card capabilities to merchants on all plans; local in-store or curbside pick up and delivery for POS merchants; an increased funding commitment of $200 million above the March 31, 2020 level for the remainder of 2020 for Shopify Capital; an expansion of Shopify Capital to the United Kingdom and Canada; and the launch of partnerships, to help bring thousands of small businesses online and help them adapt to a digital economy, with the Government of Canada through the "Go Digital Canada" program, the New York State Government through
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‘Empire State Digital’, and the Victoria State Government in Australia through the ‘Small Business Adaptation Program’.
MRR growth accelerated in the year. This growth was largely driven by the continued global shift to ecommerce that was accelerated by the impact of COVID-19, along with our initiatives to support new merchants through an extended free trial period offered from March 21, 2020 to May 31, 2020 many of whom remained on the platform and converted to paying merchants.
During the year ended December 31, 2020, we observed sustained strong momentum in GMV, buoyed by restrictions related to COVID-19, as consumers looked for ways to purchase at a safe distance, utilizing ecommerce and benefiting from features such as curbside pickup and local delivery. GMV in the year ended December 31, 2020 grew by 96% compared to the year ended December 31, 2019. Going forward, we may experience a decrease in GMV as a result of lower consumer spending on goods, but also expect that any decrease would be at least partially offset by more traditional retail businesses expanding or migrating their operations online with our platform and services. The effect of COVID-19 on other aspects of our results of operations and financial performance in the long-term, such as revenues, remains uncertain and may only be reflected in future periods.
Demand for Shopify Capital was strong in 2020, with merchants receiving $794.4 million in funding across the U.S., the U.K. and Canada. This represents a 81% increase in funding over the year ended December 31, 2019. Merchants' access to capital is generally tougher as a result of COVID-19, which makes it even more important to continue lowering this barrier by making it quick and easy to access capital, so merchants can focus on growing their business. While we provisioned for higher credit losses in the year ended December 31, 2020, when compared to losses in the year ended December 31, 2019, they remain in line with historical loss ratios and expectations.
The effects of COVID-19 have led us to reimagine the way we work resulting in the decision to be a "digital-by-default" company. Shopify employees will continue to work remotely in 2021 and beyond 2021 Shopify will embrace this digital-first way of thinking, working, and operating with the intention that the majority of employees will work remotely permanently. We believe the near-term costs of reducing our leased footprint and transitioning remaining spaces to their future intended purpose, including use for team collaboration and events, will yield longer-term benefits, including leveling the playing field for employees who already work from home, helping our employees stay healthy and safe, opening ourselves up to a diverse global talent pool, eliminating unnecessary commutes and fast-tracking new and better ways to work together that are more productive and rewarding. As a result of this decision, we have terminated certain lease agreements or sought to sublet space at certain office locations which resulted in an impairment charge of $31.6 million in the year ended December 31, 2020. We continue to assess the ongoing need for the remaining offices and may repurpose them to accommodate physical distancing measures, reconfigure them for use in a digital-by-default framework, or look to sublease or terminate the related leases in the future. We have accelerated depreciation of certain leasehold improvements and furniture, totaling $40.5 million, in order to reflect these expected changes which will be depreciated over the next two to three years.
Overview
Shopify is a leading global commerce company, providing trusted tools to start, grow, market, and manage a retail business of any size. Shopify makes commerce better for everyone with a platform and services that are engineered for reliability, while delivering a better shopping experience for buyers everywhere.
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. More than two-thirds of our merchants use two or more channels. The Shopify application program interface ("API") has been developed to support custom storefronts that let merchants sell anywhere, in any language.
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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, which is available in 20 languages, to manage products and inventory, process orders and payments, fulfill and ship orders, discover new buyers and 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. 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, with features such as Shop Pay, and with our investments in additional touchpoints with their buyers, such as retail, shipping, fulfillment, and Shop, our all-in-one mobile shopping assistant app, 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, a trend that accelerated in 2020 as the global COVID-19 pandemic necessitated physically distanced commerce, 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. Shopify has focused on enabling mobile commerce, and the Shopify platform 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 Shop 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 easier to do so.
Infrastructure. We build our platform to address the growing challenges facing merchants and with the aim of making complex tasks simple. The Shopify platform is engineered to enterprise-level standards and functionality and 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. The Shopify Plus plan also appeals to larger merchants not already on Shopify who want to migrate from their expensive and complex legacy solutions and get more functionality.
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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 42,200 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 API and the approximately 6,000 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, 2020, our platform facilitated GMV of $119.6 billion, representing an increase of 95.6% from the year ended December 31, 2019. 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, 2020, our total revenue was $2,929.5 million, an increase of 85.6% versus the year ended December 31, 2019. 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, 2020, subscription solutions revenues accounted for 31.0% of our total revenues (40.7% in the year ended December 31, 2019). 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 solves for the complexity of merchants as they grow and scale globally, offering additional functionality, and support, including features like Shopify Flow and Launchpad, for ecommerce automation, and dedicated account management where appropriate. Allbirds, Gymshark, Heinz, and Staples Canada 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, as well as through the sale of subscriptions to our Point-of-Sale ("POS") Pro offering, the sale of themes, the sale of apps, and the registration of domain names. Subscription solutions revenues increased from $642.2 million in the year ended December 31, 2019 to $908.8 million in the year ended December 31, 2020, representing an increase of 41.5%. 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 MRR is most closely correlated with the long-term value of our merchant relationships. As of December 31, 2020, MRR totaled $82.6 million, representing an increase of 53.3% relative to MRR at December 31, 2019. Over the past few years, subscription solutions revenue has been growing faster than MRR due to apps and platform fees increasing as a percentage of total subscription solutions. In the year ended December 31, 2020, MRR grew at a faster rate than subscription solutions revenues as the extended free trial resulted in lower subscription revenues during the trial period. 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 1,069,000 as at December 31, 2019 to approximately 1,749,000 as at December 31, 2020.
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, 2020, merchant solutions revenues accounted for 69.0% of total revenues (59.3% in the year ended December 31, 2019). 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 other
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transaction services, referral fees, advertising revenue on the Shopify App Store, Shopify Capital, Shop Pay Installments, Shopify Shipping, Shopify Fulfillment Network, the sale of POS hardware and collaborative warehouse fulfillment solutions. Shopify Capital is available for merchants in the United States, the United Kingdom and Canada. Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform. Merchant solutions revenues increased from $935.9 million in the year ended December 31, 2019 to $2,020.7 million in the year ended December 31, 2020, representing an increase of 115.9%.
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, business sizes, and geographies 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.
Consistent with investing for the long-term, we announced in June 2019 that we expect to build and operate Shopify Fulfillment Network, a network of fulfillment centers across the United States, to help merchants deliver orders to buyers quickly and cost-effectively. Shopify Fulfillment Network aims to leverage our scale with machine learning, including demand forecasting, smart inventory allocation across warehouses and intelligent order routing to ultimately improve supply chain economics and delivery for merchants. We expect to continue to invest in and optimize this offering to further support our merchants.
On October 17, 2019, we completed the acquisition of 6RS, a company based in Waltham, Massachusetts, United States, that provides collaborative warehouse fulfillment solutions. By adding 6RS' cloud-based software and collaborative mobile robots, we gained a leadership team with experience in fulfillment; expanded our addressable market to include warehouse automation; and intend to accelerate the development of Shopify Fulfillment Network.
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, 2020 and 2019.
| Years ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Monthly Recurring Revenue | $ | 82,611 | $ | 53,898 | |||||||||||||||||||
| Gross Merchandise Volume | $ | 119,577,147 | $ | 61,138,457 | |||||||||||||||||||
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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. Subscription plans to both our platform as well as our POS Pro offering are included in this calculation. Merchants on free trials are excluded from this calculation through the duration of the free trial. 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 subscription solutions revenue. We had $82.6 million of MRR as at December 31, 2020 compared to $53.9 million as at December 31, 2019. Our MRR growth rate increased in the year ended December 31, 2020, when compared to previous years. This increase was largely driven by the shift to ecommerce during the year, most notably as a result of COVID-19, and our initiatives to support new merchants through an extended free trial period offered from March 21, 2020 to May 31, 2020 many of whom remained on the platform and converted to paying merchants.
Gross Merchandise Volume
GMV is the total dollar value of orders facilitated through our platform including certain apps and channels for which a revenue-sharing arrangement is in place 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, 2020 and 2019, we facilitated GMV of $119.6 billion and $61.1 billion, respectively. In the year ended December 31, 2020, we observed a significant increase in GMV largely driven by the shift to ecommerce during the year, most notably as a result of COVID-19. Going forward, we may experience a decrease in GMV as a result of lower consumer spending on goods, but also expect that any decrease would be at least partially offset by more traditional retail businesses expanding or migrating their operations online with our platform and services.
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 Shipping, Shopify Capital, and Shopify Fulfillment Network, 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. We expect to see our gross margin percentage for merchant solutions decline in the short term as we develop Shopify Fulfillment Network and 6RS. 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
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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. In addition, the ongoing effect of the COVID-19 pandemic has accelerated the shift of purchase habits to ecommerce. This contributed to additional GMV during the last three quarters of 2020. Going forward, we may experience a decrease in GMV as a result of lower consumer spending on goods, although we expect that any decrease would at least be partially offset by more traditional retail businesses expanding or migrating their operations online with our platform and services.
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 "Risks and Uncertainties—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, as well as through the sale of subscriptions to our POS Pro offering. 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. 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.
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.
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Merchant Solutions
We generate merchant solutions revenues from payment processing fees from Shopify Payments, transaction fees, referral fees from partners, advertising revenue on the Shopify App Store, Shopify Capital, Shop Pay Installments, Shopify Shipping, Shopify Fulfillment Network, collaborative warehouse fulfillment solutions, the sale of POS hardware, and Shopify Email.
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.
Advertising revenue is earned on the Shopify App Store as merchants click on the apps being advertised by our partners. We recognize advertising revenues when we are entitled to receive payment from the partner.
Shopify Capital, a merchant cash advance ("MCA") and loan program for eligible merchants, is offered in the United States, the United Kingdom and Canada 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 merchant solutions 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 some of the MCA's and loans offered by Shopify Capital in the United States and Canada.
Shop Pay Installments, a "buy now pay later" product, enables merchants to sell their goods to buyers on an interest-free payment plan. Merchants will receive upfront payment for a sale, net of fees, without the worry associated with collecting future payments from the buyer. Revenues earned from Shop Pay Installments are recognized when a merchant makes a sale using this product, and is based on a percentage of the total order value. We earn and recognize a portion of the revenue from each merchant sale, with the majority of revenue earned and recognized by our third-party provider that bears the buyer underwriting and buyer credit risk associated with the product.
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
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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.
Shopify Fulfillment Network is a dedicated network of fulfillment centers in the United States and Canada. Revenues related to warehouse storage and outbound shipping are recognized over time, as merchants receive and consume the benefits obtained from these services. The revenues related to picking, packaging, and preparing orders for shipment are recognized once the services have been rendered.
We offer collaborative warehouse fulfillment solutions in which revenues related to offering cloud-based software and collaborative mobile robots are recognized over time, over the contractual term, which can be up to five years. Payments received in advance of services being rendered are recorded as deferred revenue and recognized ratably over time, over the requisite service period.
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.
Shopify Email, launched in 2019, is our native email marketing tool designed to enable merchants to create, run, and track email marketing campaigns from within the merchant admin, and help merchants to build direct relationships with buyers. Shopify Email was also made available free to all merchants from early April until October 1, 2020 to help merchants adapt during the COVID-19 pandemic and related restrictions. Revenue from Shopify Email is based on the merchants' volume of emails sent and recognized as revenue when we have a right to invoice.
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.
Also included as cost of subscription solutions are domain registration fees.
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
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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 amortization of acquired intangible assets relating mostly to the acquired 6RS technology. In addition, we incur costs associated with warehouse storage, outbound shipping, picking, packaging, and the preparation of orders for shipment as part of the Shopify Fulfillment Network offering; costs associated with 6RS for materials and third-party manufacturing for those fulfillment robots sold to customers rather than leased to customers, which are capitalized and depreciated into cost of revenues; and costs associated with POS hardware, such as the cost of acquiring the hardware inventory, including hardware purchase price and expenses associated with our use of a third-party fulfillment company, shipping and handling.
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, resulting in a growth in volumes processed. We also expect additional increases as we continue to expand Shopify Payments internationally and as we continue to invest in Shopify Fulfillment Network. We expect to see our gross margin percentage of merchant solutions decline in the short term as we develop and optimize Shopify Fulfillment Network and 6RS collaborative warehouse fulfillment solutions.
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. Research and development costs are generally expensed as incurred. We capitalize certain development costs incurred in connection with our internal use software as well as costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional features and functionality. 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, impairment related to certain office leases we have ceased using, professional services fees, sales and use and other value added taxes, insurance, the provision for expected credit losses on uncollectible receivables, 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
14
total revenues as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business.
Transaction and Loan Losses
Transaction and loan losses consist of expected and actual losses related to Shopify Payments, Shop Pay Installments and Shopify Capital. We are exposed to transaction losses on Shopify Payments and Shop Pay Installments due to chargebacks as a result of fraud or uncollectibility. We are exposed to transaction losses on merchant cash advances offered through Shopify Capital as a result of fraud or uncollectibility. We provide for loan losses whenever the amortized cost of loans exceeds their fair value. Transaction and loan losses are expected to increase in absolute dollars over time.
Other Income (Expenses)
Other income (expenses) consists primarily of unrealized gains on equity and other investments, transaction gains or losses on foreign currency, interest income, and interest expense related to the Notes. The Company has equity investments in private companies without readily determinable fair values that it carries at cost less impairments, with subsequent adjustments for observable changes, with the assets recorded on the balance sheet and any resulting unrealized gains (losses) recorded in other income. The results from these equity investments may fluctuate from period to period based on observable changes and may cause volatility to our earnings as well as impact comparability of our results from period to period.
Subsequent to the year ended December 31, 2020, the Company's investment in Affirm Holdings, Inc. ("Affirm") has a fair value that is readily determinable as a result of its initial public offering on the Nasdaq on January 13, 2021 at $49.00 per share of Class A common stock. As such, the Company commenced accounting for this equity investment at fair value through earnings, with the change in fair value of this investment recorded in other income in each reporting period based on the closing share price at the end of the period.
15
Results of Operations
The following table sets forth our consolidated statement of operations for the years ended December 31, 2020, 2019, and 2018.
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in thousands, except share and per share data) | |||||||||||||||||
Revenues: | |||||||||||||||||
| Subscription solutions | $ | 908,757 | $ | 642,241 | $ | 464,996 | |||||||||||
| Merchant solutions | 2,020,734 | 935,932 | 608,233 | ||||||||||||||
| 2,929,491 | 1,578,173 | 1,073,229 | |||||||||||||||
Cost of revenues(1)(2): | |||||||||||||||||
| Subscription solutions | 193,532 | 128,155 | 100,990 | ||||||||||||||
| Merchant solutions | 1,194,439 | 584,375 | 375,972 | ||||||||||||||
| 1,387,971 | 712,530 | 476,962 | |||||||||||||||
Gross profit | 1,541,520 | 865,643 | 596,267 | ||||||||||||||
Operating expenses: | |||||||||||||||||
Sales and marketing(1)(2) | 602,048 | 472,841 | 350,069 | ||||||||||||||
Research and development(1)(2) | 552,127 | 355,015 | 230,674 | ||||||||||||||
General and administrative(1) | 245,343 | 153,765 | 99,196 | ||||||||||||||
| Transaction and loan losses | 51,849 | 25,169 | 8,248 | ||||||||||||||
Total operating expenses | 1,451,367 | 1,006,790 | 688,187 | ||||||||||||||
| Income (loss) from operations | 90,153 | (141,147) | (91,920) | ||||||||||||||
| Other income, net | 150,211 | 45,332 | 27,367 | ||||||||||||||
| Income (loss) before income taxes | 240,364 | (95,815) | (64,553) | ||||||||||||||
| Recovery of (provision for) income taxes | 79,145 | (29,027) | — | ||||||||||||||
| Net income (loss) | $ | 319,509 | $ | (124,842) | $ | (64,553) | |||||||||||
| Net income (loss) per share attributable to shareholders: | |||||||||||||||||
| Basic | $ | 2.67 | $ | (1.10) | $ | (0.61) | |||||||||||
| Diluted | $ | 2.59 | $ | (1.10) | $ | (0.61) | |||||||||||
| Shares used to compute net income (loss) per share attributable to shareholders: | |||||||||||||||||
| Basic | 119,569,705 | 113,026,424 | 105,671,839 | ||||||||||||||
| Diluted | 123,463,274 | 113,026,424 | 105,671,839 | ||||||||||||||
(1) Includes stock-based compensation expense and related payroll taxes as follows:
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in thousands) | |||||||||||||||||
Cost of revenues | $ | 7,472 | $ | 4,090 | $ | 2,441 | |||||||||||
Sales and marketing | 46,390 | 38,167 | 24,056 | ||||||||||||||
Research and development | 188,249 | 104,645 | 59,575 | ||||||||||||||
General and administrative | 52,195 | 29,861 | 17,690 | ||||||||||||||
| $ | 294,306 | $ | 176,763 | $ | 103,762 | ||||||||||||
(2) Includes amortization of acquired intangibles as follows:
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in thousands) | |||||||||||||||||
Cost of revenues | $ | 19,488 | $ | 9,624 | $ | 4,914 | |||||||||||
Sales and marketing | 1,548 | 283 | — | ||||||||||||||
Research and development | 233 | 232 | — | ||||||||||||||
| $ | 21,269 | $ | 10,139 | $ | 4,914 | ||||||||||||
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The following table sets forth our consolidated statement of operations as a percentage of total revenues for the years ended December 31, 2020, 2019, and 2018.
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Subscription solutions | 31.0 | % | 40.7 | % | 43.3 | % | |||||||||||
| Merchant solutions | 69.0 | % | 59.3 | % | 56.7 | % | |||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of revenues: | |||||||||||||||||
| Subscription solutions | 6.6 | % | 8.1 | % | 9.4 | % | |||||||||||
| Merchant solutions | 40.8 | % | 37.0 | % | 35.0 | % | |||||||||||
| 47.4 | % | 45.1 | % | 44.4 | % | ||||||||||||
Gross profit | 52.6 | % | 54.9 | % | 55.6 | % | |||||||||||
| Operating expenses: | |||||||||||||||||
| Sales and marketing | 20.6 | % | 30.0 | % | 32.6 | % | |||||||||||
| Research and development | 18.8 | % | 22.5 | % | 21.5 | % | |||||||||||
| General and administrative | 8.4 | % | 9.7 | % | 9.2 | % | |||||||||||
| Transaction and loan losses | 1.8 | % | 1.6 | % | 0.8 | % | |||||||||||
Total operating expenses | 49.5 | % | 63.8 | % | 64.1 | % | |||||||||||
| Income (loss) from operations | 3.1 | % | (8.9) | % | (8.5) | % | |||||||||||
| Other income, net | 5.1 | % | 2.9 | % | 2.5 | % | |||||||||||
| Income (loss) before income taxes | 8.2 | % | (6.0) | % | (6.0) | % | |||||||||||
| Recovery of (provision for) income taxes | 2.7 | % | (1.9) | % | 0.0 | % | |||||||||||
| Net income (loss) | 10.9 | % | (7.9) | % | (6.0) | % | |||||||||||
The following table sets forth our consolidated revenues by geographic location for the years ended December 31, 2020, 2019, and 2018, based on the location of our merchants.
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Revenues: | |||||||||||||||||
| North America | |||||||||||||||||
| Canada | $ | 192,721 | $ | 96,168 | $ | 70,774 | |||||||||||
| United States | 1,954,105 | 1,079,520 | 755,454 | ||||||||||||||
| EMEA | |||||||||||||||||
| United Kingdom | 199,825 | 103,498 | 69,596 | ||||||||||||||
| Other | 254,444 | 121,063 | 72,731 | ||||||||||||||
| APAC | |||||||||||||||||
| Australia | 122,007 | 68,571 | 47,937 | ||||||||||||||
| Other | 170,233 | 88,670 | 46,004 | ||||||||||||||
| Latin America | 36,156 | 20,683 | 10,733 | ||||||||||||||
| Total Revenues | $ | 2,929,491 | $ | 1,578,173 | $ | 1,073,229 | |||||||||||
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The following table sets forth our consolidated revenues by geographic location as a percentage of total revenues for the years ended December 31, 2020, 2019, and 2018, based on the location of our merchants.
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Revenues: | |||||||||||||||||
| North America | |||||||||||||||||
| Canada | 6.6 | % | 6.1 | % | 6.6 | % | |||||||||||
| United States | 66.7 | % | 68.4 | % | 70.4 | % | |||||||||||
| EMEA | |||||||||||||||||
| United Kingdom | 6.8 | % | 6.6 | % | 6.5 | % | |||||||||||
| Other | 8.7 | % | 7.7 | % | 6.7 | % | |||||||||||
| APAC | |||||||||||||||||
| Australia | 4.2 | % | 4.3 | % | 4.5 | % | |||||||||||
| Other | 5.8 | % | 5.6 | % | 4.3 | % | |||||||||||
| Latin America | 1.2 | % | 1.3 | % | 1.0 | % | |||||||||||
| Total Revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
Discussion of the Results of Operations for the years ended December 31, 2020, 2019, and 2018
Revenues
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||
| Subscription solutions | $ | 908,757 | $ | 642,241 | $ | 464,996 | 41.5 | % | 38.1 | % | |||||||||||||||||||
| Merchant solutions | 2,020,734 | 935,932 | 608,233 | 115.9 | % | 53.9 | % | ||||||||||||||||||||||
| $ | 2,929,491 | $ | 1,578,173 | $ | 1,073,229 | 85.6 | % | 47.0 | % | ||||||||||||||||||||
| Percentage of revenues: | |||||||||||||||||||||||||||||
| Subscription solutions | 31.0 | % | 40.7 | % | 43.3 | % | |||||||||||||||||||||||
| Merchant solutions | 69.0 | % | 59.3 | % | 56.7 | % | |||||||||||||||||||||||
| Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||
Subscription Solutions
Subscription solutions revenues increased $266.5 million, or 41.5%, for the year ended December 31, 2020 compared to the same period in 2019. Subscription solutions revenues increased $177.2 million, or 38.1%, for the year ended December 31, 2019 compared to the same period in 2018. 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 $1,084.8 million, or 115.9%, for the year ended December 31, 2020 compared to the same period in 2019. The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue growing by $835.2 million, or 121.2%, in 2020 compared to the same period in 2019. This increase was a result of consumers turning to ecommerce for more of their purchases due to the impacts of COVID-19, 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 $28.1 billion of additional GMV facilitated using Shopify Payments in 2020 compared to the same period in 2019, representing growth of 109.4% year over year. For the year ended December 31, 2020, the Shopify Payments penetration rate was 45.1%, resulting in GMV of $53.9 billion that was facilitated using Shopify Payments. This compares to a penetration rate of 42.1%, resulting in GMV of $25.7 billion that was facilitated using Shopify Payments in the same period in 2019. As at December 31, 2020 Shopify Payments adoption among our merchants was as follows: Canada, 92%; Australia, 92%; United States, 90%; United Kingdom, 89%; Ireland, 87%; New Zealand, 85%; and other countries where Shopify Payments is available, 75%.
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In addition to the increase in revenue from Shopify Payments, revenue from transaction fees, referral fees from partners, Shopify Shipping, Shopify Capital and Shopify Fulfillment Network increased during the year ended December 31, 2020 compared to the same period in 2019, as a result of the increase in GMV facilitated through our platform.
Merchant solutions revenues increased $327.7 million, or 53.9%, for the year ended December 31, 2019 compared to the same period in 2018. The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue growing by $239.6 million, or 53.3%. Additionally, revenue from transaction fees, referral fees from partners, Shopify Capital, and Shopify Shipping increased for the year ended December 31, 2019 compared to the same period in 2018.
Cost of Revenues
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
Cost of revenues: | |||||||||||||||||||||||||||||
Cost of subscription solutions | $ | 193,532 | $ | 128,155 | $ | 100,990 | 51.0 | % | 26.9 | % | |||||||||||||||||||
Cost of merchant solutions | 1,194,439 | 584,375 | 375,972 | 104.4 | % | 55.4 | % | ||||||||||||||||||||||
Total cost of revenues | $ | 1,387,971 | $ | 712,530 | $ | 476,962 | 94.8 | % | 49.4 | % | |||||||||||||||||||
Percentage of revenues: | |||||||||||||||||||||||||||||
Cost of subscription solutions | 6.6 | % | 8.1 | % | 9.4 | % | |||||||||||||||||||||||
Cost of merchant solutions | 40.8 | % | 37.0 | % | 35.0 | % | |||||||||||||||||||||||
| 47.4 | % | 45.1 | % | 44.4 | % | ||||||||||||||||||||||||
Cost of Subscription Solutions
Cost of subscription solutions increased $65.4 million, or 51.0%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was due to an increase in the costs necessary to support a greater number of merchants using our platform, resulting in an increase in: third-party infrastructure and hosting costs, payments to third-party theme developers, credit card fees for processing merchant billings, employee-related costs and payments to third-party partners for the registration of domain names. As a percentage of revenues, costs of subscription solutions decreased from 8.1% in 2019 to 6.6% in 2020 primarily due to a greater weighting of total revenue shifting towards merchant solutions along with a relative decrease in employee-related costs, credit card fees for processing merchant billings, and third-party infrastructure and hosting costs as a percentage of revenue in 2020.
Cost of subscription solutions increased $27.2 million, or 26.9%, for the year ended December 31, 2019 compared to the same period in 2018. The increase was primarily due to higher third-party infrastructure and hosting costs, credit card fees for processing merchant billings and employee-related costs.
Cost of Merchant Solutions
Cost of merchant solutions increased $610.1 million, or 104.4%, for the year ended December 31, 2020 compared to the same period in 2019. 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 costs associated with operating Shopify Fulfillment Network, amortization, largely related to the technology resulting from the 6RS acquisition, product costs associated with expanding our product offerings, credit card fees for processing merchant billings, costs associated with 6RS such as employee-related costs, materials and third-party manufacturing costs, cost of POS hardware units, and infrastructure and hosting costs. Cost of merchant solutions as a percentage of revenues increased from 37.0% in 2019 to 40.8% in 2020, mainly as a result of Shopify Payments representing a larger percentage of total revenue.
Cost of merchant solutions increased $208.4 million, or 55.4%, for the year ended December 31, 2019 compared to the same period in 2018. The increase was primarily due to the increase in GMV facilitated through Shopify Payments, which resulted in higher payment processing fees and interchange fees. The increase was also due in part to higher amortization, largely related to the technology resulting from the 6RS acquisition.
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Gross Profit
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
Gross profit | $ | 1,541,520 | $ | 865,643 | $ | 596,267 | 78.1 | % | 45.2 | % | |||||||||||||||||||
Percentage of total revenues | 52.6 | % | 54.9 | % | 55.6 | % | |||||||||||||||||||||||
Gross profit increased $675.9 million, or 78.1%, for the year ended December 31, 2020 compared to the same period in 2019. As a percentage of total revenues, gross profit decreased from 54.9% in the year ended December 31, 2019 to 52.6% in the year ended December 31, 2020, due to Shopify Payments representing a larger percentage of total revenue, the costs associated with the continued development of Shopify Fulfillment Network, and amortization of technology related to the 6RS acquisition. This was partly offset by higher revenues from higher margin products such as referral fees from partners, Shopify Shipping, and Shopify Capital.
Gross profit increased $269.4 million, or 45.2%, for the year ended December 31, 2019 compared to the same period in 2018. As a percentage of total revenues, gross profit decreased from 55.6% in the year ended December 31, 2018 to 54.9% in the year ended December 31, 2019, due to Shopify Payments representing a larger percentage of total revenue and an increase in amortization of technology related to the 6RS acquisition as well as other platform enhancements. This was partly offset by lower third-party infrastructure and hosting costs and employee-related costs as a percentage of revenues as well as the relative growth of higher-margin merchant solutions products, namely Shopify Capital and referral fees from partners.
Operating Expenses
Sales and Marketing
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
Sales and marketing | $ | 602,048 | $ | 472,841 | $ | 350,069 | 27.3 | % | 35.1 | % | |||||||||||||||||||
Percentage of total revenues | 20.6 | % | 30.0 | % | 32.6 | % | |||||||||||||||||||||||
Sales and marketing expenses increased $129.2 million, or 27.3%, for the year ended December 31, 2020 compared to the same period in 2019, due to an increase of $66.1 million in expenditures on marketing programs to support the growth of our business, such as advertisements on search engines, display ads and social media, as well as payments to partners. These increases were slightly offset by lower spend on brand, Shopify Studios, and event sponsorship. Employee-related costs increased $56.5 million ($8.2 million of which related to stock-based compensation and related payroll taxes) to support the growth of the business. Computer hardware and software costs increased by $4.2 million, largely due to the growth in sales and marketing headcount. Facilities related costs increased by $2.4 million, including the impact of accelerating depreciation at certain offices.
Sales and marketing expenses increased $122.8 million, or 35.1%, for the year ended December 31, 2019 compared to the same period in 2018, primarily due to an increase of $70.4 million in expenditures on marketing programs. In addition to marketing costs, employee-related costs increased by $48.7 million and computer hardware and software costs increased by $3.7 million.
Research and Development
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
Research and development | $ | 552,127 | $ | 355,015 | $ | 230,674 | 55.5 | % | 53.9 | % | |||||||||||||||||||
Percentage of total revenues | 18.8 | % | 22.5 | % | 21.5 | % | |||||||||||||||||||||||
Research and development expenses increased $197.1 million, or 55.5%, for the year ended December 31, 2020 compared to the same period in 2019, due to an increase of $173.9 million in employee-related costs ($83.6 million of which related to stock-based compensation and related payroll taxes) and a $12.6 million increase in computer hardware and software costs, all as a result of growth in our research and development employee base and expanded
20
development programs In addition, facilities related costs increased $9.1 million, including the impact of accelerating depreciation at certain offices, and professional services fees increased $1.5 million.
Research and development expenses increased $124.3 million, or 53.9%, for the year ended December 31, 2019 compared to the same period in 2018, due to an increase of $114.4 million in employee-related costs, an increase of $7.4 million in computer hardware and software costs, and a $2.5 million increase in professional services fees, all as a result of growth in our research and development employee base and expanded development programs.
General and Administrative
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
General and administrative | $ | 245,343 | $ | 153,765 | $ | 99,196 | 59.6 | % | 55.0 | % | |||||||||||||||||||
Percentage of total revenues | 8.4 | % | 9.7 | % | 9.2 | % | |||||||||||||||||||||||
General and administrative expenses increased $91.6 million, or 59.6%, for the year ended December 31, 2020 compared to the same period in 2019, due largely to an increase of $43.7 million in employee-related costs ($22.3 million of which related to stock-based compensation and related payroll taxes). The increase is also due to an impairment of $31.6 million relating to certain office spaces we have ceased using, for which the leases have been or will be terminated or sublet, as we move from a primarily physical office-centric work model to a primarily digital work-from-home-centric work model. $16.8 million of the impairment related to our leasehold improvements and $14.8 million of the impairment related to our right-of-use assets. In addition, the increase in general and administrative expense is due to a $14.5 million increase in finance costs, which includes insurance, sustainability spend, corporate donations, sales and use and other value added taxes, and the provision for expected credit losses on uncollectible receivables, a $4.9 million increase in computer and software costs, a $3.0 million increase in facilities related costs, including the impact of accelerating depreciation at certain offices, and a $2.0 million increase in professional services for legal and financial services. These increases are slightly offset by a $8.1 million decrease relating to an estimated net liability for non-recurring HST payable to the Government of Canada that was recognized in 2019.
General and administrative expenses increased $54.6 million, or 55.0%, for the year ended December 31, 2019 compared to the same period in 2018, due to an increase of $28.7 million in employee-related costs, a $15.6 million increase in finance costs, which include an estimated net liability for non-recurring HST payable to the Government of Canada, sales and use and other value added taxes, insurance, and bank fees, a $6.9 million increase in professional services fees for legal and tax services, a $1.8 million increase in computer and software costs, and a $1.6 million increase in general bad debt.
Transaction and Loan Losses
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
Transaction and loan losses | $ | 51,849 | $ | 25,169 | $ | 8,248 | 106.0 | % | 205.2 | % | |||||||||||||||||||
Percentage of total revenues | 1.8 | % | 1.6 | % | 0.8 | % | |||||||||||||||||||||||
Transaction and loan losses increased $26.7 million, or 106.0%, for the year ended December 31, 2020 compared to the same period in 2019, due to an increase of $18.8 million in losses related to Shopify Payments, which is correlated to increased GMV processed through Shopify Payments, as well as a relative increase in the provision for losses related to the potential impact from COVID-19, and a $7.9 million increase in losses related to Shopify Capital driven by an expansion of our Capital offerings and programs, along with a relative increase in the provision for expected credit losses related to the potential impact from COVID-19.
Transaction and loan losses increased $16.9 million, or 205.2%, for the year ended December 31, 2019 compared to the same period in 2018, due to an increase of $9.0 million in losses related to Shopify Payments driven by increased GMV processed through Shopify Payments, and a $7.9 million increase in losses related to Shopify Capital driven by an expansion of our Capital offerings and programs.
21
Other Income (Expenses)
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Other income, net | $ | 150,211 | $ | 45,332 | $ | 27,367 | * | * | |||||||||||||||||||||
* Not a meaningful comparison
In the year ended December 31, 2020 we had other income of $150.2 million compared to other income of $45.3 million in the same period in 2019, an increase of $104.9 million. The increase was driven mainly by an unrealized gain on equity and other investments of $135.2 million related to investments in private companies, most notably our investment in Affirm received in connection with our strategic partnership. In addition, the increase was due to a change in the foreign exchange loss of $2.9 million in 2019 to a foreign exchange gain of $0.7 million in 2020, resulting in an increase in other income of $3.5 million. These increases were offset by a decrease in interest income of $24.7 million, primarily as a result of lower interest rates, and a $9.1 million increase in interest expense related to the Notes.
Other income increased by $18.0 million in the year ended December 31, 2019 compared to the same period in 2018. The increase was driven primarily by an increase in interest income from investments of $18.7 million. The remaining difference is from foreign exchange losses.
Recovery of (Provision for) Income Taxes
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Recovery of (provision for) income taxes | $ | 79,145 | $ | (29,027) | $ | — | * | * | |||||||||||||||||||||
* Not a meaningful comparison
In the third quarter of 2019, we formally established our EMEA headquarters in Ireland and our Asia-Pacific headquarters in Singapore. As a result of these actions, we transferred regional relationship and territory rights from our Canadian entity to enable each regional headquarters to develop and maintain merchant and commercial operations within its respective region, while keeping the ownership of all of the current developed technology within Canada. These transfers reflect the growing proportion of our business occurring internationally and resulted in a one-time capital gain.
As a result of the application of our tax rates on the results of ongoing operations, other discrete items, primarily related to tax benefits for share-based compensation, the impairment of right-of-use assets and fixed assets, unrealized gains on equity and other investments, and considering our ability to carry-back losses to prior years in Canada along with the recognition of deferred tax assets in the United States, Ireland and Singapore, we had a recovery of income taxes of $79.1 million in the year ended December 31, 2020, compared to a provision for income taxes of $29.0 million in the same period in 2019.
22
Profit (Loss)
| Years ended December 31, | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | % Change | % Change | |||||||||||||||||||||||||
| (in thousands, except share and per share data) | |||||||||||||||||||||||||||||
Net income (loss) | $ | 319,509 | $ | (124,842) | $ | (64,553) | * | * | |||||||||||||||||||||
| Net income (loss) per share attributable to shareholders: | |||||||||||||||||||||||||||||
Basic | $ | 2.67 | $ | (1.10) | $ | (0.61) | * | * | |||||||||||||||||||||
| Diluted | $ | 2.59 | $ | (1.10) | $ | (0.61) | * | * | |||||||||||||||||||||
| Shares used to compute net income (loss) per share attributable to shareholders: | |||||||||||||||||||||||||||||
Basic | 119,569,705 | 113,026,424 | 105,671,839 | * | * | ||||||||||||||||||||||||
| Diluted | 123,463,274 | 113,026,424 | 105,671,839 | * | * | ||||||||||||||||||||||||
* Not a meaningful comparison
For the year ended December 31, 2020, basic and diluted net income per share attributable to shareholders was $2.67 and $2.59, respectively, when compared to basic and diluted net loss per share attributable to shareholders of $(1.10) in the same period in 2019. The increase is largely due to the global shift to ecommerce during the year, most notably as a result of COVID-19, resulting in a significant growth in revenue. In addition, the recovery of income taxes in the year had a positive impact on basic and diluted net income per share. This growth was slightly offset by 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 for the year ended December 31, 2019 increased $(0.49) compared to the same period in 2018.
23
Quarterly Results of Operations
The following table sets forth our results of operations for the three months ended December 31, 2020 and 2019.
| Three months ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (in thousands, except share and per share data) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscription solutions | $ | 279,440 | $ | 183,166 | |||||||||||||||||||
| Merchant solutions | 698,304 | 321,994 | |||||||||||||||||||||
| 977,744 | 505,160 | ||||||||||||||||||||||
Cost of revenues(1)(2): | |||||||||||||||||||||||
| Subscription solutions | 59,250 | 37,369 | |||||||||||||||||||||
| Merchant solutions | 414,106 | 203,900 | |||||||||||||||||||||
| 473,356 | 241,269 | ||||||||||||||||||||||
| Gross profit | 504,388 | 263,891 | |||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Sales and marketing(1)(2) | 154,728 | 132,063 | |||||||||||||||||||||
Research and development(1)(2) | 159,077 | 102,753 | |||||||||||||||||||||
General and administrative(1) | 65,395 | 50,518 | |||||||||||||||||||||
| Transaction and loan losses | 12,647 | 8,636 | |||||||||||||||||||||
| Total operating expenses | 391,847 | 293,970 | |||||||||||||||||||||
| Income (loss) from operations | 112,541 | (30,079) | |||||||||||||||||||||
| Other (expenses) income, net | (2,788) | 11,539 | |||||||||||||||||||||
| Income (loss) before income taxes | 109,753 | (18,540) | |||||||||||||||||||||
| Recovery of income taxes | 14,119 | 19,311 | |||||||||||||||||||||
| Net income | $ | 123,872 | $ | 771 | |||||||||||||||||||
| Net income per share attributable to shareholders: | |||||||||||||||||||||||
| Basic | $ | 1.01 | $ | 0.01 | |||||||||||||||||||
| Diluted | $ | 0.99 | $ | 0.01 | |||||||||||||||||||
| Shares used to compute net income per share attributable to shareholders: | |||||||||||||||||||||||
| Basic | 122,181,067 | 116,027,240 | |||||||||||||||||||||
| Diluted | 125,454,919 | 116,027,240 | |||||||||||||||||||||
(1) Includes stock-based compensation expense and related payroll taxes as follows:
| Three months ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Cost of revenues | $ | 1,705 | $ | 1,209 | |||||||||||||||||||
Sales and marketing | 10,044 | 11,319 | |||||||||||||||||||||
Research and development | 54,262 | 32,361 | |||||||||||||||||||||
General and administrative | 16,480 | 8,533 | |||||||||||||||||||||
| $ | 82,491 | $ | 53,422 | ||||||||||||||||||||
24
(2) Includes amortization of acquired intangibles as follows:
| Three months ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Cost of revenues | $ | 4,532 | $ | 4,820 | |||||||||||||||||||
Sales and marketing | 384 | 283 | |||||||||||||||||||||
Research and development | 59 | 58 | |||||||||||||||||||||
| $ | 4,975 | $ | 5,161 | ||||||||||||||||||||
Revenues
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Subscription solutions | $ | 279,440 | $ | 183,166 | 52.6 | % | |||||||||||||||||||||||||||||
| Merchant solutions | 698,304 | 321,994 | 116.9 | % | |||||||||||||||||||||||||||||||
| Total revenues | $ | 977,744 | $ | 505,160 | 93.6 | % | |||||||||||||||||||||||||||||
| Percentage of revenues: | |||||||||||||||||||||||||||||||||||
| Subscription solutions | 28.6 | % | 36.3 | % | |||||||||||||||||||||||||||||||
| Merchant solutions | 71.4 | % | 63.7 | % | |||||||||||||||||||||||||||||||
| 100.0 | % | 100.0 | % | ||||||||||||||||||||||||||||||||
Subscription Solutions
Subscription solutions revenues increased $96.3 million, or 52.6%, for the three months ended December 31, 2020 compared to the same period in 2019. 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 $376.3 million, or 116.9%, for the three months ended December 31, 2020 compared to the same period in 2019. The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue growing in the three months ended December 31, 2020 compared to the same period in 2019. This increase was a result of consumers turning to ecommerce for more of their purchases due to the impacts of COVID-19, an increase in number of merchants using our platform, continued expansion into new geographical regions, and an increase in our Shopify Payments penetration rate, which was 46.5%, resulting in GMV of $19.1 billion that was facilitated using Shopify Payments for the three months ended December 31, 2020. This compares to a penetration rate of 42.9% resulting in GMV of $8.9 billion that was facilitated using Shopify Payments in the same period in 2019.
In addition to the increase in revenue from Shopify Payments, revenue from transaction fees, referral fees from partners, Shopify Shipping, Shopify Capital and Shopify Fulfillment Network increased during the three months ended December 31, 2020 compared to the same periods in 2019, as a result of the increase in GMV facilitated through our platform compared to the same periods in 2019.
25
Cost of Revenues
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
Cost of revenues: | |||||||||||||||||||||||||||||||||||
Cost of subscription solutions | $ | 59,250 | $ | 37,369 | 58.6 | % | |||||||||||||||||||||||||||||
Cost of merchant solutions | 414,106 | 203,900 | 103.1 | % | |||||||||||||||||||||||||||||||
Total cost of revenues | $ | 473,356 | $ | 241,269 | 96.2 | % | |||||||||||||||||||||||||||||
Percentage of revenues: | |||||||||||||||||||||||||||||||||||
Cost of subscription solutions | 6.1 | % | 7.4 | % | |||||||||||||||||||||||||||||||
Cost of merchant solutions | 42.4 | % | 40.4 | % | |||||||||||||||||||||||||||||||
| 48.4 | % | 47.8 | % | ||||||||||||||||||||||||||||||||
Cost of Subscription Solutions
Cost of subscription solutions increased $21.9 million, or 58.6%, for the three months ended December 31, 2020 compared to the same period in 2019. The increase was due to an increase in the costs necessary to support a greater number of merchants using our platform, resulting in an increase in: infrastructure and hosting costs, credit card fees for processing merchant billings, payments to third-party theme developers, and payments to third-party partners for the registration of domain names. As a percentage of revenues, cost of subscription solutions decreased from 7.4% in the three months ended December 31, 2019 to 6.1% in the three months ended December 31, 2020 due to subscription solutions representing a smaller percentage of our total revenues as higher GMV generated on the platform shifted the weighting of revenues towards merchant solutions.
Cost of Merchant Solutions
Cost of merchant solutions increased $210.2 million, or 103.1%, for the three months ended December 31, 2020 compared to the same period in 2019. The increase was primarily due to higher payment processing and interchange fees resulting from an increase in GMV facilitated through Shopify Payments. The increase was also due to an increase in costs associated with operating Shopify Fulfillment Network, credit card fees for processing merchant billings, product costs associated with expanding our product offerings, costs associated with 6RS such as employee-related costs, materials and third-party manufacturing costs, cost of POS hardware units and infrastructure and hosting costs. Cost of merchant solutions as a percentage of revenues increased from 40.4% in the three months ended December 31, 2019 to 42.4% in the three months ended December 31, 2020 due to merchant solutions representing a larger percentage of our total revenues, as higher GMV generated on the platform shifted the weighting of revenues, and due to continuing the development of Shopify Fulfillment Network.
Gross Profit
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
Gross profit | $ | 504,388 | $ | 263,891 | 91.1 | % | |||||||||||||||||||||||||||||
Percentage of total revenues | 51.6 | % | 52.2 | % | |||||||||||||||||||||||||||||||
Gross profit increased $240.5 million, or 91.1%, for the three months ended December 31, 2020 compared to the same period in 2019. As a percentage of total revenues, gross profit decreased from 52.2% in the three months ended December 31, 2019 to 51.6% in the three months ended December 31, 2020, principally due to Shopify Payments representing a larger percentage of total revenues and the costs associated with the continued development of Shopify Fulfillment Network. This was partly offset by higher revenues from higher margin products such as referral revenue, Shopify Shipping, and Shopify Capital.
26
Operating Expenses
Sales and Marketing
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
Sales and marketing | $ | 154,728 | $ | 132,063 | 17.2 | % | |||||||||||||||||||||||||||||
Percentage of total revenues | 15.8 | % | 26.1 | % | |||||||||||||||||||||||||||||||
Sales and marketing expenses increased $22.7 million, or 17.2%, for the three months ended December 31, 2020 compared to the same period in 2019, due to an increase of $14.5 million on marketing programs to support the growth of our business, such as advertisements on search engines, display ads and social media, as well as payments to partners. These increases were slightly offset by lower spend on brand, Shopify Studios, and event sponsorship. Additional increases in overall sales and marketing expenses include an increase of $8.1 million in employee-related costs (which includes a $1.3 million decrease related to stock-based compensation and related payroll taxes) and an increase of $0.2 million related to computer hardware and software. These increases were offset slightly by a $0.1 million decrease in facilities related costs.
Research and Development
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
Research and development | $ | 159,077 | $ | 102,753 | 54.8 | % | |||||||||||||||||||||||||||||
Percentage of total revenues | 16.3 | % | 20.3 | % | |||||||||||||||||||||||||||||||
Research and development expenses increased $56.3 million, or 54.8%, for the three months ended December 31, 2020 compared to the same period in 2019, due to an increase of $50.7 million in employee-related costs ($21.9 million of which related to stock-based compensation and related payroll taxes) and a $3.6 million increase in computer hardware and software costs, all as a result of the growth in our employee base and expanded development programs. In addition, facilities related costs increased $1.4 million, including the impact of accelerating depreciation at certain offices, and professional services fees increased $0.6 million.
General and Administrative
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
General and administrative | $ | 65,395 | $ | 50,518 | 29.4 | % | |||||||||||||||||||||||||||||
Percentage of total revenues | 6.7 | % | 10.0 | % | |||||||||||||||||||||||||||||||
General and administrative expenses increased $14.9 million, or 29.4%, for the three months ended December 31, 2020 compared to the same period in 2019, due to an increase of $16.5 million in employee-related costs ($7.9 million of which related to stock-based compensation and related payroll taxes), a $3.8 million increase in finance costs, which includes sustainability spend, insurance, sales and use and other value added taxes and the provision for expected credit losses on uncollectible receivables, a $1.7 million increase in professional services for legal and financial services and a $1.4 million increase in computer and software costs. These increases were offset by a $8.1 million decrease relating to an estimated net liability for non-recurring HST payable to the Government of Canada that was recognized in 2019 as well as a $0.4 million decrease in facilities related costs.
27
Transaction and Loan Losses
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
Transaction and loan losses | $ | 12,647 | $ | 8,636 | 46.4 | % | |||||||||||||||||||||||||||||
Percentage of total revenues | 1.3 | % | 1.7 | % | |||||||||||||||||||||||||||||||
Transaction and loan losses increased $4.0 million, or 46.4%, for the three months ended December 31, 2020 compared to the same period in 2019, due to an increase of $5.1 million in losses related to Shopify Payments, which is correlated to increased GMV processed through Shopify Payments, as well as a relative increase in the provision for losses related to the potential impact from COVID-19. Losses related to Shopify Capital decreased $1.1 million driven largely in part to higher remittances obtained during the holiday season offset slightly by an increase in the provision for expected credit losses related to the potential impact from COVID-19.
Other Income (Expenses)
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Other (expenses) income, net | $ | (2,788) | $ | 11,539 | * | ||||||||||||||||||||||||||||||
* Not a meaningful comparison
In the three months ended December 31, 2020 we had other expenses of $2.8 million, compared to other income of $11.5 million in the same period in 2019. The decrease was driven by a reduction in interest income of $9.1 million, primarily as a result of lower interest rates, and a $7.9 million increase in interest expense related to the Notes. These decreases were offset slightly by an unrealized gain on equity and other investments of $2.0 million related to an investment in a private company and a decrease of $0.7 million in foreign exchange losses.
Recovery of Income Taxes
| Three months ended December 31, | 2020 vs. 2019 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
Recovery of income taxes | $ | 14,119 | $ | 19,311 | * | ||||||||||||||||||||||||||||||
* Not a meaningful comparison
In the third quarter of 2019, we formally established our EMEA headquarters in Ireland and our Asia-Pacific headquarters in Singapore. As a result of these actions, we transferred regional relationship and territory rights from our Canadian entity to enable each regional headquarters to develop and maintain merchant and commercial operations within its respective region, while keeping the ownership of all of the Company's current developed technology within Canada. These transfers reflect the growing proportion of our business occurring internationally and resulted in a one-time capital gain.
As a result of the application of our effective tax rate on the results of ongoing operations, other discrete items, primarily related to tax benefits for share-based compensation, unrealized gains on equity and other investments, and considering our ability to carry-back losses to prior years in Canada along with the recognition of deferred tax assets in the United States, Ireland and Singapore, we had a recovery of income taxes of $14.1 million in the three months ended December 31, 2020, compared to a recovery of income taxes of $19.3 million in the same period in 2019.
28
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, 2020. 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 include 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, 2020 | Sep 30, 2020 | June 30, 2020 | Mar 31, 2020 | Dec 31, 2019 | Sep 30, 2019 | Jun 30, 2019 | Mar 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subscription solutions | $ | 279,440 | $ | 245,274 | $ | 196,434 | $ | 187,609 | $ | 183,166 | $ | 165,577 | $ | 153,047 | $ | 140,451 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Merchant solutions | 698,304 | 522,131 | 517,907 | 282,392 | 321,994 | 224,975 | 208,932 | 180,031 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 977,744 | 767,405 | 714,341 | 470,001 | 505,160 | 390,552 | 361,979 | 320,482 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenues:(1)(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subscription solutions | 59,250 | 52,170 | 44,400 | 37,712 | 37,369 | 33,263 | 29,538 | 27,985 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Merchant solutions | 414,106 | 310,087 | 294,907 | 175,339 | 203,900 | 140,593 | 127,676 | 112,206 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 473,356 | 362,257 | 339,307 | 213,051 | 241,269 | 173,856 | 157,214 | 140,191 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross profit | 504,388 | 405,148 | 375,034 | 256,950 | 263,891 | 216,696 | 204,765 | 180,291 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales and marketing(1)(2) | 154,728 | 147,608 | 144,850 | 154,862 | 132,063 | 116,546 | 119,210 | 105,022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development(1)(2) | 159,077 | 143,427 | 133,227 | 116,396 | 102,753 | 90,387 | 85,520 | 76,355 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General and administrative(1) | 65,395 | 51,799 | 83,307 | 44,842 | 50,518 | 38,022 | 34,922 | 30,303 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transaction and loan losses | 12,647 | 11,753 | 13,366 | 14,083 | 8,636 | 7,399 | 4,733 | 4,401 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 391,847 | 354,587 | 374,750 | 330,183 | 293,970 | 252,354 | 244,385 | 216,081 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations | 112,541 | 50,561 | 284 | (73,233) | (30,079) | (35,658) | (39,620) | (35,790) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other (expenses) income, net | (2,788) | 135,806 | 4,084 | 13,109 | 11,539 | 11,212 | 10,942 | 11,639 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 109,753 | 186,367 | 4,368 | (60,124) | (18,540) | (24,446) | (28,678) | (24,151) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recovery of (provision for) income taxes | 14,119 | 4,701 | 31,630 | 28,695 | 19,311 | (48,338) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 123,872 | $ | 191,068 | $ | 35,998 | $ | (31,429) | $ | 771 | $ | (72,784) | $ | (28,678) | $ | (24,151) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) per share attributable to shareholders: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | $ | 1.01 | $ | 1.59 | $ | 0.30 | $ | (0.27) | $ | 0.01 | $ | (0.64) | $ | (0.26) | $ | (0.22) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | $ | 0.99 | $ | 1.54 | $ | 0.29 | $ | (0.27) | $ | 0.01 | $ | (0.64) | $ | (0.26) | $ | (0.22) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Includes stock-based compensation expense and related payroll taxes as follows:
| Three months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dec 31, 2020 | Sep 30, 2020 | June 30, 2020 | Mar 31, 2020 | Dec 31, 2019 | Sep 30, 2019 | Jun 30, 2019 | Mar 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenues | $ | 1,705 | $ | 2,914 | $ | 1,529 | $ | 1,324 | $ | 1,209 | $ | 1,041 | $ | 1,026 | $ | 814 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales and marketing | 10,044 | 11,481 | 12,431 | 12,434 | 11,319 | 9,692 | 9,511 | 7,645 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 54,262 | 47,741 | 49,825 | 36,421 | 32,361 | 25,913 | 26,448 | 19,923 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 16,480 | 13,266 | 12,682 | 9,767 | 8,533 | 7,853 | 7,444 | 6,031 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 82,491 | $ | 75,402 | $ | 76,467 | $ | 59,946 | $ | 53,422 | $ | 44,499 | $ | 44,429 | $ | 34,413 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(2) Includes amortization of acquired intangibles as follows:
| Three months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dec 31, 2020 | Sep 30, 2020 | June 30, 2020 | Mar 31, 2020 | Dec 31, 2019 | Sep 30, 2019 | Jun 30, 2019 | Mar 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenues | $ | 4,532 | $ | 4,531 | $ | 4,856 | $ | 5,569 | $ | 4,820 | $ | 1,649 | $ | 1,530 | $ | 1,625 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales and marketing | 384 | 388 | 388 | 388 | 283 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 59 | 58 | 58 | 58 | 58 | 58 | 58 | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 4,975 | $ | 4,977 | $ | 5,302 | $ | 6,015 | $ | 5,161 | $ | 1,707 | $ | 1,588 | $ | 1,683 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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, 2020.
| Three months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dec 31, 2020 | Sep 30, 2020 | June 30, 2020 | Mar 31, 2020 | Dec 31, 2019 | Sep 30, 2019 | Jun 30, 2019 | Mar 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subscription solutions | 28.6% | 32.0% | 27.5% | 39.9% | 36.3% | 42.4% | 42.3% | 43.8% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Merchant solutions | 71.4% | 68.0% | 72.5% | 60.1% | 63.7% | 57.6% | 57.7% | 56.2% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subscription solutions | 6.1% | 6.8% | 6.2% | 8.0% | 7.4% | 8.5% | 8.2% | 8.7% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Merchant solutions | 42.4% | 40.4% | 41.3% | 37.3% | 40.4% | 36.0% | 35.3% | 35.0% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 48.4% | 47.2% | 47.5% | 45.3% | 47.8% | 44.5% | 43.5% | 43.7% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross profit | 51.6% | 52.8% | 52.5% | 54.7% | 52.2% | 55.5% | 56.6% | 56.3% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales and marketing | 15.8% | 19.2% | 20.3% | 32.9% | 26.1% | 29.8% | 32.9% | 32.8% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 16.3% | 18.7% | 18.7% | 24.8% | 20.3% | 23.1% | 23.6% | 23.8% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 6.7% | 6.7% | 11.7% | 9.5% | 10.0% | 9.7% | 9.7% | 9.4% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transaction and loan losses | 1.3% | 1.5% | 1.9% | 3.0% | 1.7% | 1.9% | 1.3% | 1.4% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 40.1% | 46.2% | 52.5% | 70.2% | 58.1% | 64.5% | 67.5% | 67.4% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations | 11.5% | 6.6% | 0.0% | (15.6)% | (5.9)% | (9.1)% | (10.9)% | (11.2)% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other (expenses) income, net | (0.3)% | 17.7% | 0.6% | 2.8% | 2.3% | 2.9% | 3.0% | 3.6% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 11.2% | 24.3% | 0.6% | (12.8)% | (3.6)% | (6.3)% | (7.9)% | (7.5)% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recovery of (provision for) income taxes | 1.4% | 0.6% | 4.4% | 6.1% | 3.8% | (12.4)% | 0.0% | 0.0% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 12.7% | 24.9% | 5.0% | (6.7)% | 0.2% | (18.6)% | (7.9)% | (7.5)% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 fourth-quarter holiday season. As a result, we have historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. Due to the ongoing effect of the COVID-19 pandemic which has accelerated the shift of purchasing habits to ecommerce, we have observed a rapid growth in merchant solutions revenue in our most recent 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.
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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 in each of the next three quarters 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. However, due to the ongoing effect of the COVID-19 pandemic which has accelerated the shift of purchasing habits to ecommerce, we have observed a rapid increase in merchant solutions revenue in our most recent quarters that do not replicate historical patterns. 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, additional operating expenses associated with the acquisition of 6RS as well as additional marketing initiatives to attract potential merchants.
Quarterly Other Income (Expenses) Trends
Historically, there have been no consistent trends associated with other income (expenses) as changes are impacted by foreign exchange rates, interest rates, and observable changes or impairments associated with our equity investments in private companies. The results from these changes may fluctuate from period to period and may cause volatility to our earnings as well as impact comparability of our results from period to period.
Key Balance Sheet Information
| December 31, 2020 | December 31, 2019 | ||||||||||
| (in thousands) | |||||||||||
Cash, cash equivalents and marketable securities | $ | 6,387,967 | $ | 2,455,194 | |||||||
Total assets | 7,762,905 | 3,489,479 | |||||||||
Total liabilities | 1,362,182 | 473,745 | |||||||||
Total non-current liabilities | 923,850 | 157,363 | |||||||||
Total assets increased $4,273.4 million as at December 31, 2020 compared to December 31, 2019, principally due to a $3,932.8 million increase in cash, cash equivalents and marketable securities driven largely by our May 2020 and September 2020 public equity offerings, and our issuance of the Notes, a $171.0 million increase in equity and other investments due mainly to our investment in Affirm received in conjunction with our strategic partnership, a $94.6 million increase in merchant cash advances, loans and related receivables largely due to an expansion of our Capital offerings and programs, a $56.1 million increase in income taxes receivable, a $33.2 million increase in deferred tax assets, a $30.2 million increase in trade and other receivables, and a $21.9 million increase in other current assets. These increases were partially offset by: a $31.6 million decrease in intangibles assets due to amortization in the period; and $19.3 million and $15.4 million decreases in property and equipment and right-of-use assets, respectively, largely related to the impairment of leaseholds and right-of-use assets at certain offices spaces we have ceased using, for which the leases have been or will be terminated or sublet. Total liabilities increased by $888.4 million, principally as a result of the issuance of the Notes in the period of $758.0 million, a $119.6 million increase in accounts payable and accrued liabilities, which was largely due to an increase in shipping fees and payroll
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liabilities, a $66.2 million increase in deferred revenue mainly due to the growth in sales of our subscription solutions and our new strategic partnership with Affirm, and a $3.2 million increase in lease liabilities. These increases were offset by a reduction in income taxes payable of $49.8 million, and a decrease of $8.8 million in deferred tax liabilities.
Liquidity and Capital Resources
To date, we have financed our operations primarily through the sale of equity securities as well as the sale of the Notes, raising approximately $6.2 billion, net of issuance costs, from investors.
In September 2020, the Company completed a public offering in which it issued and sold 1,265,000 Class A subordinate voting shares at a public offering price of $900.00 per share, including 165,000 Class A subordinate voting shares purchased by the underwriters pursuant to the exercise of the over-allotment option. The Company received total net proceeds of $1,117.6 million after deducting offering fees and expenses of $20.9 million.
In September 2020, the Company also issued $920.0 million aggregate principal amount of 0.125% convertible senior notes due 2025. The net proceeds from the issuance of the Notes were $908.0 million after deducting underwriting discounts and offering costs. The Notes have an initial conversion rate of 0.6944 Class A subordinate voting shares per one thousand dollars of principal amount of Notes, which is equivalent to an initial conversion price of approximately $1,440.09 per share. The Notes bear cash interest at 0.125% per year and, if we undergo a "fundamental change" (which includes a change of control of more than 50% of our common equity or our liquidation or dissolution) prior to the maturity date of the Notes, we will, subject to limited exceptions, be required to purchase for cash all outstanding Notes at a purchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
In July 2020, due to the expiry of our previous short-term 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. This shelf prospectus and registration statement allows Shopify to offer up to $7.5 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 May 2020, the Company completed a public offering in which it issued and sold 2,127,500 Class A subordinate voting shares at a public offering price of $700.00 per share, including 277,500 Class A subordinate voting shares purchased by the underwriters pursuant to the exercise of the over-allotment option. The Company received total net proceeds of $1,460.9 million after deducting offering fees and expenses of $28.3 million.
In September 2019, the Company completed a public offering, in which it issued and sold 2,185,000 Class A subordinate voting shares at a public offering price of $317.50 per share, including 285,000 Class A subordinate voting shares purchased by the underwriters pursuant to the exercise of the over-allotment option. The Company received total net proceeds of $688.0 million after deducting offering fees and expenses of $5.7 million, net of tax of $1.5 million.
Our principal cash requirements are for working capital and capital expenditures. Excluding current deferred revenue, working capital at December 31, 2020 was $6,547.2 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, including any potential negative impacts to cash that may occur as a result of the potential impact from COVID-19. Our future financing requirements will depend on many factors including our growth rate (including the effect of COVID-19 on our growth rate), subscription renewal activity, the timing and extent of spending to support development of our platform, the expansion of sales and marketing activities, the macroeconomic conditions and overall levels of consumer spending on goods, and potential mergers and acquisitions activity. 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
32
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 $3,932.8 million to $6,388.0 million as at December 31, 2020 from $2,455.2 million as at December 31, 2019, primarily as a result of proceeds from the public equity offerings in May 2020 and September 2020, proceeds from the issuance of the Notes in September 2020, cash provided by our operating activities, and proceeds from the exercise of stock options.
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, 2020.
The following table summarizes our total cash, cash equivalents and marketable securities as at December 31, 2020 and 2019 as well as our operating, investing and financing activities for the years ended December 31, 2020 and 2019:
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Cash, cash equivalents and marketable securities (end of year) | $ | 6,387,967 | $ | 2,455,194 | |||||||||||||
Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 424,958 | $ | 70,615 | |||||||||||||
| Investing activities | (1,931,848) | (569,475) | |||||||||||||||
| Financing activities | 3,557,350 | 736,351 | |||||||||||||||
Effect of foreign exchange on cash and cash equivalents | 3,221 | 1,742 | |||||||||||||||
Net increase in cash and cash equivalents | 2,053,681 | 239,233 | |||||||||||||||
Change in marketable securities | 1,879,092 | 246,291 | |||||||||||||||
Net increase in cash, cash equivalents and marketable securities | $ | 3,932,773 | $ | 485,524 | |||||||||||||
Cash Flows From Operating Activities
Our largest source of operating cash is from merchant solutions. Within merchant solutions, the largest source of cash flows are Shopify Payments processing fee arrangements, which are received on a daily basis as transactions are processed. We also generate significant cash flows from our 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. Our primary uses of cash from operating activities are for third-party payment processing fees, advancing funds to merchants through Shopify Capital, employee-related expenditures, marketing programs, third-party shipping and fulfillment partners, third-party application and theme partners, outsourced hosting costs, and leased facilities.
For the year ended December 31, 2020, cash provided by operating activities was $425.0 million. This was primarily as a result of our net income of $319.5 million, which once adjusted for $246.9 million of stock-based compensation expense, an unrealized gain on equity and other investments of $135.2 million, $70.1 million of amortization and depreciation, a $42.0 million increase in net deferred income taxes, $31.6 million of impairment of right-of-use assets and leasehold improvements, a $27.3 million increase of our provision for transaction and loan losses, a $8.8 million increase of amortization of debt discount and offering costs related to the Notes offering, and an unrealized foreign exchange gain of $1.7 million, contributed $525.3 million of positive cash flows. Additional cash flows of $183.5 million were provided by the following changes in operating liabilities: a $118.6 million increase in accounts payable and accrued liabilities due mainly to trade accounts payable, accrued liabilities and payroll liabilities; a
33
$66.2 million increase in deferred revenue due to the growth in sales of our subscription solutions and a new strategic partnership; offset slightly by a $1.2 million decrease in net lease assets and liabilities. Cash used of $283.9 million resulted from the following increases in operating assets: $112.7 million in merchant cash advances and loans as we continued to grow Shopify Capital; $105.9 million net change in income tax assets and liabilities, largely driven by an increase in corporate taxes receivable of $56.1 million mainly from the Government of Canada, and a $49.8 million decrease in corporate taxes payable relating to a payment made to the Government of Canada; $29.1 million in trade and other receivables; $24.7 million in non cash consideration received in the form of equity and other investments in conjunction with our strategic partnership with Affirm, and $11.4 million in other current assets driven primarily by an increase in capitalized contract costs.
For the year ended December 31, 2019, cash provided by operating activities was $70.6 million. This was primarily as a result of our net loss of $124.8 million, which once adjusted for $158.5 million of stock-based compensation expense, $35.7 million of amortization and depreciation, a $37.9 million increase in deferred income taxes, a $17.9 million increase of our provision for transaction and loan losses, and an unrealized foreign exchange loss of $3.2 million, contributed $52.5 million of positive cash flows. Additional cash of $160.9 million resulted from the following increases in operating liabilities: $82.5 million in accounts payable and accrued liabilities; $64.6 million in income tax assets and liabilities; $12.3 million in deferred revenue; and $1.5 million in net lease liabilities. These were offset by $142.8 million of cash used resulting from the following increases in operating assets: $74.2 million in merchant cash advances and loans; $56.2 million in trade and other receivables; and $12.4 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, equity and other investments, business acquisitions, purchases of leasehold improvements and furniture and fixtures to support our expanding infrastructure and workforce, and purchases of computer equipment.
Net cash used by investing activities in the year ended December 31, 2020 was $1,931.8 million, which was driven by net purchases of $1,878.8 million in marketable securities, $41.7 million used to purchase property and equipment, which consisted of expenditures on leasehold improvements made prior to our decision to shift to being a digital-by-default company as well as on additional leasehold improvements to accommodate our future needs at our remaining office locations, $11.1 million used to enter into equity and other investments, and $0.3 million used for purchasing and developing software to add functionality to our platform and support our expanding merchant base.
Net cash used in investing activities in the year ended December 31, 2019 was $569.5 million, which was driven by $265.5 million used to make business acquisitions, net purchases of $241.6 million in marketable securities, $56.8 million used to purchase property and equipment, which primarily consisted of expenditures on leasehold improvements, and $5.6 million used for purchasing and developing software.
Cash Flows From Financing Activities
To date, cash flows from financing activities have related to proceeds from private placements, public offerings, the issuance of the Notes, and exercises of stock options.
Net cash provided by financing activities in the year ended December 31, 2020 was $3,557.4 million driven by $1,460.9 million raised in our May 2020 public equity offering, $1,117.6 million raised in our September 2020 public equity offering, $908.0 million in proceeds from the issuance of the Notes in September 2020, and $70.8 million in proceeds from the issuance of Class A subordinate voting shares and Class B multiple voting shares as a result of stock option exercises. This compares to $736.4 million for the same period in 2019, driven mainly by the $688.0 million raised in our September 2019 public equity offering and $48.3 million which related to stock option exercises.
34
Contractual Obligations and Contingencies
Our principal commitments consist of our Notes and obligations under our operating leases for office space. The following table summarizes our contractual obligations as of December 31, 2020:
Payments Due by Period | |||||||||||||||||||||||||||||
| Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | Total | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
Convertible senior notes(1) | $ | 1,287 | $ | 2,300 | $ | 922,300 | $ | — | $ | 925,887 | |||||||||||||||||||
Bank indebtedness | — | — | — | — | — | ||||||||||||||||||||||||
Operating lease and unconditional purchase obligations(2) | 100,951 | 232,215 | 107,492 | 368,014 | 808,672 | ||||||||||||||||||||||||
| Total contractual obligations | $ | 102,238 | $ | 234,515 | $ | 1,029,792 | $ | 368,014 | $ | 1,734,559 | |||||||||||||||||||
(1) $920,000 of the payments due in three to five years may be settled in Class A subordinate voting shares instead of cash, at our option.
(2) 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 above under "Contractual Obligations and Contingencies").
Risks and Uncertainties
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. We are also exposed to other uncertainties as the COVID-19 pandemic continues to evolve. For further discussion of these risks and uncertainties see "Risk Factors" in our annual information form.
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.
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Effect of Foreign Exchange Rates
The following non-GAAP financial measure converts our revenues, cost of revenues, operating expenses, and income (loss) from operations using the comparative period's monthly average exchange rates:
| Years ended December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| GAAP Amounts As Reported | Exchange Rate Effect (1) | At Prior Year Effective Rates (2) | GAAP Amounts As Reported | ||||||||||||||
| (in thousands) | |||||||||||||||||
| Revenues | $ | 2,929,491 | $ | 1,203 | $ | 2,930,694 | $ | 1,578,173 | |||||||||
| Cost of revenues | (1,387,971) | (1,868) | (1,389,839) | (712,530) | |||||||||||||
| Operating expenses | (1,451,367) | (7,836) | (1,459,203) | (1,006,790) | |||||||||||||
| Income (loss) from operations | $ | 90,153 | $ | (8,501) | $ | 81,652 | $ | (141,147) | |||||||||
(1) Represents the increase or decrease in GAAP amounts reported resulting from using the comparative period's effective CAD-USD foreign exchange rates.
(2) Represents the outcome that would have resulted if the comparative period's effective CAD-USD foreign exchange rates 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 clear 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 $6,388.0 million as of December 31, 2020. 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.
In September 2020, we issued $920.0 million aggregate principal amount of Notes. The Notes have a fixed annual interest rate of 0.125%; accordingly, we do not have economic interest rate exposure on the Notes. However, the fair market value of the Notes is exposed to interest rate risk. Generally, the fair market value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair market value of the Notes will generally fluctuate as the price of our Class A subordinate voting shares fluctuates. On our balance sheet, we carry the Notes at face value less unamortized discount and debt offering costs, and we present the fair value for required disclosure purposes only.
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Concentration of Credit Risk
The Company’s cash and cash equivalents, marketable securities, trade and other receivables, merchant cash advances, loans and related receivables, 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 creditworthy. 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 that insures a portion of the merchant cash advances and loans offered by Shopify Capital. The receivable related to insurance recoveries is included in the merchant cash advances, loans and related receivables balance. There are no receivables from individual merchants accounting for 10% or more of revenues or receivables. Potential ongoing effects from COVID-19 on the Company's credit risk have been considered and have resulted in adjustments to the Company's allowances for expected credit losses on contract balances and merchant cash advances and loans, as discussed in notes 7 and 8 of our audited consolidated financial statements for the year ended December 31, 2020, respectively. The Company continues its assessment given the fluidity of COVID-19's global impact.
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, 2020 and have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2020.
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.
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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, 2020. 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, 2020.
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of the Company's internal control over financial reporting as at December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report on the audited consolidated financial statements for December 31, 2020.
Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2020, there were no changes in the Company’s internal control over financial reporting 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 and in further detail in Note 3 - Significant Accounting Policies of our audited consolidated financial statements for the year ended December 31, 2020.
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 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.
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We follow the guidance provided in ASC 606, Revenue from Contracts with Customers, for determining whether we are the principal or an agent in arrangements with customers that involve another party that contributes to providing a specified service to a customer. In these instances, we determine whether we have promised to provide the specified service itself (as principal) or to arrange for the specified service to be provided by another party (as an agent). This determination depends on the facts and circumstances of each arrangement and, in some instances, involves significant judgment. We recognize revenue from Shopify Shipping, the sales of apps and Shop Pay Installments on a net basis as we are not primarily responsible for the fulfillment, do not have control of the promised service, and do not have full discretion in establishing prices and therefore are the agent in the arrangement with merchants. All other revenue is reported on a gross basis, as we have determined we are the principal in the arrangement.
Provision for Credit Losses 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 balance sheet date, net of an allowance for expected credit losses. The Company estimates the provision based on an assessment of various factors, including historical trends, merchants' gross merchandise volume, supportable forecasted information and other factors, including the potential impact of the novel coronavirus ("COVID-19"), that may affect the merchants' ability to make future payments on the receivables. Additions to the provision are reflected in current operating results, while charges against the provision are made when losses are incurred. These additions are classified within transaction and loan losses on the consolidated statements of operations and comprehensive income (loss). Recoveries are reflected as a reduction in the allowance for credit losses related to merchant cash advances and loans when the recovery occurs.
Provision for Transaction Losses Related to Shopify Payments and Shop Pay Installments
Shopify Payments and Shop Pay Installments losses arise when refunded merchant transactions cannot be recovered. The Company estimates the provision based on an assessment of various factors, including historical trends, gross merchandise volume facilitated using Shopify Payments and Shop Pay Installments, supportable forecasted information and other factors, including the potential impact of COVID-19, that may increase the volume of refunded transactions. Additions to the provision are reflected in current operating results, while charges against the provision are made when losses are incurred. These additions are classified within transaction and loan losses on the consolidated statements of operations and comprehensive income (loss).
Convertible Senior Notes
The Company accounts for the Notes as separate liability and equity components. The Company determined the carrying amount of the liability component as the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the conversion option was calculated by deducting the fair value of the liability component from the principal amount of the Notes. This difference represents a debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
The offering costs incurred related to the issuance of the Notes were allocated to the liability and equity components based on their relative initial carrying values. Offering costs attributable to the liability component are being amortized to interest expense over the respective terms of the Notes, and offering costs attributable to the equity component are netted against the equity component of the Notes in shareholders' equity.
Accounting Pronouncements Adopted in the Year
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
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supportable information to inform credit loss estimates on loans, trade and other receivables, held-to-maturity debt securities, and other instruments. In May 2019, the Financial Accounting Standards Board issued ASU No. 2019-05, Financial Instruments - Credit Losses, which provides transition relief that is optional for, and available to, all reporting entities within the scope of Topic 326. The updates are effective for annual periods beginning after December 15, 2019 including interim periods within those periods. The Company adopted the standard effective January 1, 2020 using a modified retrospective approach. Upon adoption, the Company changed its approach to estimating its expected credit losses, which did not have a material impact on any of its existing allowances at that time.
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the Financial Accounting Standards Board issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which eliminates certain models associated with accounting for convertible instruments, makes targeted improvements to the disclosures for convertible instruments and earnings per share guidance, and amends the guidance for the derivative scope exception for contracts in an entity's own equity. The updates are effective for annual periods beginning after December 15, 2021 including interim periods within those periods. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those periods. The Company will early adopt this ASU effective January 1, 2021. The Company is currently in the process of finalizing its assessment of the impact of this ASU. Upon adoption, the Company will no longer separately account for the liability and equity components of its Notes, which exist under current accounting guidance. As a result of the adoption, non-cash interest expense related to its currently outstanding Notes will be eliminated.
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 11, 2021 there were 111,055,417 Class A subordinate voting shares issued and outstanding, and 11,600,866 Class B multiple voting shares issued and outstanding.
As of February 11, 2021 there were 964,019 options outstanding under the Company’s Fourth Amended and Restated Incentive Stock Option Plan, of which 959,019 were vested as of such date. Each such option is or will become exercisable for one Class B multiple voting share. As of February 11, 2021 there were 1,379,214 options outstanding under the Company’s Amended and Restated Stock Option Plan, of which 821,928 were vested as of such date. Each such option is or will become exercisable for one Class A subordinate voting share. As of February 11, 2021 there were 54,406 options outstanding under the 6 River Systems 2016 Amended and Restated Stock Option and Grant Plan, which the Company assumed on closing of its acquisition of 6RS on October 17, 2019. Of these options, 18,014 were vested as of such date. Each option is or will become exercisable for one Class A subordinate voting share.
As of February 11, 2021 there were 1,064,725 RSUs and 883 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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