Table of Contents

As filed with the Securities and Exchange Commission on April 14, 2015

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SHOPIFY INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Canada		7372		30-0830605
(State or Other Jurisdiction of Incorporation or Organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

 

Shopify Inc.

150 Elgin Street, 8th Floor

Ottawa, Ontario, Canada K2P 1L4

(613) 241-2828

(Address, Including ZIP Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

CT Corporation System

1209 Orange Street

Wilmington, DE 19801

(302) 658-7581

(Name, Address, Including ZIP Code, and Telephone Number, including Area Code, of Agent for Service)

Copies to:

 

Joseph A. Frasca, Esq. General Counsel Shopify Inc. 150 Elgin Street, 8th Floor Ottawa, Ontario, Canada K2P 1L4 (613) 241-2828		Margaret A. Brown, Esq. Gregg A. Noel, Esq. Riccardo A. Leofanti, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 500 Boylston Street Boston, MA 02116 (617) 523-0002		Christopher J. Cummings, Esq. Paul, Weiss, Rifkind, Wharton & Garrison LLP 77 King Street West, Suite 3100 Toronto, Ontario, Canada M5K 1J3 (416) 504-0522

Approximate date of commencement of proposed offering to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities To Be Registered		Proposed Maximum Aggregate Offering Price(1)(2)		Amount of Registration Fee
Class A subordinate voting shares		$100,000,000		$11,620

(1)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended (the “Securities Act”).

(2)	Includes Class A subordinate voting shares the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

---

Table of Contents

PROSPECTUS (SUBJECT TO COMPLETION) • DATED APRIL 14, 2015 Shopify Inc. is selling of our Class A subordinate voting shares. This is our initial public offering and no public market currently exists for our Class A subordinate voting shares. Following this offering, our authorized share capital will include Class A subordinate voting shares and Class B multiple voting shares. The rights of the holders of Class A subordinate voting shares and Class B multiple voting shares are generally identical, except with respect to voting and conversion. The Class A subordinate voting shares will have one vote per share and tthe Class B multiple voting shares will have 10 votes per share. The Class A subordinate voting shares are not convertible into any other class of shares, while 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. After giving effect to this offering, the Class A subordinate voting shares will collectively represent % of our total issued and outstanding shares and % of the voting power attached to all of our issued and outstanding shares ( % and %, respectively, if the underwriters’ over-allotment option is exercised in full) and the Class B multiple voting shares will collectively represent % of our total issued and outstanding shares and % of the voting power attached to all of our issued and outstanding shares ( % and %, respectively, if the underwriters’ over-allotment option is exercised in full). We intend to apply for listing of our Class A subordinate voting shares on the New York Stock Exchange and the Toronto Stock Exchange under the symbols “SHOP” and “SH”, respectively. We are an “emerging growth company” under the U.S. federal securities laws. Investing in our Class A subordinate voting shares involves risks. See “Risk Factors” beginning on page 12. (1) See “Underwriting” for a description of the compensation payable to the underwriters. We have granted the underwriters the right to purchase up to an additional Class A subordinate voting shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the Class A subordinate voting shares to purchasers on , 2015. MORGAN STANLEY CREDIT SUISSE RBC CAPITAL MARKETS PACIFIC CREST SECURITIES RAYMOND JAMES CANACCORD GENUITY Proceeds to Shopify Inc. $$ Underwriting Discounts and Commissions (1) $$ Price to Public $$ PER CLASS A SUBORDINATE VOTING SHARE TOTAL $ PER CLASS A SUBORDINATE VOTING SHARE Class A Subordinate Voting Shares Shopify Inc. Shares The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

---

Table of Contents

---

Table of Contents

TABLE OF CONTENTS

 

 

 

Neither we nor the underwriters have authorized anyone to provide you with any additional information or information that is different from the information contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus and any free writing prospectus prepared by us or on our behalf may only be used where it is legal to sell these securities. The information in this prospectus or any free writing prospectus prepared by us or on our behalf is only accurate as of the date of this prospectus or such free writing prospectus.

We are offering to sell, and seeking offers to buy, Class A subordinate voting shares only in jurisdictions where offers and sales are permitted. Persons who come into possession of this prospectus in jurisdictions outside the United States or Canada are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

Until                 , 2015 (25 days after the date of this prospectus), all dealers that buy, sell or trade our Class A subordinate voting shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i

---

Table of Contents

 

1

---

Table of Contents

 

2

---

Table of Contents

 

3

---

Table of Contents

 

4

---

Table of Contents

 

5

---

Table of Contents

 

6

---

Table of Contents

 

7

---

Table of Contents

 

8

---

Table of Contents

 

9

---

Table of Contents

 

10

---

Table of Contents

 

11

---

Table of Contents

RISK FACTORS

An investment in our Class A subordinate voting shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our financial statements and related notes thereto, before deciding to invest in our Class A subordinate voting shares. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future prospects. In these circumstances, the market price of our Class A subordinate voting shares could decline, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks described below. See “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Industry

Our rapid growth may not be sustainable and depends on our ability to attract new merchants, retain existing merchants and increase sales to both new and existing merchants.

We principally generate revenues through the sale of subscriptions to our platform and the sale of additional solutions to our merchants. Our subscription plans typically have a one-month term, although a small percentage of our merchants have annual or multi-year subscription terms. Our merchants have no obligation to renew their subscriptions after their subscription term expires. As a result, even though the number of merchants using our platform has grown rapidly in recent years, there can be no assurance that we will be able to retain these merchants. In fact, we have historically experienced merchant turnover as a result of many of our merchants being SMBs that are more susceptible than larger businesses to general economic conditions and other risks affecting their businesses. Further, many of these SMBs are in the entrepreneurial stage of their development and there is no guarantee that their businesses will succeed. Our costs associated with subscription renewals are substantially lower than costs associated with generating revenue from new merchants or costs associated with generating sales of additional solutions to existing merchants. Therefore, if we are unable to retain merchants, even if such losses are offset by an increase in new merchants or an increase in other revenues, our operating results could be adversely impacted.

We may also fail to attract new merchants, retain existing merchants or increase sales to both new and existing merchants as a result of a number of other factors, including:

 

•

reductions in our current or potential merchants’ spending levels;

 

•

competitive factors affecting the software as a service, or SaaS, business software applications market, including the introduction of competing platforms, discount pricing and other strategies that may be implemented by our competitors;

 

•

our ability to execute on our growth strategy and operating plans;

 

•

a decline in our merchants’ level of satisfaction with our platform and merchants’ usage of our platform;

 

•

changes in our relationships with third parties, including our partners, app developers, theme designers, referral sources and payment processors;

 

•

the timeliness and success of our solutions;

 

•

the frequency and severity of any system outages;

 

•

technological change; and

 

•

our focus on long-term value over short-term results, meaning that we may make strategic decisions that may not maximize our short-term revenue or profitability if we believe that the decisions are consistent with our mission and will improve our financial performance over the long-term.

 

12

---

Table of Contents

Additionally, we anticipate that our growth rate will decline over time to the extent that the number of merchants using our platform increases and we achieve higher market penetration rates. To the extent our growth rate slows, our business performance will become increasingly dependent on our ability to retain existing merchants and increase sales to existing merchants.

Our business could be harmed if we fail to manage our growth effectively.

The rapid growth we have experienced in our business places significant demands on our operational infrastructure. The scalability and flexibility of our platform depends on the functionality of our technology and network infrastructure and its ability to handle increased traffic and demand for bandwidth. The growth in the number of merchants using our platform and the number of orders processed through our platform has increased the amount of data and requests that we process. Any problems with the transmission of increased data and requests could result in harm to our brand or reputation. Moreover, as our business grows, we will need to devote additional resources to improving our operational infrastructure and continuing to enhance its scalability in order to maintain the performance of our platform.

Our growth has placed, and will likely continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We have grown from 131 employees at December 31, 2012 to 632 employees at March 31, 2015. We intend to further expand our overall business, including headcount, with no assurance that our revenues will continue to grow. As we grow, we will be required to continue to improve our operational and financial controls and reporting procedures and we may not be able to do so effectively. In addition, some members of our management do not have significant experience managing a large global business operation, so our management may not be able to manage such growth effectively. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross profit or operating expenses.

In addition, we believe that an important contributor to our success has been our corporate culture, which we believe fosters innovation, teamwork, passion for our merchants and a focus on attractive designs and technologically advanced and well-crafted software. Most of our employees have been with us for fewer than two years as a result of our rapid growth. As we continue to grow, we must effectively integrate, develop and motivate a growing number of new employees. As a result, we may find it difficult to maintain our corporate culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute on our business strategy.

We have a history of losses and we may be unable to achieve profitability.

We incurred net losses of $1.2 million in 2012, $4.8 million in 2013 and $22.3 million in 2014. We also incurred net losses of $6.4 million and $4.5 million in the three months ended March 31, 2014 and 2015, respectively. At March 31, 2015, we had an accumulated deficit of $33.6 million. These losses and accumulated deficit are a result of the substantial investments we made to grow our business and we expect to make significant expenditures to expand our business in the future. We expect to increase our investment in sales and marketing as we continue to spend on marketing activities and expand our partner referral programs. We plan to increase our investment in research and development as we continue to introduce new products and services to extend the functionality of our platform. We also intend to invest in maintaining our high level of merchant service and support, which we consider critical for our continued success. In order to support the continued growth of our business and to comply with continuously changing security and operational requirements, we plan to continue investing in our data center and network infrastructure. These increased expenditures will make it harder for us to achieve profitability and we cannot predict if we will achieve profitability in the near term or at all. Historically, our costs have increased each year due to these factors and we expect to continue to incur increasing costs to support our anticipated future growth. We also expect to incur additional general and administrative expenses as a result of both

 

13

---

Table of Contents

our growth and the increased costs associated with being a public company. Our expenses may be greater than we anticipate, and our investments to make our business and our technical infrastructure more efficient may not be successful. Increases in our costs may adversely affect our business and profitability.

Our limited operating history in a new and developing market makes it difficult to evaluate our current business and future prospects and may increase the risk that we will not be successful.

We launched the Shopify platform in 2006 and the majority of our revenue growth has occurred in 2013 and 2014. This short history makes it difficult to accurately assess our future prospects. We also operate in a new and developing market that may not develop as we expect. You should consider our future prospects in light of the challenges and uncertainties that we face, including the fact that our business has grown rapidly and it may not be possible to discern fully the trends that we are subject to, that we operate in a new and developing market and that elements of our business strategy are new and subject to ongoing development. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including increasing and unforeseen expenses as we continue to grow our business. If we do not manage these risks successfully, our business, results of operations and prospects will be harmed.

If we fail to improve and enhance the functionality, performance, reliability, design, security and scalability of our platform in a manner that responds to our merchants’ evolving needs, our business may be adversely affected.

The markets in which we compete are characterized by constant change and innovation and we expect them to continue to evolve rapidly. Our success has been based on our ability to identify and anticipate the needs of our merchants and design a platform that provides them with the tools they need to operate their businesses. Our ability to attract new merchants, retain existing merchants and increase sales to both new and existing merchants will depend in large part on our ability to continue to improve and enhance the functionality, performance, reliability, design, security and scalability of our platform.

We may experience difficulties with software development that could delay or prevent the development, introduction or implementation of new solutions and enhancements. Software development involves a significant amount of time for our research and development team, as it can take our developers months to update, code and test new and upgraded solutions and integrate them into our platform. We must also continually update, test and enhance our software platform. For example, our design team spends a significant amount of time and resources incorporating various design enhancements, such as customized colors, fonts, content and other features, into our platform. The continual improvement and enhancement of our platform requires significant investment and we may not have the resources to make such investment. To the extent we are not able to improve and enhance the functionality, performance, reliability, design, security and scalability of our platform in a manner that responds to our merchants’ evolving needs, our business, operating results and financial condition will be adversely affected.

Payment transactions on Shopify Payments may subject us to regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business.

Many of our merchants use Shopify Payments, an integrated payment processing solution that allows them to accept payments on major payment cards. We are subject to a number of risks related to payments processed through Shopify Payments, including:

 

•

we pay interchange and other fees, which may increase our operating expenses;

 

•

if we are unable to maintain our chargeback rate at acceptable levels, our credit card fees may increase or credit card issuers may terminate their relationship with us;

 

•

increased costs and diversion of management time and effort and other resources to deal with fraudulent transactions or chargeback disputes;

 

14

---

Table of Contents

•

potential fraudulent or otherwise illegal activity by merchants, their customers, developers, employees or third parties;

 

•

restrictions on funds or required reserves related to payments; and

 

•

additional disclosure and other requirements, including new reporting regulations and new credit card association rules.

We are required by our payment processors to comply with payment card network operating rules and we have agreed to reimburse our payment processors for any fines they are assessed by payment card networks as a result of any rule violations by us or our merchants. The payment card networks set and interpret the card rules. In addition, we face the risk that one or more payment card networks or other processors may, at any time, assess penalties against us or terminate our ability to accept credit card payments or other forms of online payments from customers, which would have an adverse effect on our business, financial condition and operating results.

If we fail to comply with the rules and regulations adopted by the payment card networks, including the Payment Card Industry Data Security Standard, or PCI DSS, we would be in breach of our contractual obligations to our payment processors, financial institutions, partners and merchants. Such failure to comply may subject us to fines, penalties, damages, higher transaction fees and civil liability, and could eventually prevent us from processing or accepting payment cards or could lead to a loss of payment processor partners, even if there is no compromise of customer information.

We are currently subject to a variety of laws and regulations in Canada, the United States, the United Kingdom and elsewhere related to payment processing, including those governing cross-border and domestic money transmission, gift cards and other prepaid access instruments, electronic funds transfers, foreign exchange, anti-money laundering, counter-terrorist financing, banking and import and export restrictions. Depending on how Shopify Payments and our other merchant solutions evolve, we may be subject to additional laws in Canada, the United States, the United Kingdom and elsewhere. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. Our efforts to comply with these laws and regulations could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and desist order, or we may be required to make changes to our platform, any of which could have an adverse effect on our business, financial condition and results of operations.

We rely on a single supplier to provide the technology we offer through Shopify Payments.

In order to provide Shopify Payments, we have entered into payment service provider agreements with Stripe Inc., or Stripe. These payment service provider agreements renew every 12 months, unless either party provides a notice of termination prior to the end of the then current term. These agreements are integral to Shopify Payments and any disruption or problems with Stripe or its services could have an adverse effect on our reputation, results of operations and financial results. If Stripe were to terminate its relationship with us, we could incur substantial delays and expense in finding and integrating an alternative payment service provider into Shopify Payments, and the quality and reliability of such alternative payment service provider may not be comparable. Any long term or permanent disruption in Shopify Payments would decrease our revenues from merchant solutions, since our merchants would be required to use one of the alternative payment gateways offered through our platform.

If our software contains serious errors or defects, we may lose revenue and market acceptance and may incur costs to defend or settle claims with our merchants.

Software such as ours often contains errors, defects, security vulnerabilities or software bugs that are difficult to detect and correct, particularly when first introduced or when new versions or enhancements are

 

15

---

Table of Contents

released. Despite internal testing, our platform may contain serious errors or defects, security vulnerabilities or software bugs that we may be unable to successfully correct in a timely manner or at all, which could result in lost revenue, significant expenditures of capital, a delay or loss in market acceptance and damage to our reputation and brand, any of which could have an adverse effect on our business, financial condition and results of operations. Furthermore, our platform is a multi-tenant cloud based system that allows us to deploy new versions and enhancements to all of our merchants simultaneously. To the extent we deploy new versions or enhancements that contain errors, defects, security vulnerabilities or software bugs to all of our merchants simultaneously, the consequences would be more severe than if such versions or enhancements were only deployed to a smaller number of our merchants.

Since our merchants use our services for processes that are critical to their businesses, errors, defects, security vulnerabilities, service interruptions or software bugs in our platform could result in losses to our merchants. Our merchants may seek significant compensation from us for any losses they suffer or cease conducting business with us altogether. Further, a merchant could share information about bad experiences on social media, which could result in damage to our reputation and loss of future sales. There can be no assurance that provisions typically included in our agreements with our merchants that attempt to limit our exposure to claims would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to any particular claim. Even if not successful, a claim brought against us by any of our merchants would likely be time-consuming and costly to defend and could seriously damage our reputation and brand, making it harder for us to sell our solutions.

A denial of service attack or security breach could delay or interrupt service to our merchants and their customers, harm our reputation or subject us to significant liability.

In the past, we have been subject to distributed denial of service, or DDoS, attacks, a technique used by hackers to take an internet service offline by overloading its servers. Our platform and our third-party apps may be subject to DDoS attacks in the future and we cannot guarantee that applicable recovery systems, security protocols, network protection mechanisms and other procedures are or will be adequate to prevent network and service interruption, system failure or data loss. Moreover, our platform and our third-party apps could be breached if vulnerabilities in our platform or our third-party apps are exploited by unauthorized third parties. Since techniques used to obtain unauthorized access change frequently and the size of DDoS attacks is increasing, we may be unable to implement adequate preventative measures or stop the attacks while they are occurring. A DDoS attack or security breach could delay or interrupt service to our merchants and their customers and may deter consumers from visiting our merchants’ shops. In addition, any actual or perceived DDoS attack or security breach could damage our reputation and brand, expose us to a risk of litigation and possible liability and require us to expend significant capital and other resources to alleviate problems caused by the DDoS attack or security breach. Some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data and our agreements with certain merchants require us to notify them in the event of a security incident. Such mandatory disclosures could lead to negative publicity and may cause our merchants to lose confidence in the effectiveness of our data security measures. Moreover, if a high profile security breach occurs with respect to another SaaS provider, merchants may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing merchants or attract new ones.

We may be unable to achieve or maintain data transmission capacity.

Our merchants often draw significant numbers of consumers to their shops over short periods of time, including from events such as new product releases, holiday shopping seasons and flash sales, which significantly increases the traffic on our servers and the volume of transactions processed on our platform. Our servers may be unable to achieve or maintain data transmission capacity high enough to handle increased traffic or process orders in a timely manner. Our failure to achieve or maintain high data transmission capacity could significantly reduce demand for our solutions. In the future, we may be required

 

16

---

Table of Contents

to allocate resources, including spending substantial amounts of money, to build, purchase or lease additional data centers and equipment and upgrade our technology and network infrastructure in order to handle the increased load. Our ability to deliver our solutions also depends on the development and maintenance of internet infrastructure by third-parties, including the maintenance of reliable networks with the necessary speed, data capacity and bandwidth. If one of these third-parties suffers from capacity constraints, our business may be adversely affected. In addition, because we and our merchants generate a disproportionate amount of revenue in the fourth quarter, any disruption in our merchants’ ability to process and fulfill customer orders in the fourth quarter could have a disproportionately negative effect on our operating results.

Our growth depends in part on the success of our strategic relationships with third parties.

We anticipate that the growth of our business will continue to depend on third-party relationships, including relationships with our app developers, theme designers, referral sources, resellers, payment processors and other partners. In addition to growing our third-party partner ecosystem, we intend to pursue additional relationships with other third-parties, such as technology and content providers and implementation consultants. Identifying, negotiating and documenting relationships with third parties requires significant time and resources as does integrating third-party content and technology. Some of the third parties that sell our services have the direct contractual relationships with the merchants, and therefore we risk the loss of such merchants if the third parties fail to perform their obligations. Our agreements with providers of cloud hosting, technology, content and consulting services are typically non-exclusive and do not prohibit such service providers from working with our competitors or from offering competing services. These third-party providers may choose to terminate their relationship with us or to make material changes to their businesses, products or services. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our platform. In addition, these providers may not perform as expected under our agreements or under their agreements with our merchants, and we or our merchants may in the future have disagreements or disputes with such providers. If we lose access to products or services from a particular supplier, or experience a significant disruption in the supply of products or services from a current supplier, especially a single-source supplier, it could have an adverse effect on our business and operating results.

If we fail to maintain a consistently high level of customer service, our brand, business and financial results may be harmed.

We believe our focus on customer service and support is critical to onboarding new merchants and retaining our existing merchants and growing our business. As a result, we have invested heavily in the quality and training of our support team along with the tools they use to provide this service. If we are unable to maintain a consistently high level of customer service, we may lose existing merchants. In addition, our ability to attract new merchants is highly dependent on our reputation and on positive recommendations from our existing merchants. Any failure to maintain a consistently high level of customer service, or a market perception that we do not maintain high-quality customer service, could adversely affect our reputation and the number of positive merchant referrals that we receive.

We use a limited number of data centers to deliver our services. Any disruption of service at these facilities could harm our business.

We currently manage our services and serve all of our merchants from two third-party data center facilities. While we own the hardware on which our platform runs and deploy this hardware to the data center facilities, we do not control the operation of these facilities. We have experienced, and may in the future experience, failures at the third-party data centers where our hardware is deployed from time to time. Data centers are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures,

 

17

---

Table of Contents

telecommunications failures and similar events. Any of these events could result in lengthy interruptions in our services. Changes in law or regulations applicable to data centers in various jurisdictions could also cause a disruption in service. Interruptions in our services would reduce our revenue, subject us to potential liability and adversely affect our ability to retain our merchants or attract new merchants. The performance, reliability and availability of our platform is critical to our reputation and our ability to attract and retain merchants. Merchants could share information about bad experiences on social media, which could result in damage to our reputation and loss of future sales. The property and business interruption insurance coverage we carry may not be adequate to compensate us fully for losses that may occur.

Our agreements with our third-party data facility providers terminate on May 31, 2016 and September 23, 2017, respectively. The agreements do not provide for early termination without cause, as defined therein. Upon expiration of the initial term, both agreements will automatically renew for successive 12 month periods unless appropriate notice is provided. However, when our agreements with the third-party data facilities terminate, the owners of the data facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if the owners of the data facilities decide to close such facilities, we may be required to transfer to new data center facilities and we may incur costs and possible service interruption in connection with doing so.

Mobile devices are increasingly being used to conduct commerce, and if our solutions do not operate as effectively when accessed through these devices, our merchants and their customers may not be satisfied with our services, which could harm our business.

We are dependent on the interoperability of our platform with third-party mobile devices and mobile operating systems as well as web browsers that we do not control. Any changes in such devices, systems or web browsers that degrade the functionality of our platform or give preferential treatment to competitive services could adversely affect usage of our platform. Effective mobile functionality is integral to our long-term development and growth strategy. In the event that our merchants and their customers have difficulty accessing and using our platform on mobile devices, our business and operating results could be adversely affected.

Our business and prospects would be harmed if changes to technologies used in our platform or new versions or upgrades of operating systems and internet browsers adversely impact the process by which merchants and consumers interface with our platform.

We believe the simple and straightforward interface for our platform has helped us to expand and offer our solutions to merchants with limited technical expertise. In the future, providers of internet browsers could introduce new features that would make it difficult for merchants to use our platform. In addition, internet browsers for desktop or mobile devices could introduce new features, change existing browser specifications such that they would be incompatible with our platform, or prevent consumers from accessing our merchants’ shops. Any changes to technologies used in our platform, to existing features that we rely on, or to operating systems or internet browsers that make it difficult for merchants to access our platform or consumers to access our merchants’ shops, may make it more difficult for us to maintain or increase our revenues and could adversely impact our business and prospects.

The impact of worldwide economic conditions, including the resulting effect on spending by SMBs, may adversely affect our business, operating results and financial condition.

A majority of the merchants that use our platform are SMBs and many of our merchants are in the entrepreneurial stage of their development. Our performance is subject to worldwide economic conditions and their impact on levels of spending by SMBs and their customers. SMBs and entrepreneurs may be disproportionately affected by economic downturns. SMBs and entrepreneurs frequently have limited budgets and may choose to allocate their spending to items other than our platform, especially in times of economic uncertainty or recessions.

 

18

---

Table of Contents

Economic downturns may also adversely impact retail sales, which could result in merchants who use our platform going out of business or deciding to stop using our services in order to conserve cash. Weakening economic conditions may also adversely affect third-parties with whom we have entered into relationships and upon which we depend in order to grow our business. Uncertain and adverse economic conditions may also lead to increased refunds and chargebacks, any of which could adversely affect our business.

We store personally identifiable information of our merchants and their customers. If the security of this information is compromised or otherwise subjected to unauthorized access, our reputation may be harmed and we may be exposed to liability.

We store personally identifiable information, credit card information and other confidential information of our merchants and their customers. The third-party apps sold on our platform may also store personally identifiable information, credit card information and other confidential information of our merchants and their customers. We do not regularly monitor or review the content that our merchants upload and store and, therefore, do not control the substance of the content on our servers, which may include personal information. We may experience successful attempts by third parties to obtain unauthorized access to the personally identifiable information of our merchants and their customers. This information could also be otherwise exposed through human error or malfeasance. The unauthorized access or compromise of this personally identifiable information could have an adverse affect on our business, financial condition and results of operations.

We are also subject to federal, state, provincial and foreign laws regarding privacy and protection of data. Some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data and our agreements with certain merchants require us to notify them in the event of a security incident. We post on our website our privacy policy and terms of service, which describe our practices concerning the use, transmission and disclosure of merchant data and data relating to their customers. In addition, the interpretation of data protection laws in the United States, Canada and elsewhere, and their application to the internet, is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways from jurisdiction to jurisdiction, and in a manner that is not consistent with our current data protection practices. Changes to such data protection laws may impose more stringent requirements for compliance and impose significant penalties for non-compliance. Any such new laws or regulations, or changing interpretations of existing laws and regulations, may cause us to incur significant costs and effort to ensure compliance. Because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees or infrastructure.

Our failure to comply with federal, state, provincial and foreign laws regarding privacy and protection of data could lead to significant fines and penalties imposed by regulators, as well as claims by our merchants or their customers. These proceedings or violations could force us to spend money in defense or settlement of these proceedings, result in the imposition of monetary liability, diversion of management’s time and attention, increase our costs of doing business, and adversely affect our reputation and the demand for our solutions. In addition, if our security measures fail to protect credit card information adequately, we could be liable to both our merchants and their customers for their losses, as well as our payments processing partners under our agreements with them. As a result, we could be subject to fines and higher transaction fees, we could face regulatory action and our merchants could end their relationships with us. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that our insurers will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition and results of operations.

 

19

---

Table of Contents

We may be unable to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third-parties from making unauthorized use of our technology.

Our intellectual property rights are important to our business. We rely on a combination of confidentiality clauses with employees and third parties, trade secrets, copyrights and trademarks to protect our intellectual property and competitive advantage, all of which offer only limited protection. The steps we take to protect our intellectual property require significant resources and may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. We may be required to use significant resources to monitor and protect these rights. Despite our precautions, it may be possible for unauthorized third parties to copy our platform and use information that we regard as proprietary to create services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our proprietary information may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, we hold no issued patents and thus would not be entitled to exclude or prevent our competitors from using our proprietary technology, methods and processes to the extent independently developed by our competitors.

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to our proprietary information and trade secrets. The confidentiality agreements on which we rely to protect certain technologies may be breached, may not be adequate to protect our confidential information, trade secrets and proprietary technologies and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, trade secrets or proprietary technology. Further, these agreements do not prevent our competitors or others from independently developing software that is substantially equivalent or superior to our software. In addition, others may independently discover our trade secrets and confidential information, and in such cases, we likely would not be able to assert any trade secret rights against such parties. Additionally, we may from time to time be subject to opposition or similar proceedings with respect to applications for registrations of our intellectual property, including our trademarks. While we aim to acquire adequate protection of our brand through trademark registrations in key markets, occasionally third parties may have already registered or otherwise acquired rights to identical or similar marks for services that also address our market. We rely on our brand and trademarks to identify our platform and to differentiate our platform and services from those of our competitors, and if we are unable to adequately protect our trademarks third parties may use our brand names or trademarks similar to ours in a manner that may cause confusion in the market, which could decrease the value of our brand and adversely affect our business and competitive advantages.

Policing unauthorized use of our intellectual property and misappropriation of our technology and trade secrets is difficult and we may not always be aware of such unauthorized use or misappropriation. Despite our efforts to protect our intellectual property rights, unauthorized third-parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop services with the same or similar functionality as our platform. If our competitors infringe, misappropriate or otherwise misuse our intellectual property rights and we are not adequately protected, or if our competitors are able to develop a platform with the same or similar functionality as ours without infringing our intellectual property, our competitive advantage and results of operations could be harmed. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. As a result, we may be aware of infringement by our competitors but may choose not to bring litigation to enforce our intellectual property rights due to the cost, time and distraction of bringing such litigation. Furthermore, if we do decide to bring litigation, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits challenging or opposing our right to use and otherwise exploit particular intellectual property, services and technology or the enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further

 

20

---

Table of Contents

sales or the implementation of our solutions, impair the functionality of our platform, prevent or delay introductions of new or enhanced solutions, result in our substituting inferior or more costly technologies into our platform or injure our reputation. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to developing and protecting their technology or intellectual property rights than we do.

We may be subject to claims by third-parties of intellectual property infringement.

The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. Third parties have in the past asserted, and may in the future assert, that our platform, solutions, technology, methods or practices infringe, misappropriate or otherwise violate their intellectual property or other proprietary rights. Such claims may be made by our competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, non-practicing entities have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. The risk of claims may increase as the number of solutions that we offer and competitors in our market increases and overlaps occur. In addition, to the extent that we gain greater visibility and market exposure, we face a higher risk of being the subject of intellectual property infringement claims.

Any such claims, regardless of merit, that result in litigation could result in substantial expenses, divert the attention of management, cause significant delays in introducing new or enhanced services or technology, materially disrupt the conduct of our business and have a material and adverse effect on our brand, business, financial condition and results of operations. Although we do not believe that our proprietary technology, processes and methods have been patented by any third party, it is possible that patents have been issued to third parties that cover all or a portion of our business. As a consequence of any patent or other intellectual property claims, we could be required to pay substantial damages, develop non-infringing technology, enter into royalty-bearing licensing agreements, stop selling or marketing some or all of our solutions or re-brand our solutions. We may also be obligated to indemnify our merchants or partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. If it appears necessary, we may seek to secure license rights to intellectual property that we are alleged to infringe at a significant cost, potentially even if we believe such claims to be without merit. If required licenses cannot be obtained, or if existing licenses are not renewed, litigation could result. Litigation is inherently uncertain and can cause us to expend significant money, time and attention to it, even if we are ultimately successful. Any adverse decision could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses for alternative technologies from third-parties, prevent us from offering all or a portion of our solutions and otherwise negatively affect our business and operating results.

Our use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible litigation.

Our solutions incorporate and are dependent to a significant extent on the use and development of “open source” software and we intend to continue our use and development of open source software in the future. Such open source software is generally licensed by its authors or other third-parties under open source licenses and is typically freely accessible, usable and modifiable. Pursuant to such open source licenses, we may be subject to certain conditions, including requirements that we offer our proprietary software that incorporates the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that uses or distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages,

 

21

---

Table of Contents

enjoined from the sale of our solutions that contained or are dependent upon the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our solutions. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our platform. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. As there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, the potential impact of these terms on our business is uncertain and may result in unanticipated obligations regarding our solutions and technologies. It is our view that we do not distribute our software, since no installation of our software is necessary and our platform is accessible solely through the “cloud.” Nevertheless, this position could be challenged. Any requirement to disclose our proprietary source code, termination of open source license rights or payments of damages for breach of contract could be harmful to our business, results of operations or financial condition, and could help our competitors develop products and services that are similar to or better than ours.

In addition to risks related to license requirements, usage of open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software, or remedies against the licensors. Many of the risks associated with usage of open source software cannot be eliminated and could adversely affect our business.

Although we believe that we have complied with our obligations under the various applicable licenses for open source software, it is possible that we may not be aware of all instances where open source software has been incorporated into our proprietary software or used in connection with our solutions or our corresponding obligations under open source licenses. We do not have robust open source software usage policies or monitoring procedures in place. We rely on multiple software programmers to design our proprietary software and we cannot be certain that our programmers have not incorporated open source software into our proprietary software that we intend to maintain as confidential or that they will not do so in the future. To the extent that we are required to disclose the source code of certain of our proprietary software developments to third-parties, including our competitors, in order to comply with applicable open source license terms, such disclosure could harm our intellectual property position, competitive advantage, results of operations and financial condition. In addition, to the extent that we have failed to comply with our obligations under particular licenses for open source software, we may lose the right to continue to use and exploit such open source software in connection with our operations and solutions, which could disrupt and adversely affect our business.

We rely on search engines and social networking sites to attract a meaningful portion of our merchants. If we are not able to generate traffic to our website through search engines and social networking sites, our ability to attract new merchants may be impaired. In addition, if our merchants are not able to generate traffic to their shops through search engines and social networking sites, their ability to attract consumers may be impaired.

Many of our merchants locate our website through internet search engines, such as Google, and advertisements on social networking sites, such as Facebook. The prominence of our website in response to internet searches is a critical factor in attracting potential merchants to our platform. If we are listed less prominently or fail to appear in search results for any reason, visits to our website could decline significantly, and we may not be able to replace this traffic.

Similarly, many consumers locate our merchants’ shops through internet search engines and advertisements on social networking sites. If our merchants’ shops are listed less prominently or fail to appear in search results for any reason, visits to our merchants’ shops could decline significantly. As a result, our merchants’ businesses may suffer, which would affect the GMV that they process through our platform and could affect the ability of such merchants to pay for our solutions.

 

22

---

Table of Contents

Search engines revise their algorithms from time to time in an attempt to optimize their search results. If search engines modify their algorithms, our website and our merchants’ shops may appear less prominently or not at all in search results, which could result in reduced traffic to our website and to our merchants’ shops.

Additionally, if the price of marketing our solutions over search engines or social networking sites increases, we may incur additional marketing expenses or may be required to allocate a larger portion of our marketing spend to search engine marketing and our business and operating results could be adversely affected. Furthermore, competitors may in the future bid on the search terms that we use to drive traffic to our website. Such actions could increase our marketing costs and result in decreased traffic to our website. In addition, search engines or social networking sites may change their advertising policies from time to time. If any change to these policies delays or prevents us from advertising through these channels, it could result in reduced traffic to our website and sales of our solutions. As well, new search engines or social networking sites may develop, particularly in specific jurisdictions, that reduce traffic on existing search engines and social networking sites, and if we are not able to achieve prominence through advertising or otherwise, we may not achieve significant traffic to our website through these new platforms and our business and operating results could be adversely affected.

Our brand is integral to our success. If we fail to effectively maintain, promote and enhance our brand, our business and competitive advantage may be harmed.

We believe that maintaining, promoting and enhancing the Shopify brand is critical to expanding our business. Maintaining and enhancing our brand will depend largely on our ability to continue to provide high-quality, well-designed, useful, reliable and innovative solutions, which we may not do successfully.

Errors, defects, disruptions or other performance problems with our platform, including with third-party apps, may harm our reputation and brand. We may introduce new solutions or terms of service that our merchants and their customers do not like, which may negatively affect our brand. Additionally, if our merchants or their customers have a negative experience using our solutions or third-party solutions integrated with Shopify, such an experience may affect our brand. Our Shopify Experts directory enables independent designers, developers and marketers to offer their services to merchants who engage them directly. Our reputation may be harmed if any of the services provided by these third parties does not meet our merchants’ expectations.

We believe that the importance of brand recognition will increase as competition in our market increases. In addition to our ability to provide reliable and useful solutions at competitive prices, successful promotion of our brand will depend on the effectiveness of our marketing efforts. While we market our platform primarily through advertisements on search engines and social networking and media sites, and paid banner advertisements on other websites, our platform is also marketed through our partner and reseller channels and through a number of free traffic sources, including customer referrals, word-of-mouth and search engines. We have also recently begun to hire sales personnel to market Shopify Plus, a subscription plan for merchants with higher volume sales and additional functionality requirements. introducing additional costs with no assurance of success. Our efforts to market our brand have involved significant expenses, which we intend to increase. Our marketing spend may not yield increased revenue, and even if it does, any increased revenue may not offset the expenses we incur in building and maintaining our brand.

If we are unable to hire, retain and motivate qualified personnel, our business will suffer.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The inability to attract or retain qualified personnel or delays in hiring required personnel may seriously harm our business, financial condition and operating results. Our ability to continue to attract and retain highly skilled personnel, specifically employees with technical and engineering skills and employees with high levels of experience in designing and developing software and internet-related services, will be

 

23

---

Table of Contents

critical to our future success. Competition for highly skilled personnel in the Ottawa area, Greater Toronto area, Montreal area, Kitchener-Waterloo area and elsewhere can be intense due in part to the more limited pool of qualified personnel as compared to other places in the world, and we have experienced difficulties hiring employees from foreign jurisdictions to work in our offices. Further, decreases in the Canadian dollar relative to the U.S. dollar and other currencies could make it more difficult for us to offer compensation packages to new employees that are competitive with packages in the United States or elsewhere and could increase our costs of acquiring qualified personnel. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information. While we intend to issue stock options or other equity awards as key components of our overall compensation and employee attraction and retention efforts, we are required under U.S. GAAP to recognize compensation expense in our operating results for employee stock-based compensation under our equity grant programs which may increase the pressure to limit stock-based compensation. Most of our employees have outstanding options or directly own some shares. The ability to either exercise their options or sell their shares in a public market after the completion of this offering may lead to a larger than normal turnover rate.

We are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.

Our future performance depends on the continued services and contributions of our senior management, including our Chief Executive Officer, Tobias Lütke, and other key employees to execute on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our strategic objectives. In addition, some of the members of our current senior management team have only been working together for a short period of time, which could adversely impact our ability to achieve our goals. From time to time, there may be changes in our senior management team resulting from the hiring or departure of executives, which could disrupt our business. We do not maintain key person life insurance policies on any of our employees other than a policy providing limited coverage on the life of our Chief Executive Officer. The loss of the services of one or more of our senior management or other key employees for any reason could adversely affect our business, financial condition and operating results and require significant amounts of time, training and resources to find suitable replacements and integrate them within our business, and could affect our corporate culture.

Activities of merchants or the content of their shops could damage our brand, subject us to liability and harm our business and financial results.

Our terms of service prohibit our merchants from using our platform to engage in illegal activities and our terms of service permit us to take down a merchant’s shop if we become aware of such illegal use. Merchants may nonetheless engage in prohibited or illegal activities or upload store content in violation of applicable laws, which could subject us to liability. Furthermore, our brand may be negatively impacted by the actions of merchants that are deemed to be hostile, offensive, inappropriate or illegal. We do not proactively monitor or review the appropriateness of the content of our merchants’ shops and we do not have control over merchant activities. The safeguards we have in place may not be sufficient for us to avoid liability or avoid harm to our brand, especially if such hostile, offensive, inappropriate or illegal use is high profile, which could adversely affect our business and financial results.

Exchange rate fluctuations may negatively affect our results of operations.

While most of our revenues are denominated in U.S. dollars, the majority of our operating expenses are incurred in Canadian dollars. As a result, our results of operations will be adversely impacted by an increase in the value of the Canadian dollar relative to the U.S. dollar. Exchange rate fluctuations may also

 

24

---

Table of Contents

affect our merchant solutions. For example, we generate revenue through Shopify Payments in the local currency of the country in which the applicable merchant is located. As a result, we will be further exposed to currency fluctuations to the extent non-U.S. dollar revenues from Shopify Payments increase. The value of the Canadian dollar relative to the U.S. dollar has varied significantly and investors are cautioned that past and current exchange rates are not indicative of future exchange rates.

Our operating results are subject to seasonal fluctuations.

Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform. Our merchants historically have processed additional GMV during the holiday season. As a result, we have historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date. As a result of the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future and that historical patterns in our business may not be a reliable indicator of our future sales activity or performance.

Our business is susceptible to risks associated with international sales and the use of our platform in various countries.

We currently have merchants in approximately 150 countries. Our international sales and the use of our platform in various countries subject us to risks that we do not generally face with respect to domestic sales within North America. These risks include, but are not limited to:

 

•

greater difficulty in enforcing contracts, including our universal terms of service and other agreements;

 

•

lack of familiarity and burdens and complexity involved with complying with multiple, conflicting and changing foreign laws, standards, regulatory requirements, tariffs, export controls and other barriers;

 

•

difficulties in ensuring compliance with countries’ multiple, conflicting and changing international trade, customs and sanctions laws;

 

•

data privacy laws which may require that merchant and customer data be stored and processed in a designated territory;

 

•

difficulties in managing systems integrators and technology partners;

 

•

differing technology standards;

 

•

potentially adverse tax consequences, including the complexities of foreign value added tax (or other tax) systems and restrictions on the repatriation of earnings;

 

•

uncertain political and economic climates;

 

•

currency exchange rates;

 

•

reduced or uncertain protection for intellectual property rights in some countries; and

 

•

new and different sources of competition.

These factors may cause our international costs of doing business to exceed our comparable domestic costs and may also require significant management attention and financial resources. Any negative impact from our international business efforts could adversely affect our business, results of operations and financial condition.

 

25

---

Table of Contents

If third-party apps and themes change such that we do not or cannot maintain the compatibility of our platform with these apps and themes, or if we fail to provide third-party apps and themes that our merchants desire to add to their shops, demand for our platform could decline.

The success of our platform depends, in part, on our ability to integrate third-party apps, themes and other offerings into our third-party ecosystem. Third-party developers may change the features of their offerings or alter the terms governing the use of their offerings in a manner that is adverse to us. If we are unable to maintain technical interoperation, our merchants may not be able to effectively integrate our platform with other systems and services they use. We may also be unable to maintain our relationships with certain third-party vendors if we are unable to integrate our platform with their offerings. Further, third-party developers may refuse to partner with us or limit or restrict our access to their offerings. Such changes could functionally limit or terminate our ability to use these third-party offerings with our platform, which could negatively impact our solution offerings and harm our business. If we fail to integrate our platform with new third-party offerings that our merchants need for their shops, or to adapt to the data transfer requirements of such third-party offerings, we may not be able to offer the functionality that our merchants and their customers expect, which would negatively impact our offerings and, as a result, harm our business.

We rely on computer hardware, purchased or leased, and software licensed from and services rendered by third parties in order to provide our solutions and run our business, sometimes by a single-source supplier.

We rely on computer hardware, purchased or leased, and software licensed from and services rendered by third-parties in order to provide our solutions and run our business, sometimes by a single-source supplier. Third-party hardware, software and services may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use or any failures of third-party hardware, software or services could result in delays in our ability to provide our solutions or run our business until equivalent hardware, software or services are developed by us or, if available, identified, obtained and integrated, which could be costly and time-consuming and may not result in an equivalent solution, any of which could cause an adverse effect on our business and operating results. Further, merchants could assert claims against us in connection with such service disruption or cease conducting business with us altogether. Even if not successful, a claim brought against us by any of our merchants would likely be time-consuming and costly to defend and could seriously damage our reputation and brand, making it harder for us to sell our solutions.

We may not be able to compete successfully against current and future competitors.

We face competition in various aspects of our business and we expect such competition to grow in the future. We have competitors with longer operating histories, larger customer bases, greater brand recognition, greater experience and more extensive commercial relationships in certain jurisdictions, and greater financial, technical, marketing and other resources than we do. As a result, our potential competitors may be able to develop products and services better received by merchants or may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, regulations or merchant requirements. In addition, some of our larger competitors may be able to leverage a larger installed customer base and distribution network to adopt more aggressive pricing policies and offer more attractive sales terms, which could cause us to lose potential sales or to sell our solutions at lower prices.

Competition may intensify as our competitors enter into business combinations or alliances or raise additional capital, or as established companies in other market segments or geographic markets expand into our market segments or geographic markets. For instance, certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage against us in areas where we operate including: by integrating competing platforms or features into products they control such as search engines, web browsers, mobile device operating systems or social networks; by making acquisitions; or by making access to our platform more difficult. Further, current and future competitors could choose to offer a

 

26

---

Table of Contents

different pricing model or to undercut prices in an effort to increase their market share. If we cannot compete successfully against current and future competitors, our business, results of operations and financial condition could be negatively impacted.

We do not have the history with our solutions or pricing models necessary to accurately predict optimal pricing necessary to attract new merchants and retain existing merchants.

We have limited experience determining the optimal prices for our solutions. We have changed our pricing model from time to time and expect to do so in the future. For example, in February 2014, we launched Shopify Plus. Given our limited experience with selling new solutions, we may not offer new solutions at the optimal price, which may result in our solutions not being profitable or not gaining market share. As competitors introduce new solutions that compete with ours, especially in the payments space where we face significant competition, we may be unable to attract new merchants at the same price or based on the same pricing models as we have used historically. Pricing decisions may also impact the mix of adoption among our plans and negatively impact our overall revenue. Moreover, SMBs, which comprise the majority of merchants using our platform, may be quite sensitive to price increases or prices offered by competitors. As a result, in the future we may be required to reduce our prices, which could adversely affect our revenue, gross profit, profitability, financial position and cash flows.

We have in the past made and in the future may make acquisitions and investments, which could divert management’s attention, result in operating difficulties and dilution to our shareholders and otherwise disrupt our operations and adversely affect our business, operating results or financial position.

From time to time, we evaluate potential strategic acquisition or investment opportunities. Any transactions that we enter into could be material to our financial condition and results of operations. The process of acquiring and integrating another company or technology could create unforeseen operating difficulties and expenditures. Acquisitions and investments involve a number of risks, such as:

 

•

diversion of management time and focus from operating our business;

 

•

use of resources that are needed in other areas of our business;

 

•

in the case of an acquisition, implementation or remediation of controls, procedures and policies of the acquired company;

 

•

in the case of an acquisition, difficulty integrating the accounting systems and operations of the acquired company, including potential risks to our corporate culture;

 

•

in the case of an acquisition, coordination of product, engineering and selling and marketing functions, including difficulties and additional expenses associated with supporting legacy services and products and hosting infrastructure of the acquired company and difficulty converting the customers of the acquired company onto our platform and contract terms, including disparities in the revenues, licensing, support or professional services model of the acquired company;

 

•

in the case of an acquisition, retention and integration of employees from the acquired company;

 

•

unforeseen costs or liabilities;

 

•

adverse effects to our existing business relationships with partners and merchants as a result of the acquisition or investment;

 

•

the possibility of adverse tax consequences;

 

•

litigation or other claims arising in connection with the acquired company or investment; and

 

•

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries.

 

27

---

Table of Contents

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

Acquisitions and investments may also result in dilutive issuances of equity securities, which could adversely affect our share price, or result in issuances of securities with superior rights and preferences to the Class A subordinate voting shares or the incurrence of debt with restrictive covenants that limit our future uses of capital in pursuit of business opportunities.

We may not be able to identify acquisition or investment opportunities that meet our strategic objectives, or to the extent such opportunities are identified, we may not be able to negotiate terms with respect to the acquisition or investment that are acceptable to us. At this time we have made no commitments or agreements with respect to any such transaction.

Provisions of our debt instruments may restrict our ability to pursue our business strategies.

We currently have two credit facilities, one of which is collateralized by substantially all of our assets. Our credit facilities require us, and any debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to, among other things:

 

•

dispose of assets;

 

•

complete mergers or acquisitions;

 

•

incur indebtedness;

 

•

encumber assets;

 

•

pay dividends or make other distributions to holders of our shares;

 

•

make specified investments;

 

•

change certain key management personnel;

 

•

engage in any business other than the businesses we currently engage in; and

 

•

engage in transactions with our affiliates.

These restrictions could inhibit our ability to pursue our business strategies. If we default under a credit facility, and such event of default is not cured or waived, the lenders could terminate commitments to lend and cause all amounts outstanding with respect to the debt to be due and payable immediately, which in turn could result in cross-defaults under our other debt instruments. Our assets and cash flow may not be sufficient to fully repay borrowings under all of our outstanding debt instruments if some or all of these instruments are accelerated upon a default.

We may also incur additional indebtedness in the future. The instruments governing such indebtedness could contain provisions that are as, or more, restrictive than our existing debt instruments. If we are unable to repay, refinance or restructure our indebtedness when payment is due, the lenders could proceed against the collateral granted to them to secure such indebtedness, as applicable, or force us into bankruptcy or liquidation.

We may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise capital when needed or on acceptable terms.

From time to time, we may seek additional equity or debt financing to fund our growth, enhance our platform, respond to competitive pressures or make acquisitions or other investments. Our business plans

 

28

---

Table of Contents

may change, general economic, financial or political conditions in our markets may deteriorate or other circumstances may arise, in each case that have a material adverse effect on our cash flows and the anticipated cash needs of our business. Any of these events or circumstances could result in significant additional funding needs, requiring us to raise additional capital. We cannot predict the timing or amount of any such capital requirements at this time. If financing is not available on satisfactory terms, or at all, we may be unable to expand our business at the rate desired and our results of operations may suffer. Financing through issuances of equity securities would be dilutive to holders of our shares.

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.

With sales in various countries, we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have an adverse impact on our liquidity and results of operations.

In addition, the authorities in Canada and other jurisdictions could review our tax returns and impose additional tax, interest and penalties, which could have an impact on us and our results of operations. We previously have participated in government programs with both the Canadian federal government and the Government of Ontario that provide investment tax credits based upon qualifying research and development expenditures. If Canadian taxation authorities successfully challenge such expenses or the correctness of such income tax credits claimed, our historical operating results could be adversely affected. As a public company, we will no longer be eligible for refundable tax credits under the Canadian federal Scientific Research and Experimental Development Program, or SR&ED credits.

Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

•

changes in the valuation of our deferred tax assets and liabilities;

 

•

expected timing and amount of the release of any tax valuation allowances;

 

•

tax effects of stock-based compensation;

 

•

costs related to intercompany restructurings;

 

•

changes in tax laws, regulations or interpretations thereof; or

 

•

future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings in countries where we have higher statutory tax rates.

We currently conduct activities in the United States through our subsidiaries pursuant to transfer pricing arrangements and may in the future conduct operations in other jurisdictions pursuant to similar arrangements. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arms’ length. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us.

 

29

---

Table of Contents

New tax laws could be enacted or existing laws could be applied to us or our merchants, which could increase the costs of our solutions and adversely impact our business.

The application of federal, state, provincial, local and foreign tax laws to solutions provided over the internet is evolving. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, possibly with retroactive effect, and could be applied solely or disproportionately to solutions provided over the internet. These enactments could adversely affect our sales activity due to the inherent cost increase the taxes would represent, and could ultimately result in a negative impact on our results of operations and cash flows.

State tax authorities may seek to assess state and local business taxes and sales and use taxes. If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to tax liability for past sales.

There is a risk that U.S. states could assert that we are liable for U.S. state and local business activity taxes, which are levied upon income or gross receipts, or for the collection of U.S. local sales and use taxes. This risk exists regardless of whether we are subject to U.S. federal income tax. States are becoming increasingly active in asserting nexus for business activity tax purposes and imposing sales and use taxes on products and services provided over the internet. We may be subject to U.S. state and local business activity taxes if a state tax authority asserts that our activities or the activities of our non-U.S. subsidiaries are sufficient to establish nexus. We could also be liable for the collection of U.S. state and local sales and use taxes if a state tax authority asserts that distribution of our solutions over the internet is subject to sales and use taxes. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that change over time. We review these rules and regulations periodically and, when we believe we are subject to sales and use taxes in a particular state, voluntarily engage state tax authorities in order to determine how to comply with their rules and regulations. If a state tax authority asserts that distribution of our solutions is subject to such sales and use taxes, the additional cost may decrease the likelihood that such merchants would purchase our solutions or continue to renew their subscriptions.

A successful assertion by one or more states requiring us to collect sales or other taxes on subscription service revenue could result in substantial tax liabilities for past transactions and otherwise harm our business. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states where we currently believe no such taxes are required. New obligations to collect or pay taxes of any kind could increase our cost of doing business. In the quarter ended December 31, 2014, we determined that we owed amounts related to sales and use taxes in various states and local jurisdictions and as a result recorded a sales tax liability of $2.2 million, which has been included in general and administrative expenses for the year ended December 31, 2014. During the first quarter of 2015, we registered in applicable states, filed all necessary voluntary disclosure agreements and began charging sales taxes to our merchants. As at March 31, 2015, we recorded an additional sales tax liability of $0.6 million within general and administrative expenses.

We are dependent upon consumers’ and merchants’ willingness to use the internet for commerce.

Our success depends upon the general public’s continued willingness to use the internet as a means to pay for purchases, communicate, access social media, research and conduct commercial transactions, including through mobile devices. If consumers or merchants become unwilling or less willing to use the internet for commerce for any reason, including lack of access to high-speed communications equipment, congestion of traffic on the internet, internet outages or delays, disruptions or other damage to merchants’ and consumers’ computers, increases in the cost of accessing the internet and security and privacy risks or the perception of such risks, our business could be adversely affected.

 

30

---

Table of Contents

Risks Related to this Offering and Ownership of our Class A Subordinate Voting Shares

The dual class structure that will be contained in our articles of incorporation has the effect of concentrating voting control and the ability to influence corporate matters with those shareholders who held our shares prior to our initial public offering, including our executive officers, employees and directors and their affiliates.

Our Class B multiple voting shares have 10 votes per share and our Class A subordinate voting shares, which are the shares we are selling in this offering, have one vote per share. Shareholders who hold Class B multiple voting shares, including our executive officers, employees and directors and their affiliates, will together hold approximately         % of the voting power of our outstanding voting shares following this offering (assuming no exercise of the over-allotment option) and will therefore have significant influence over our management and affairs and over all matters requiring shareholder approval, including election of directors and significant corporate transactions.

In addition, because of the 10-to-1 voting ratio between our Class B multiple voting shares and Class A subordinate voting shares, the holders of our Class B multiple voting shares, collectively, will continue to control a majority of the combined voting power of our voting shares even where the Class B multiple voting shares represent a substantially reduced percentage of our total outstanding shares. The concentrated voting control of holders of our Class B multiple voting shares will limit the ability of our Class A subordinate voting shareholders to influence corporate matters for the foreseeable future, including the election of directors as well as with respect to decisions regarding amendment of our share capital, creating and issuing additional classes of shares, making significant acquisitions, selling significant assets or parts of our business, merging with other companies and undertaking other significant transactions. As a result, holders of Class B multiple voting shares will have the ability to influence many matters affecting us and actions may be taken that our Class A subordinate voting shareholders may not view as beneficial. The market price of our Class A subordinate voting shares could be adversely affected due to the significant influence and voting power of the holders of Class B multiple voting shares. Additionally, the significant voting interest of holders of Class B multiple voting shares may discourage transactions involving a change of control, including transactions in which an investor, as a holder of the Class A subordinate voting shares, might otherwise receive a premium for the Class A subordinate voting shares over the then-current market price, or discourage competing proposals if a going private transaction is proposed by one or more holders of Class B multiple voting shares.

Future transfers by holders of Class B multiple voting shares will generally result in those shares converting to Class A subordinate voting shares, which will have the effect, over time, of increasing the relative voting power of those holders of Class B multiple voting shares who retain their shares. If, for example, our Chief Executive Officer, Tobias Lütke, who will hold approximately     % of our outstanding Class B multiple voting shares following this offering, retains a significant portion of his holdings of Class B multiple voting shares for an extended period of time, he could, in the future, control a significant percentage of the combined voting power of our Class A subordinate voting shares and Class B multiple voting shares. Each of our directors and officers owes a fiduciary duty to Shopify and must act honestly and in good faith with a view to the best interests of Shopify. However, any director and/or officer that is a shareholder, even a controlling shareholder, is entitled to vote his or her shares in his or her own interests, which may not always be in the interests of our shareholders generally.

Our articles of incorporation will also amend certain default rights provided for under the CBCA for holders of Class B multiple voting shares and Class A subordinate voting shares to vote separately as a class for certain types of amendments to our articles. Specifically, neither the holders of the Class B multiple voting shares nor Class A subordinate voting shares shall be entitled to vote separately as a class upon a proposal to amend our articles of incorporation to (1) increase or decrease any maximum number of authorized shares of such class, or increase any maximum number of authorized shares of a class having rights or privileges equal or superior to the shares of such class; or (2) create a new class of shares equal or superior to the shares of such class, which rights are otherwise provided for in paragraphs (a) and (e) of subsection

 

31

---

Table of Contents

176(1) of the CBCA. Pursuant to our amended articles of incorporation, neither holders of our Class A subordinate voting shares nor holders of our Class B multiple voting shares will be entitled to vote separately as a class on a proposal to amend our articles to effect an exchange, reclassification or cancellation of all or part of the shares of such class pursuant to Section 176(1)(b) of the CBCA unless such exchange, reclassification or cancellation: (a) affects only the holders of that class; or (b) affects the holders of Class A subordinate voting shares and Class B multiple voting shares differently, on a per share basis, and such holders are not already otherwise entitled to vote separately as a class under applicable law or our amended articles of incorporation in respect of such exchange, reclassification or cancellation.

Pursuant to our amended articles of incorporation, holders of Class A subordinate voting shares and Class B multiple voting shares will be treated equally and identically, on a per share basis, in certain change of control transactions that require approval of our shareholders under the CBCA, unless different treatment of the shares of each such class is approved by a majority of the votes cast by the holders of our Class A subordinate voting shares and Class B multiple voting shares, each voting separately as a class.

An active, liquid and orderly trading market for our Class A subordinate voting shares may not develop, and you may not be able to resell your shares at or above the initial public offering price.

We intend to submit an application to have our Class A subordinate voting shares listed on the NYSE under the symbol “SHOP” and on the TSX under the symbol “SH.” There is currently no market through which our Class A subordinate voting shares may be sold and, if a market for our Class A subordinate voting shares does not develop or is not sustained, you may not be able to resell your Class A subordinate voting shares purchased in this offering. This may affect the pricing of the securities in the secondary market, the transparency and availability of trading prices, the liquidity of the securities and the extent of issuer regulation. The initial public offering price of our Class A subordinate voting shares will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our Class A subordinate voting shares after the offering. In the absence of an active trading market for our Class A subordinate voting shares, investors may not be able to sell their shares at or above the initial public offering price. We cannot predict the prices at which our Class A subordinate voting shares will trade.

The market price of our Class A subordinate voting shares may be volatile, which could result in substantial losses for investors purchasing shares in this offering.

The market price of our Class A subordinate voting shares could be subject to significant fluctuations after this offering, and it may decline below the initial public offering price. Some of the factors that may cause the market price of our Class A subordinate voting shares to fluctuate include:

 

•

significant volatility in the market price and trading volume of comparable companies;

 

•

actual or anticipated changes or fluctuations in our operating results or in the expectations of market analysts;

 

•

adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

•

short sales, hedging and other derivative transactions in our shares;

 

•

announcements of technological innovations, new products, strategic alliances or significant agreements by us or by our competitors;

 

•

changes in the prices of our solutions or the prices of our competitors’ solutions;

 

•

litigation or regulatory action against us;

 

•

investors’ general perception of us and the public’s reaction to our press releases, our other public announcements and our filings with the U.S. Securities and Exchange Commission, or the SEC, and Canadian securities regulators;

 

32

---

Table of Contents

•

the market’s reaction to our reduced disclosure as a result of being an emerging growth company under the JOBS Act;

 

•

publication of research reports or news stories about us, our competitors or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

•

changes in general political, economic, industry and market conditions and trends;

 

•

sales of our Class A subordinate voting shares and Class B multiple voting shares by our directors, executive officers and existing shareholders;

 

•

recruitment or departure of key personnel; and

 

•

the other risk factors described in this section of the prospectus.

In addition, the stock markets have historically experienced substantial price and volume fluctuations, particularly in the case of shares of technology companies. Broad market and industry factors may harm the market price of our Class A subordinate voting shares. Hence, the price of our Class A subordinate voting shares could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce the share price of our Class A subordinate voting shares regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has been instituted against that company. If we were involved in any similar litigation, we could incur substantial costs, our management’s attention and resources could be diverted and it could harm our business, operating results and financial condition.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our Class A subordinate voting shares to drop significantly.

Sales of a substantial number of our shares in the public market could occur at any time after the expiration of the 180-day contractual lock-up period described in the “Underwriting” section of this prospectus. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could significantly reduce the market price of our Class A subordinate voting shares and the market price could decline below the initial public offering price. We cannot predict the effect, if any, that future public sales of these securities or the availability of these securities for sale will have on the market price of our Class A subordinate voting shares. If the market price of our Class A subordinate voting shares was to drop as a result, this might impede our ability to raise additional capital and might cause remaining shareholders to lose all or part of their investments.

After the closing of this offering, we will have             Class A subordinate voting shares and             Class B multiple voting shares outstanding (assuming no exercise of the over-allotment option). This includes the             Class A subordinate voting shares that we are selling in this offering, which may be resold in the public market immediately. We, our executive officers and directors, and the holders of substantially all of our outstanding Class B multiple voting shares, collectively representing             % of our outstanding shares and options on a fully-diluted basis, have agreed with the underwriters that, subject to limited exceptions, for a period of 180 days after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, grant any option to purchase or otherwise dispose of any Class A subordinate voting shares or Class B multiple voting shares or any securities convertible into or exercisable or exchangeable for such shares, or in any manner transfer all or a portion of the economic consequences associated with the ownership of our Class A subordinate voting shares or Class B multiple voting shares, or cause a registration statement or prospectus relating to our Class A subordinate voting shares or Class B multiple voting shares to be filed, without the prior written consent of the designated representative of the underwriters, who may, in their sole discretion and at any time without notice, release all or any portion of the shares subject to these lock-up agreements. Following the expiration of the 180-day period, the Class A subordinate voting shares issuable upon conversion of the Class B multiple voting shares that will be

 

33

---

Table of Contents

outstanding immediately following completion of this offering will be available for sale in the public markets subject to restrictions under applicable securities laws. In addition, as of March 31, 2015, there were outstanding          options to acquire our common shares which, following completion of this offering, will be exercisable for Class B multiple voting shares. The Class A subordinate voting shares issuable upon conversion of the Class B multiple voting shares subject to these options will, to the extent permitted by any applicable vesting requirements, lock-up agreements and restrictions under applicable securities laws, also become eligible for sale in the public market.

Moreover, after this offering, certain of our shareholders will have certain rights to require us to file registration statements in the United States or prospectuses in Canada covering their shares or to include their shares in registration statements or prospectuses that we may file for ourselves or on behalf of other shareholders.

Further, we cannot predict the size of future issuances of our Class A subordinate voting shares or the effect, if any, that future issuances and sales of our Class A subordinate voting shares will have on the market price of our Class A subordinate voting shares. Sales of substantial amounts of our shares, or the perception that such sales could occur, may adversely affect prevailing market prices for our Class A subordinate voting shares.

Purchasers in this offering will incur immediate and substantial dilution in the net tangible book value of their investment as a result of this offering.

The initial public offering price will be substantially higher than the net tangible book value per share immediately after this offering. If you purchase Class A subordinate voting shares in this offering, you will incur immediate and substantial dilution of $         per share, representing the difference between the assumed initial public offering price of $         per share and our pro forma net tangible book value per share as of March 31, 2015. Moreover, we issued options in the past to acquire common shares (which, following the amendment to our articles to redesignate our common shares as Class B multiple voting shares, will be exercisable for Class B multiple voting shares) at prices significantly below the assumed initial public offering price. As of March 31, 2015, there were                          options issued and outstanding with a weighted average exercise price of $         per share. To the extent that these outstanding options are ultimately exercised, you will incur further dilution. For more information, see “Dilution.”

We have not yet determined whether our existing internal controls over financial reporting are compliant with Section 404 of the Sarbanes-Oxley Act or National Instrument 52-109.

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, or National Instrument 52-109—Certification of Disclosure in Issuers’ Annual and Interim Filings, or NI 52-109, of the Canadian Securities Administrators. As a result, we are not currently required to make an assessment of the effectiveness of our internal controls, or to deliver a report that assesses the effectiveness of our internal control over financial reporting. Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, our management will be required to report on the effectiveness of our internal control over financial reporting starting with the second annual report that we file with the SEC after the consummation of this offering. We have elected to take advantage of certain exceptions from reporting requirements that are available to emerging growth companies under the JOBS Act and therefore our auditor will not be required to deliver an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404 until after the date we are no longer an emerging growth company. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31.

 

34

---

Table of Contents

We have not yet commenced the process of determining whether our existing internal controls over financial reporting are compliant with Section 404 or NI 52-109. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate. Irrespective of compliance with Section 404 or NI 52-109, any failure of our internal controls could have an adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and results of operations. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be adversely impacted.

We will incur increased costs and regulatory burden and devote substantial management time as a result of being a public company.

Prior to this offering, we were not subject to the continuous and timely disclosure requirements of Canadian and U.S. securities laws and the rules, regulations and policies of the NYSE and the TSX. As a public company, we will incur increased legal, accounting and other costs not incurred as a private company. We will be subject to, among other things, the Exchange Act, the rules and regulations of the Canadian Securities Administrators, the corporate governance requirements found in the Sarbanes-Oxley Act and related rules and regulations of the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the rules and regulations implemented by the NYSE and the TSX. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. We have made, and will continue to make, changes to our financial management control systems and other areas to manage our obligations as a public company, including corporate governance, corporate controls, disclosure controls and procedures and financial reporting and accounting systems. However, we cannot assure you that these and other measures that we might take will be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

Our senior management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

The individuals who now constitute our senior management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our senior management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under U.S. and Canadian securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business.

Because we do not expect to pay any dividends on our Class A subordinate voting shares for the foreseeable future, investors in this offering may never receive a return on their investment.

We have never declared or paid any dividends on our securities. We do not have any present intention to pay cash dividends on our Class A subordinate voting shares and we do not anticipate paying any cash dividends on our Class A subordinate voting shares in the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on our financial

 

35

---

Table of Contents

condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

Our management will have broad discretion over the use of the proceeds we receive from this offering and might not use them effectively, which could affect our results of operations and cause our share price to decline.

Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds of this offering in ways that increase the value of your investment. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information publicly available to our shareholders.

We are a “foreign private issuer,” as such term is defined in Rule 405 under the Securities Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we will not file the same reports that a U.S. domestic issuer would file with the SEC, although we will be required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our officers, directors, and principal shareholders are exempt from the reporting and “short swing” profit recovery provisions of Section 16 of the Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are longer.

As a foreign private issuer, we will be exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements. We will also be exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. While we will comply with the corresponding requirements relating to proxy statements and disclosure of material non-public information under Canadian securities laws, these requirements differ from those under the Exchange Act and Regulation FD and shareholders should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies. In addition, we will have four months after the end of each fiscal year to file our annual report with the SEC and will not be required under the Exchange Act to file quarterly reports with the SEC as promptly as U.S. domestic companies whose securities are registered under the Exchange Act.

In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the Canadian practices we follow instead. We intend to rely on this exemption with respect to requirements regarding the quorum for any meeting of our shareholders. We may in the future elect to follow home country practices in Canada with regard to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of U.S. domestic companies that are subject to all corporate governance requirements. See “Management—Corporate Governance.”

We may lose foreign private issuer status in the future, which could result in significant additional costs and expenses to us.

We may in the future lose our foreign private issuer status if a majority of our shares are held in the United States and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer

 

36

---

Table of Contents

status, such as if: (1) a majority of our directors or executive officers are U.S. citizens or residents; (2) a majority of our assets are located in the United States; or (3) our business is administered principally in the United States. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer will be significantly more than the costs incurred as a Canadian foreign private issuer. If we are not a foreign private issuer, we would not be eligible to use foreign issuer forms and would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to a foreign private issuer. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A subordinate voting shares less attractive to investors.

We are an emerging growth company. For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations and exemptions from the requirements of auditor attestation reports on the effectiveness of our internal control over financial reporting. We cannot predict if investors will find our Class A subordinate shares less attractive because we will rely on these exemptions. If some investors find our Class A subordinate shares less attractive as a result, there may be a less active trading market for our Class A subordinate voting shares and our share price may be more volatile. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31.

Provisions of Canadian law may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.

The Investment Canada Act (Canada) subjects an acquisition of control of us by a non-Canadian to government review if the value of our assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant Minister is satisfied that the investment is likely to be of net benefit to Canada. This could prevent or delay a change of control and may eliminate or limit strategic opportunities for shareholders to sell their Class A subordinate voting shares.

It may be difficult to enforce civil liabilities in Canada under U.S. securities laws.

We were incorporated in Canada, and our corporate headquarters are located in Canada. A majority of our directors and executive officers and certain of the experts named in this prospectus reside principally in Canada and the majority of our assets and all or a substantial portion of the assets of these persons is located outside the United States. It may be difficult for investors who reside in the United States to effect service of process upon these persons in the United States, or to enforce a U.S. court judgment predicated upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons. There is substantial doubt whether an action could be brought in Canada in the first instance predicated solely upon U.S. federal securities laws. Canadian courts may refuse to hear a claim based on an alleged violation of U.S. securities laws against us or these persons on the grounds that Canada is not the most appropriate forum in which to bring such a claim. Even if a Canadian court agrees to hear a claim, it may determine that Canadian law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Canadian law.

 

37

---

Table of Contents

Our by-laws provide that any derivative actions, actions relating to breach of fiduciary duties and other matters relating to our internal affairs will be required to be litigated in Canada, which could limit your ability to obtain a favorable judicial forum for disputes with us.

We have adopted a forum selection by-law that provides that, unless we consent in writing to the selection of an alternative forum, the Superior Court of Justice of the Province of Ontario, Canada and appellate Courts therefrom (or, failing such Court, any other “court” as defined in the CBCA having jurisdiction, and the appellate Courts therefrom), will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf; (2) any action or proceeding asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us; (3) any action or proceeding asserting a claim arising pursuant to any provision of the CBCA or our amended articles or by-laws; or (4) any action or proceeding asserting a claim otherwise related to our “affairs” (as defined in the CBCA). Our forum selection by-law also provides that our securityholders are deemed to have consented to personal jurisdiction in the Province of Ontario and to service of process on their counsel in any foreign action initiated in violation of our by-law. Therefore, it may not be possible for securityholders to litigate any action relating to the foregoing matters outside of the Province of Ontario.

Our forum selection by-law seeks to reduce litigation costs and increase outcome predictability by requiring derivative actions and other matters relating to our affairs to be litigated in a single forum. While forum selection clauses in corporate charters and by-laws are becoming more commonplace for public companies in the United States and have been upheld by courts in certain states, they are untested in Canada. It is possible that the validity of our forum selection by-law could be challenged and that a court could rule that such by-law is inapplicable or unenforceable. If a court were to find our forum selection by-law inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions and we may not obtain the benefits of limiting jurisdiction to the courts selected.

Provisions of our charter documents and certain Canadian legislation could delay or deter a change of control, limit attempts by our shareholders to replace or remove our current senior management and affect the market price of our Class A subordinate voting shares.

Our amended articles of incorporation will authorize our board of directors to issue an unlimited number of preferred shares without shareholder approval and to determine the rights, privileges, restrictions and conditions granted to or imposed on any unissued series of preferred shares. Those rights may be superior to those of our Class A subordinate voting shares and Class B multiple voting shares. For example, preferred shares may rank prior to Class A subordinate voting shares and Class B multiple voting shares as to dividend rights, liquidation preferences or both, may have full or limited voting rights and may be convertible into Class A subordinate voting shares. If we were to issue a significant number of preferred shares, these issuances could deter or delay an attempted acquisition of us or make the removal of management more difficult, particularly in the event that we issue preferred shares with special voting rights. Issuances of preferred shares, or the perception that such issuances may occur, could cause the trading price of our Class A subordinate voting shares to drop.

In addition, provisions in the CBCA and in our amended articles of incorporation and by-laws may have the effect of delaying or preventing changes in our senior management, including provisions that:

 

•

require that any action to be taken by our shareholders be effected at a duly called annual or special meeting and not by written consent;

 

•

establish an advance notice procedure for shareholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; and

 

•

require the approval of a two-thirds majority of the votes cast by shareholders present in person or by proxy in order to amend certain provisions of our amended articles of incorporation, including,

 

38

---

Table of Contents

in some circumstances, by separate class votes of holders of our Class A subordinate voting shares and Class B multiple voting shares.

These provisions may frustrate or prevent any attempts by our shareholders to launch a proxy contest or replace or remove our current senior management by making it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing the members of our senior management. Any of these provisions could have the effect of delaying, preventing or deferring a change in control which could limit the opportunity for our Class A subordinate voting shareholders to receive a premium for their Class A subordinate voting shares, and could also affect the price that investors are willing to pay for Class A subordinate voting shares.

Our constating documents permit us to issue an unlimited number of Class A subordinate voting shares and Class B multiple voting shares.

Our amended articles of incorporation permit us to issue an unlimited number of Class A subordinate voting shares and Class B multiple voting shares. We anticipate that we will, from time to time, issue additional Class A subordinate voting shares in the future. Subject to the requirements of the NYSE and the TSX, we will not be required to obtain the approval of shareholders for the issuance of additional Class A subordinate voting shares. Although the rules of the TSX generally prohibit us from issuing additional Class B multiple voting shares, there may be certain circumstances where additional Class B multiple voting shares may be issued, including upon receiving shareholder approval and pursuant to the exercise of stock options under the Legacy Option Plan that were granted prior to this offering. Any further issuances of Class A subordinate voting shares or Class B multiple voting shares will result in immediate dilution to existing shareholders and may have an adverse effect on the value of their shareholdings. Additionally, any further issuances of Class B multiple voting shares may significantly lessen the combined voting power of our Class A subordinate voting shares due to the 10-to-1 voting ratio between our Class B multiple voting shares and Class A subordinate voting shares.

 

39

---

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s current estimates, beliefs and assumptions, which are based on management’s perception of historic trends, current conditions and expected future developments, as well as other factors management believes are appropriate in the circumstances. Although we believe that the plans, intentions, expectations, assumptions and strategies reflected in these 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 that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “continue” or the negative of these terms or other comparable terminology. 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 prospectus include, but are not limited to, statements about:

 

•

the size of our addressable markets and our ability to serve those markets;

 

•

the achievement of advances in and expansion of our platform and our solutions;

 

•

our ability to predict future commerce trends and technology;

 

•

the growth of our merchants’ revenues;

 

•

the growth of our third-party ecosystem, including formation of strategic partnerships;

 

•

potential selective acquisitions and investments;

 

•

the expansion of our platform internationally; and

 

•

the proposed use of proceeds of this offering.

Although the forward-looking statements contained in this prospectus are based upon what we believe are reasonable assumptions, investors are cautioned against placing undue reliance on these statements since actual results may vary from the forward-looking statements. Certain assumptions made in preparing the forward-looking statements include:

 

•

our ability to generate revenue while controlling our costs and expenses;

 

•

our ability to manage our growth effectively;

 

•

the absence of material adverse changes in our industry or the global economy;

 

•

trends in our industry and markets;

 

•

our ability to maintain good business relationships with our merchants, vendors and partners;

 

•

our ability to develop solutions that keep pace with the continuing changes in technology, evolving industry standards, changes to the regulatory environment, new product introductions by competitors and changing merchant preferences and requirements;

 

•

our ability to protect our intellectual property rights;

 

•

our continued compliance with third-party license terms and the non-infringement of third-party intellectual property rights;

 

•

our ability to manage and integrate acquisitions;

 

•

our ability to retain key personnel; and

 

40

---

Table of Contents

•

our ability to raise sufficient debt or equity financing to support our continued growth.

Forward-looking statements involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations include:

 

•

our rapid growth may not be sustainable and depends on our ability to attract new merchants, retain existing merchants and increase sales to both new and existing merchants;

 

•

our business could be harmed if we fail to manage our growth effectively;

 

•

we have a history of losses and we may be unable to achieve profitability;

 

•

our limited operating history in a new and developing market makes it difficult to evaluate our current business and future prospects and may increase the risk that we will not be successful;

 

•

if we fail to improve and enhance the functionality, performance, reliability, design, security and scalability of our platform in a manner that responds to our merchants’ evolving needs, our business may be adversely affected;

 

•

payment transactions on Shopify Payments may subject us to regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business;

 

•

we rely on a single supplier to provide the technology we offer through Shopify Payments;

 

•

if our software contains serious errors or defects, we may lose revenue and market acceptance and may incur costs to defend or settle claims with our merchants;

 

•

a denial of service attack or security breach could delay or interrupt service to our merchants and their customers, harm our reputation or subject us to significant liability;

 

•

we may be unable to achieve or maintain data transmission capacity;

 

•

our growth depends in part on the success of our strategic relationships with third parties;

 

•

if we fail to maintain a consistently high level of customer service, our brand, business and financial results may be harmed;

 

•

any disruption of service at our data facilities could harm our business;

 

•

if our solutions do not operate as effectively when accessed through mobile devices, our merchants and their customers may not be satisfied with our solutions;

 

•

changes to technologies used in our platform or new versions or upgrades of operating systems and internet browsers could adversely impact the process by which merchants and customers interface with our platform;

 

•

the impact of worldwide economic conditions, including the resulting effect on spending by SMBs, may adversely affect our business, operating results and financial condition;

 

•

if the security of personally identifiable information we store relating to merchants and their customers is breached or otherwise subjected to unauthorized access, our reputation may be harmed and we may be exposed to liability;

 

•

we may be unable to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third-parties from making unauthorized use of our technology;

 

•

we may be subject to claims by third-parties of intellectual property infringement;

 

•

our use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible litigation;

 

•

if we are not able to generate traffic to our website through search engines and social networking sites, our ability to attract new merchants may be impaired and if our merchants are not able to

 

41

---

Table of Contents

generate traffic to their shops through search engines and social networking sites, their ability to attract consumers may be impaired;

 

•

if we fail to effectively maintain, promote and enhance our brand, our business and competitive advantage may be harmed;

 

•

if we are unable to hire, retain and motivate qualified personnel, our business will suffer;

 

•

we are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition;

 

•

activities of merchants or the content of their shops could damage our brand, subject us to liability and harm our business and financial results;

 

•

exchange rate fluctuations may negatively affect our results of operations;

 

•

our operating results are subject to seasonal fluctuations;

 

•

our business is susceptible to risks associated with international sales and the use of our platform in various countries;

 

•

if third-party apps and themes change such that we do not or cannot maintain the compatibility of our platform with these apps and themes, or if we fail to provide third-party apps and themes that our merchants desire to add to their shops, demand for our platform could decline;

 

•

we rely on computer hardware, purchased or leased, and software licensed from and services rendered by third-parties in order to provide our solutions and run our business, sometimes by a single-source supplier;

 

•

we may not be able to compete successfully against current and future competitors;

 

•

we do not have the history with our solutions or pricing models necessary to accurately predict optimal pricing necessary to attract new merchants and retain existing merchants;

 

•

we have in the past made and in the future may make acquisitions and investments that could divert management’s attention, result in operating difficulties and dilution to our shareholders and otherwise disrupt our operations and adversely affect our business, operating results or financial position;

 

•

we may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise capital when needed or on acceptable terms;

 

•

unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition;

 

•

new tax laws could be enacted or existing laws could be applied to us or our merchants, which could increase the costs of our solutions and adversely impact our business;

 

•

if we are required to collect sales and use taxes in additional jurisdictions, we might be subject to tax liability for past sales; and

 

•

we are dependent upon consumers’ and merchants’ willingness to use the internet for commerce.

These risks are described in further detail in the section entitled “Risk Factors” and elsewhere in this prospectus. 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 prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, 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.

 

42

---

Table of Contents

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. 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 prospectus.

PRESENTATION OF FINANCIAL INFORMATION

We prepare and report our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. We maintain our books and records in U.S. dollars.

We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them.

EXCHANGE RATE DATA

We express all amounts in this prospectus in U.S. dollars, except where otherwise indicated. References to “$” and “US$” are to U.S. dollars and references to “C$” are to Canadian dollars. The following table sets forth, for the periods indicated, the high, low, average and end of period noon rates of exchange for one U.S. dollar, expressed in Canadian dollars, published by the Bank of Canada during the respective periods.

 

		Year Ended December 31,												Three Months Ended March 31,
		2012				2013				2014				2014				2015
Highest rate during the period			1.0418				1.0697				1.1643				1.1279				1.2835
Lowest rate during the period			0.9710				0.9839				1.0614				1.0589				1.1599
Average noon spot rate for the period(1)			0.9994				1.0345				1.1084				1.1028				1.2403
Rate at the end of the period			0.9949				1.0636				1.1601				1.1050				1.2686

 

(1)	Determined by averaging the rates on the last day of each month during the respective period.

On April 13, 2015, the Bank of Canada noon rate of exchange was $1.00 = C$1.2602.

INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made based on that data and other similar sources, and on our knowledge of the markets for our services. Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

43

---

Table of Contents

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $         million based upon an assumed initial public offering price of $         per Class A subordinate voting share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $         million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of Class A subordinate voting shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal reasons for this offering are to increase our capitalization and financial flexibility, increase our visibility in the marketplace and create a public market for our Class A subordinate voting shares. We currently expect to use the net proceeds from this offering for working capital and general corporate purposes, including to fund our growth strategies, which may include: increasing our investment in sales and marketing, research and development and general and administrative functions; investing in maintaining our high level of merchant service and support; continuing to invest in our data centers and network infrastructure; and future acquisitions. See “Business—Growth Strategy.” As a result of our significant growth in recent periods and the fact that we operate in a rapidly evolving market, we do not believe we can provide the approximate amounts of the proceeds that will be allocated to each of these purposes with certainty. Such decisions will depend on market and competitive factors as they evolve over time.

While we currently anticipate that we will use the net proceeds from the offering as outlined above, the actual use of the net proceeds may vary depending upon numerous factors, including our operating costs and capital expenditure requirements, our strategy relative to the market and other conditions in effect at the time, as well as the other factors described under “Risk Factors” in this prospectus. Accordingly, we will retain the discretion to allocate the net proceeds of this offering, and we reserve the right to change the allocation of the net proceeds from time to time.

Pending their use, we intend to invest the net proceeds to us from the offering in short-term, investment-grade, interest-bearing instruments or hold them as cash.

 

44

---

Table of Contents

DIVIDEND POLICY

We have never declared or paid any dividends on our securities. We do not have any present intention to pay cash dividends on our Class A subordinate voting shares and we do not anticipate paying any cash dividends on our Class A subordinate voting shares in the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. However, any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

45

---

Table of Contents

CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and consolidated capitalization as of March 31, 2015:

 

•

on an actual basis;

 

•

on a pro forma basis to give effect to the amendment and redesignation of our common shares as Class B multiple voting shares, which will occur immediately prior to the consummation of this offering, and the conversion of all of our outstanding Series A, Series B and Series C convertible preferred shares into Class B multiple voting shares, which will occur upon the consummation of this offering; and

 

•

on a pro forma as adjusted basis to give effect to the transactions described above as well as the issuance by us of                  Class A subordinate voting shares in this offering at an assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma and pro forma as adjusted information below is illustrative only, and our cash, cash equivalents and short-term investments and consolidated capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing. You should read this table together with “Selected Historical Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

		As of March 31, 2015
		Actual				Pro Forma				Pro Forma As Adjusted(5)
		(in thousands)
Cash, cash equivalents and short-term investments		$	59,161			$				$
Long-term debt		$	—			$	—			$	—
Shareholders’ equity:
Preferred shares(1)			87,056				—				—
Common shares(2)			4,303				—				—
Class A subordinate voting shares(3)			—
Class B multiple voting shares(4)			—
Additional paid-in-capital			6,990
Accumulated deficit			(33,594)
Total shareholders’ equity			64,755
Consolidated capitalization		$	64,755			$				$

 

(1)

Actual: Series A convertible preferred shares—13,025,765 shares authorized, issued and outstanding; Series B convertible preferred shares—7,247,070 shares authorized, issued and outstanding; Series C convertible preferred shares—6,886,442 shares authorized, issued and outstanding. Pro forma and pro forma as adjusted: preferred shares—no shares authorized, issued or outstanding.

(2)	Actual: unlimited shares authorized; 39,574,306 shares issued and outstanding, which includes 110,262 shares issued and held in escrow in connection with certain historical acquisitions. Pro forma and pro forma as adjusted: no shares authorized, issued or outstanding.

(3)	Actual: no shares authorized, issued or outstanding. Pro forma: unlimited shares authorized; no shares issued and outstanding; Pro forma as adjusted: unlimited shares authorized;                  shares issued and outstanding.

 

46

---

Table of Contents

(4)	Actual: no shares authorized, issued or outstanding. Pro forma and pro forma as adjusted: unlimited shares authorized,                  shares issued and outstanding, which includes                      shares issued and held in escrow in connection with certain historical acquisitions.

(5)

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) pro forma as adjusted cash, cash equivalents and short-term investments and shareholders’ equity by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

47

---

Table of Contents

DILUTION

If you invest in our Class A subordinate voting shares in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per Class A subordinate voting share and the pro forma as adjusted net tangible book value per share immediately after this offering.

Our historical net tangible book value as of March 31, 2015 was $59.0 million, or $         per share. The historical net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of common shares outstanding as of March 31, 2015.

Our pro forma net tangible book value as of March 31, 2015 was $         million, or $         per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of Class A subordinate voting shares and Class B multiple voting shares outstanding as of March 31, 2015 after giving effect to (1) the amendment and redesignation of our common shares as Class B multiple voting shares and (2) the conversion of all of our outstanding Series A, Series B and Series C convertible preferred shares into Class B multiple voting shares.

After giving effect to the sale by us of Class A subordinate voting shares in this offering at an assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2015 would have been $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of $         per share to new investors in this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share						$
Pro forma net tangible book value per share as of March 31, 2015		$
Increase in pro forma net tangible book value per share attributable to this offering
Pro forma as adjusted net tangible book value per share after this offering
Dilution to new investors in this offering						$

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) pro forma as adjusted net tangible book value per share after this offering by $         per share and increase (decrease) the dilution to new investors by $         per share, in each case assuming the number of Class A subordinate voting shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, as of March 31, 2015, on a pro forma as adjusted basis as described above, the aggregate number of Class A subordinate voting shares and Class B multiple voting shares, as well as the total consideration and the average price per share paid to us by existing shareholders and to be paid by new investors acquiring shares in this offering.

 

		Shares Acquired						Total Consideration								Average Price per Share
		Number		Percent				Amount				Percent
Existing shareholders						%		$								$
New investors																$
Totals					100	%		$					100	%

 

48

---

Table of Contents

If the underwriters’ option to purchase additional Class A subordinate voting shares is exercised in full, the number of shares held by the existing shareholders after this offering would be reduced to     % of the total number of shares outstanding after this offering, and the number of shares held by new investors would increase to                  shares, or     % of the total number of shares outstanding after this offering.

The foregoing discussion assumes no exercise of options to purchase                  Class B multiple voting shares at a weighted average exercise price of $         per share, which were outstanding as of March 31, 2015, and excludes                  Class A subordinate voting shares reserved for future issuance under our Incentive Plans, which will become effective prior to or upon the consummation of this offering. See “Executive Compensation—Incentive Plans.” To the extent that options are exercised that have an exercise price that is less than the offering price of the Class A subordinate voting shares in this offering, new investors will experience further dilution.

 

49

---

Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following tables set forth our selected historical consolidated financial information. The information set forth below does not take into account the amendment and redesignation of our common shares as Class B multiple voting shares, which will occur immediately prior to the consummation of this offering, or the conversion of all of our outstanding Series A, Series B and Series C convertible preferred shares into Class B multiple voting shares, which will occur upon the consummation of this offering. You should read the following selected historical consolidated financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We have derived the selected consolidated statement of operations information for the years ended December 31, 2012, 2013 and 2014 and the selected consolidated balance sheet information as of December 31, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated statement of operations information for the three months ended March 31, 2014 and 2015 and the selected consolidated balance sheet information as of March 31, 2015 from our unaudited interim consolidated financial statements included elsewhere in this prospectus, which, in the opinion of management, include all adjustments necessary to present fairly the results of operations and financial condition at the dates and for the periods presented. Our consolidated financial statements have been prepared in accordance with U.S. GAAP and are presented in U.S. dollars except where otherwise indicated. Our historical results are not necessarily indicative of the results that should be expected in any future period.

 

50

---

Table of Contents

All of our operations are continuing operations and we have not paid any dividends since inception.

 

		Year Ended December 31,												Three Months Ended March 31,
		2012				2013				2014				2014				2015
		(in thousands, except share and per share data)
Consolidated Statement of Operations Information:
Revenues:
Subscription solutions		$	19,200			$	38,339			$	66,668			$	13,053			$	22,352
Merchant solutions			4,513				11,913				38,350				5,757				14,996
			23,713				50,252				105,018				18,810				37,348
Cost of revenues(1):
Subscription solutions			4,291				8,504				16,790				3,284				5,033
Merchant solutions			485				5,009				26,433				3,898				10,749
			4,776				13,513				43,223				7,182				15,782
Gross profit			18,937				36,739				61,795				11,628				21,566
Operating expenses:
Sales and marketing(1)			12,262				23,351				45,929				9,718				13,540
Research and development(1)(2)			6,452				13,682				25,915				6,086				7,313
General and administrative(1)			1,737				3,975				11,566				1,796				4,189
			20,451				41,008				83,410				17,600				25,042
Loss from operations			(1,514	)			(4,269	)			(21,615	)			(5,972	)			(3,476	)
Other income (expense):
Interest income, net			50				42				57				10				11
Loss on asset disposal			—				(73	)			(100	)			—				—
Foreign exchange gain (loss)			232				(537	)			(653	)			(403	)			(1,065	)
			282				(568	)			(696	)			(393	)			(1,054	)
Net loss and comprehensive loss		$	(1,232	)		$	(4,837	)		$	(22,311	)		$	(6,365	)		$	(4,530	)
Basic and diluted net loss per share attributable to common shareholders(3)		$	(0.03	)		$	(0.13	)		$	(0.57	)			$(0.16)				$(0.12)
Weighted average shares used to compute net loss per share attributable to common shareholders(3)			36,155,333				37,248,710				38,940,252				38,643,293				39,344,619
Pro forma basic and diluted net loss per share attributable to common shareholders (unaudited)(4)										$	(0.34	)							$(0.07)
Weighted average shares used to compute pro forma net loss per share attributable to common shareholders (unaudited)(4)											66,099,529								66,503,896

 

51

---

Table of Contents

 

(1)	Includes stock-based compensation expense as follows:

 

		Year Ended December 31,												Three Months Ended March 31,
		2012				2013				2014				2014				2015
		(in thousands)
Cost of revenues		$	11			$	113			$	259			$	40			$	59
Sales and marketing			66				354				696				133				174
Research and development			282				1,152				2,776				869				779
General and administrative			49				147				712				73				428
Total stock-based compensation expense		$	408			$	1,766			$	4,443			$	1,115			$	1,440

 

(2)	Net of refundable tax credits ($902, $891 and $1,295 for the years ended December 31, 2012, 2013 and 2014, respectively, and $240 and $300 for the three months ended March 31, 2014 and 2015, respectively).

 

(3)	Does not give effect to the conversion of our Series A, Series B and Series C convertible preferred shares into common shares, which will occur upon the consummation of this offering.

 

(4)

See note 8 to the notes to our unaudited condensed consolidated interim financial statements and note 16 to the notes to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate pro forma net loss per share attributable to common shareholders and the weighted average number of shares used in the pro forma computation of the per share amounts.

 

		As of December 31,												As of March 31,
		2012				2013				2014				2015
		(in thousands)
Balance Sheet Information:
Cash, cash equivalents and short-term investments		$	17,655			$	83,529			$	59,662			$	59,161
Working capital			14,735				77,960				48,610				43,556
Total assets			23,603				95,788				95,193				97,326
Total liabilities			5,634				10,407				27,461				32,571
Shareholders’ equity			17,969				85,381				67,732				97,326

 

52

---

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results, performance and achievements could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.”

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. All amounts are in U.S. dollars except where otherwise indicated. See “Presentation of Financial Information.”

Overview

Shopify provides a leading cloud-based commerce platform designed for small and medium-sized businesses, or SMBs. Merchants use our software to run their business across all of their sales channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops. While we started Shopify to help merchants design, set up and manage their online stores, we have expanded far beyond that. Whether a merchant is starting their business online or offline, we provide a platform for merchants to create an omni-channel experience that helps showcase the merchant’s brand and grow its business. 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, build customer relationships and leverage analytics and reporting. Merchants can also use Shopify Mobile, our iPhone and Android application, to manage their business on the go. The Shopify platform has been engineered to enterprise-level standards and functionality while being designed for simplicity and ease-of-use. We have also designed our platform with a robust technical infrastructure able to manage large spikes in traffic. We are constantly innovating and enhancing our platform, with our continuously deployed, multi-tenant architecture ensuring all merchants are always using the latest technology.

A rich ecosystem of app developers, theme designers and other partners has evolved around the Shopify platform. The platform’s functionality is highly extensible and can be expanded through our application program interface, or API, and the over 900 apps available in the Shopify App Store. This ecosystem helps drive growth of our merchant base, which in turn further accelerates growth of the ecosystem.

We principally generate revenues through the sale of subscriptions to our platform. In 2014, subscription solutions revenues accounted for 63.5% of our total revenues (59.8% in the three months ended March 31, 2015). We offer subscription plans with various price points, from starter plans to plans catered to merchants with higher volume sales and additional functionality requirements. The flexibility of our pricing plans is designed to help our merchants grow and to provide more advanced features and support as their business needs evolve. Our Starter Plan allows merchants to sell up to 25 products with 1GB of file storage (along with unlimited bandwidth and chat and email support). Our Professional Plan provides additional features including gift cards, professional reports and abandoned cart recovery. For larger, higher volume businesses, we offer premium features and dedicated support to allow merchants to easily manage millions of orders. Revenue from subscription solutions is generated through the sale of subscriptions to our platform as well as from the sale of themes and apps and registration of domain names. Our merchants typically enter into monthly subscription plans so we do not believe deferred revenue is an accurate indicator of future revenue. Instead, we believe Monthly Recurring Revenue, or MRR, is most closely correlated with the long-term value of our merchant relationships. Subscription solutions revenues increased from $19.2 million in 2012, to $38.3 million in 2013 and to $66.7 million in 2014, representing year-over-year increases of 99.7% in 2013 and 73.9% in 2014. Subscription solutions revenues increased from $13.1 million in the

 

53

---

Table of Contents

three months ended March 31, 2014 to $22.4 million in the three months ended March 31, 2015, representing an increase of 71.0%.

We also offer a variety of merchant solutions that are intended to add value to our merchants and supplement our subscription solutions. We principally generate merchant solutions revenues from payment processing fees from Shopify Payments. In 2014, merchant solutions revenues accounted for 36.5% of total revenues ($40.2% in the three months ended March 31, 2015). In August 2013, we launched Shopify Payments in the United States and have since released Shopify Payments in other jurisdictions. Shopify Payments is a fully integrated payment processing service that allows our merchants to accept and process payment cards online and offline. As a result of the launch of Shopify Payments, we have seen significant growth in the revenues generated from our merchant solutions. In addition to payment processing fees from Shopify Payments, we also generate revenue from transaction fees and referral fees from partners. Our merchant solutions revenues are directionally correlated with the level of Gross Merchandise Volume, or GMV, that our merchants process through our platform. Merchant solutions revenue increased from $4.5 million in 2012, to $11.9 million in 2013 and to $38.4 million in 2014, representing year-over-year increases of 164.0% in 2013 and 221.9% in 2014. Merchant solutions revenues increased from $5.8 million in the three months ended March 31, 2014 to $15.0 million in the three months ended March 31, 2015, representing an increase of 158.6%.

Our business model is driven by our ability to attract new merchants, retain existing merchants and increase sales to both new and existing merchants. The total number of merchants using our platform grew from 41,295 as of December 31, 2012 to 162,261 as of March 31, 2015. Our merchants represent a wide array of retail verticals and business sizes and no single merchant represented more than one percent of our total revenues in 2012, 2013, 2014 or the three months ended March 31, 2014 or 2015.

We generate the majority of our revenues from merchants located in the United States. As of March 31, 2015, approximately 60% of our merchants were located in the United States. Although most of our merchants are in the United States, we currently have merchants from approximately 150 countries using our platform. In 2014, we generated 68.7% of our total revenues from merchants located in the United States, up from 63.2% in 2013. The growth in the percentage of revenue from merchants located in the United States was primarily a result of Shopify Payments being launched in the United States in August 2013, while only being released in Canada in September 2013 and in the United Kingdom in November 2014. We plan to continue to roll out merchant solutions, such as Shopify Payments, in additional jurisdictions.

We have focused on rapidly growing our business and plan to continue making investments to drive future growth. We believe that our future success is dependent on many factors, including our ability to expand our merchant base, grow our merchants’ revenue on our platform, develop new solutions to extend the functionality of our platform, enhance our ecosystem and partner programs and provide a high level of merchant service and support. We expect to use the proceeds from this offering to fund these and other growth strategies.

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. We further believe this will result in revenue increasing faster than the increase in sales and marketing, research and development and general and administrative expenses as we reach economies of scale. However, we expect to continue to incur losses in the near term. If we are unable to achieve our revenue growth objectives, we may not be able to achieve profitability.

Key Performance Indicators

Key performance indicators that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions include Monthly

 

54

---

Table of Contents

Recurring Revenue and Gross Merchandise Volume. Our key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies.

The following table sets forth the key performance indicators that we use to evaluate our business for the years ended December 31, 2012, 2013 and 2014 and the three months ended March 31, 2014 and 2015.

 

		Year Ended December 31,												Three Months Ended March 31,
		2012				2013				2014				2014				2015
		(in thousands, except percentages)
Monthly Recurring Revenue (at period end)		$	2,024			$	3,819			$	6,573			$	4,294			$	7,400
Gross Merchandise Volume			707,402				1,616,301				3,763,838				637,282				1,324,082
Monthly Billing Retention Rate			99	%			101	%			101	%			101	%			101	%

Monthly Recurring Revenue

We calculate Monthly Recurring Revenue, or 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 revenue in effect on the last day of that period, assuming they maintain their subscription plans the following month. MRR allows us to average our various pricing plans and billing periods into a single, consistent number that we can track over time. We also analyze the factors that make up MRR, specifically the number of paying merchants using our platform and changes in our average revenue earned from subscription plan fees per paying merchant. In addition, we use MRR to forecast and predict monthly, quarterly and annual subscription solutions revenue.

Gross Merchandise Volume

Gross Merchandise Volume, or GMV, is the total dollar value of orders processed through our platform in the period, net of refunds, inclusive of shipping and handling, duty and value-added taxes. GMV does not represent revenue earned by us. However, the volume of GMV processed through our platform is an indicator of the success of our merchants and the strength of our platform.

Monthly Billings Retention Rate

Monthly Billings Retention Rate, or MBRR, is calculated as of the end of each month by considering the cohort of merchants on the Shopify platform as of the beginning of the month and dividing total billings attributable to this cohort in the then-current month by total billings attributable to this cohort in the immediately preceding month. Billings includes billings from subscriptions, apps (net of referral fees), transaction fees and fees for Shopify Payments. For annual and quarterly fiscal periods, we report the average MBRR over the preceding 12 months. We use MBRR to evaluate our ability to maintain and expand our relationships with merchants.

To provide a deeper understanding of our merchant economics, the chart below displays the annual billings for merchant cohorts that joined the Shopify platform at different times in our history: from 2007 to 2011 (or the Pre-2012 cohort), as well as in 2012, 2013 and 2014. Although our focus on SMBs results in merchant retention rates that we believe are consistent with what we would associate with early stage businesses, the chart below demonstrates that any merchant decline within a cohort has been largely offset by increased billings from remaining merchants within that cohort. This shows the real strength of our monetization strategy: As our merchants have grown their businesses and become more successful, they have gradually moved to higher plans and consume more of our merchant solutions.

 

55

---

Table of Contents

Factors Affecting the Comparability of our Results

Change in Revenue Mix

We introduced Shopify Payments in the United States in August 2013, in Canada in September 2013 and in the United Kingdom in November 2014. Principally as a result of introducing Shopify Payments, our revenues from merchant solutions and associated costs have increased significantly. Merchant solutions are intended to supplement subscription solutions by providing additional value to our merchants and increasing their use of our platform. Gross profit margins on merchant solutions are typically lower due to the associated third-party costs of providing these solutions. As a result, the introduction of Shopify Payments and the resultant shift in the mix of revenue sources has affected our overall gross margin. More specifically, while our total revenues have increased in recent periods as a result of offering Shopify Payments, our overall gross margin percentage has decreased in these periods. Although we intend to continue to increase the number of jurisdictions where we offer Shopify Payments, our gross margin percentage from merchant solutions has begun to stabilize.

Seasonality

Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform. Our merchants typically process additional GMV during the holiday season. As a result, we have historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date. As a result of the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future and that historical patterns in our business may not be a reliable indicator of our future performance.

Foreign Currency Fluctuations

While most of our revenues are denominated in U.S. dollars, the majority of our operating expenses are incurred in Canadian dollars. As a result, our results of operations will be adversely impacted by an increase in the value of the Canadian dollar relative to the U.S. dollar. In addition, a portion of Shopify Payments revenue is based on the local currency of the country in which the applicable merchant is located. As a result, we will be further exposed to currency fluctuations to the extent non-U.S. dollar based payment processing revenues increase.

 

56

---

Table of Contents

Key Components of Results of Operations

Revenues

We derive revenues from subscription solutions and merchant solutions.

Subscription Solutions

We principally generate subscription solutions revenues through the sale of subscriptions to our platform. We also generate associated subscription solutions revenues from the sale of themes and apps and registration of domain names.

We offer subscription plans with various price points, from starter plans to Shopify Plus, a plan for merchants with higher volume sales and additional functionality requirements. Our subscription plans typically have a one-month term, although a small number of our merchants have annual or multi-year subscription terms that allow them to realize a small discount relative to our monthly subscription terms. Subscription terms automatically renew unless notice of cancellation is provided in advance. Most merchants purchase subscription plans directly from us, although a small number of subscription plans are purchased through third-parties with whom we have reseller agreements in place. Where we contract directly with the merchant, subscription fees are paid to us at the start of the applicable subscription period, regardless of the length of the subscription period. As subscription fees are received in advance of providing the related services, we record deferred revenue on our consolidated balance sheet for the unearned revenue and recognize revenue ratably over the related subscription period. These subscription fees are non-refundable. Where we have reseller agreements in place, we bill the reseller for eligible merchants on a monthly basis and do not record deferred revenues on our consolidated balance sheet in connection with these subscriptions.

We also generate additional subscription solutions revenues from merchants that have subscription plans with us through the sale of themes and 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 rateable basis over the contractual term, which is generally 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 are recognized on a gross basis. Revenues from the sale of themes and 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 subscriptions arrangement or because they are charged on a recurring basis.

Merchant Solutions

We generate merchant solutions revenues from payment processing fees from Shopify Payments, transaction fees, referral fees from partners and sales of POS hardware.

The 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 on a percentage of the dollar amount processed. Card-not-present transactions also include an additional per transaction fee.

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 processed. We bill our merchants for transaction fees at the end of a 30-day billing cycle and any fees that have not been billed are accrued as an unbilled receivable at the end of the reporting period.

We also generate revenues in the form of referral fees from partners to whom we direct business. Pursuant to terms of the agreements with our partners, these revenues can be recurring or non-recurring.

 

57

---

Table of Contents

Where the agreement provides for recurring payments to us, we continue to earn revenues so long as the merchant that we have referred to the partner continues to use the services of the partner. Non-recurring revenues generally take the form of one-time payments that we receive when we initially refer the merchant to the partner. In either case, we recognize referral revenues when we are entitled to receive payment from the partner pursuant to the terms of the underlying agreement.

In connection with Shopify POS, a mobile application that lets merchants sell their products in a physical or retail setting, we sell compatible hardware products, which are sourced from third-party vendors. We recognize revenues from the sale of POS hardware when title passes to the merchant, in accordance with the shipping terms of the sale.

For a discussion of how we expect seasonal factors to affect our merchant solutions revenue, see “—Factors Affecting the Comparability of our Results—Seasonality.”

Cost of Revenues

Cost of Subscription Solutions

Cost of subscription solutions consists primarily of costs associated with hosting infrastructure, billing processing fees and operations and merchant support expenses. Operations and merchant support expenses include costs associated with our data and network infrastructure and personnel-related costs directly associated with operations and merchant support, including salaries, benefits and stock-based compensation, as well as allocated overhead. Overhead associated with facilities, information technology and depreciation is allocated to our cost of revenues and operating expenses based on headcount. We expect that cost of subscription solutions will increase in absolute dollars as we continue to invest in growing our business and 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.

Additionally, cost of subscription solutions includes costs we are required to pay to third-party developers in connection with sales of themes. Our paid themes are primarily designed by third-party developers who earn fees for each theme sold by us. The amount paid to the third-party developer varies depending on whether the developer has agreed to provide ongoing support to the merchant in connection with the merchant’s use of the theme.

Also included as cost of subscription solutions are domain registration fees and amortization of internal use software relating to the capitalized costs associated with the development of Shopify POS software and data infrastructure.

While gross margin percentage on subscription solutions decreased slightly in 2014 relative to the prior year, this decrease was principally a result of one-time costs associated with building out the Company’s second data center for geographical redundancy. Building out the second data center is expected to result in operational efficiencies going forward.

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. We introduced Shopify Payments in the United States in August 2013, in Canada in September 2013 and in the United Kingdom in November 2014. Principally as a result of introducing Shopify Payments, our cost of merchant solutions has increased significantly. Cost of merchant solutions also consists of costs associated with hosting infrastructure and operations and merchant support expenses, including personnel-related costs directly associated with merchant solutions such as salaries, benefits and stock-based compensation, as well as allocated overhead.

 

58

---

Table of Contents

Overhead associated with facilities, information technology and depreciation is allocated to our cost of revenues and operating expenses based on headcount. Cost of merchant solutions also includes costs associated with POS hardware, such as the cost of acquiring the hardware inventory, including hardware purchase price, expenses associated with a third-party fulfillment company, shipping and handling and inventory adjustments. Also included within cost of merchant solutions is amortization of internal use software relating to capitalized costs associated with the development of the Shopify Payments processing platform.

We expect that the cost of merchant solutions will increase in absolute dollars in future periods as the number of merchants utilizing these solutions increases and the volume processed also grows. The gross margin percentage on merchant solutions is expected to decline as we launch Shopify Payments in new regions.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of marketing programs, partner referral payments, 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 commissions, travel-related expenses and corporate overhead allocations. Costs to acquire merchants are expensed as incurred. We plan to continue to expand sales and marketing efforts to attract new merchants, retain existing merchants and increase revenues from both new and existing merchants. This growth will include adding outbound sales personnel and expanding our marketing activities to continue to generate additional leads and build brand awareness. Over time, we expect sales and marketing expenses will 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 and product design, contractor and consultant fees and corporate overhead allocations. We continue to focus our research and development efforts on adding new features and solutions, and increasing the functionality and enhancing the ease of use of our platform. In the past, these expenses have been reduced by Canadian federal Scientific Research and Experimental Development Program, or SR&ED, tax credits. Once we are a public company, we will no longer be able to reduce our research and development expenses through refundable SR&ED credits, which will cause our research and development expenses to increase. While we expect research and development expenses to increase in absolute dollars as we continue to increase the functionality of our platform, we expect our research and development expenses to decline as a percentage of total revenues.

General and Administrative

General and administrative expenses consist of employee-related expenses for finance and accounting, legal, data analytics, administrative, human resources and IT personnel, legal costs, professional fees, other corporate expenses and corporate overhead allocations. We expect that general and administrative expenses will increase on an absolute dollar basis but decrease as a percentage of total revenues as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business. We also anticipate increases to general and administrative expenses as we incur the costs of compliance associated with being a public company, including increased accounting and legal expenses.

Other Income (Expense)

Other income (expense) consists primarily of transaction gains or losses on foreign currency, interest income net of interest expense and loss on asset disposals.

 

59

---

Table of Contents

Results of Operations

The following table sets forth our consolidated statement of operations data for the years ended December 31, 2012, 2013 and 2014 and the three months ended March 31, 2014 and 2015:

 

		Year Ended December 31,												Three Months Ended March 31,
		2012				2013				2014				2014				2015
		(in thousands)
Revenues:
Subscription solutions		$	19,200			$	38,339			$	66,668			$	13,053			$	22,352
Merchant solutions			4,513				11,913				38,350				5,757				14,996
			23,713				50,252				105,018				18,810				37,348
Cost of revenues(1):
Subscription solutions			4,291				8,504				16,790				3,284				5,033
Merchant solutions			485				5,009				26,433				3,898				10,749
			4,776				13,513				43,223				7,182				15,782
Gross profit			18,937				36,739				61,795				11,628				21,566
Operating expenses:
Sales and marketing(1)			12,262				23,351				45,929				9,718				13,540
Research and development(1)(2)			6,452				13,682				25,915				6,086				7,313
General and administrative(1)			1,737				3,975				11,566				1,796				4,189
			20,451				41,008				83,410				17,600				25,042
Loss from operations			(1,514	)			(4,269	)			(21,615	)			(5,972	)			(3,476	)
Other income (expense):
Interest income, net			50				42				57				10				11
Loss on asset disposal			—				(73	)			(100	)			—				—
Foreign exchange gain (loss)			232				(537	)			(653	)			(403	)			(1,065	)
			282				(568	)			(696	)			(393	)			(1,054	)
Net loss and comprehensive loss		$	(1,232	)		$	(4,837	)		$	(22,311	)		$	(6,365	)		$	(4,530	)

 

(1)	Includes stock-based compensation expense as follows:

 

 

(2)	Net of refundable tax credits ($902, $891 and $1,295 for the years ended December 31, 2012, 2013 and 2014, respectively, and $240 and $300 for the three months ended March 31, 2014 and 2015, respectively).

 

60

---

Table of Contents

The following table sets forth our consolidated statement of operations data as a percentage of total revenues for the years ended December 31, 2012, 2013 and 2014 and the three months ended March 31, 2014 and 2015:

 

		Year Ended December 31,												Three Months Ended March 31,
		2012				2013				2014				2014				2015
Revenues:
Subscription solutions			81.0	%			76.3	%			63.5	%			69.4	%			59.8	%
Merchant solutions			19.0	%			23.7	%			36.5	%			30.6	%			40.2	%
			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues:
Subscription solutions			18.1	%			16.9	%			16.0	%			17.5	%			13.5	%
Merchant solutions			2.0	%			10.0	%			25.2	%			20.7	%			28.8	%
			20.1	%			26.9	%			41.2	%			38.2	%			42.3	%
Gross profit			79.9	%			73.1	%			58.8	%			61.8	%			57.7	%
Operating expenses:
Sales and marketing			51.7	%			46.5	%			43.7	%			51.7	%			36.3	%
Research and development			27.2	%			27.2	%			24.7	%			32.4	%			19.6	%
General and administrative			7.3	%			7.9	%			11.0	%			9.5	%			11.2	%
			86.2	%			81.6	%			79.4	%			93.6	%			67.1	%
Loss from operations			(6.4	)%			(8.5	)%			(20.6	)%			(31.8	)%			(9.4	)%
Other income (expense)			1.2	%			(1.1	)%			(0.7	)%			(2.1	)%			(2.8	)%
Net loss and comprehensive loss			(5.2	)%			(9.6	)%			(21.2	)%			(33.7	)%			(12.2	)%

The following table sets forth our consolidated revenues by geographic location for the years ended December 31, 2012, 2013 and 2014:

 

		Year Ended December 31,
		2012				2013				2014
		(in thousands)
Revenues:
Canada		$	1,853			$	4,101			$	7,729
United States			15,113				31,743				72,149
United Kingdom			2,154				4,517				7,912
Australia			1,810				3,807				6,420
Rest-of-world			2,783				6,084				10,808
Total revenues		$	23,713			$	50,252			$	105,018

The following table sets forth our consolidated revenues by geographic location as a percentage of total revenues for the years ended December 31, 2012, 2013 and 2014:

 

		Year Ended December 31,
		2012				2013				2014
Revenues:
Canada			7.8	%			8.2	%			7.4	%
United States			63.7	%			63.2	%			68.7	%
United Kingdom			9.1	%			9.0	%			7.5	%
Australia			7.6	%			7.6	%			6.1	%
Rest-of-world			11.8	%			12.0	%			10.3	%
Total revenues			100.0	%			100.0	%			100.0	%

 

61

---

Table of Contents

Results of Operations for the Three Months Ended March 31, 2014 and 2015

Revenues

 

		Three Months Ended March 31,								Change
		2014				2015				Amount				%
		(in thousands, except percentages)
Revenues:
Subscription solutions		$	13,053			$	22,352			$	9,299				71.2	%
Merchant solutions			5,757				14,996				9,239				160.5	%
Total revenues		$	18,810			$	37,348			$	18,538				98.6	%
Percentage of total revenues:
Subscription solutions			69.4	%			59.8	%
Merchant solutions			30.6	%			40.2	%
Total revenues			100.0	%			100.0	%

Subscription Solutions

Subscription solutions revenues increased $9.3 million, or 71.2%, for the three months ended March 31, 2015 compared to the same period in 2014. The increase was primarily a result of growth in the number of merchants using our platform.

Merchant Solutions

Merchant solutions revenues increased $9.2 million, or 160.5%, for the three months ended March 31, 2015 compared to the same period in 2014. The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue growing by $7.7 million, or 212.0%, compared to the same period in 2014. Additionally, revenue from transaction fees and referral fees from partners increased by $0.8 million and $0.4 million, respectively, during the three months ended March 31, 2015 as a result of the increase in GMV processed through our platform compared to the same period in 2014. Merchant solutions also includes the sale of POS hardware, which increased by $0.2 million in the three months ended March 31, 2015 as a result of growing our POS subscription base compared to the same period in 2014.

Cost of Revenues

 

		Three Months Ended March 31,								Change
		2014				2015				Amount				%
		(in thousands, except percentages)
Cost of Revenues:
Subscription solutions		$	3,284			$	5,033			$	1,749				53.3	%
Merchant solutions			3,898				10,749				6,851				175.8	%
Cost of revenues		$	7,182			$	15,782			$	8,600				119.7	%
Percentage of total revenues:
Cost of Subscription solutions			17.5	%			13.5	%
Cost of Merchant solutions			20.7	%			28.8	%
Cost of revenues			38.2	%			42.3	%

 

62

---

Table of Contents

Cost of Subscription Solutions

Cost of subscription solutions increased $1.7 million, or 53.3%, for the three months ended March 31, 2015 compared to the same period in 2014. The increase was primarily due to an increase in the costs necessary to support a greater number of merchants using our platform, resulting in a $0.3 million increase in employee-related costs, a $0.5 million increase in payments to third-party theme developers and domain registration providers, a $0.4 million increase in amortization from our investment in software and hardware relating to our data centers, a $0.2 million increase in credit card fees for processing merchant billings and a $0.3 million increase in third-party server costs.

Cost of Merchant Solutions

Cost of merchant solutions increased $6.9 million, or 175.8%, for the three months ended March 31, 2015 compared to the same period in 2014. The increase was primarily due to the increase in GMV processed through Shopify Payments as well as the sale of POS hardware, which resulted in payment processing fees and hardware cost of revenues increasing by $6.5 million and $0.3 million, respectively, for the three months ended March 31, 2015 as compared to the same period in 2014.

Gross Profit

 

		Three Months Ended March 31,								Change
		2014				2015				Amount				%
		(in thousands, except percentages)
Gross profit		$	11,628			$	21,566			$	9,938				85.5	%
Percentage of total revenues			61.8	%			57.7	%

Gross profit increased $9.9 million, or 85.5%, for the three months ended March 31, 2015 compared to the same period in 2014. As a percentage of total revenues, gross profit decreased from 61.8% in the three months ended March 31, 2014 to 57.7% in the three months ended March 31, 2015, principally due to the faster growth of merchant solutions revenue compared to subscription solutions revenue during the three months ended March 31, 2015. The faster growth of merchant solutions revenue created a change in the revenue mix. Merchant solutions are intended to supplement subscription solutions by providing additional value to our merchants and increasing their use of our platform. The lower gross margin percentage on merchant solutions is due to third-party costs associated with providing these solutions.

Operating Expenses

Sales and Marketing

 

		Three Months Ended March 31,								Change
		2014				2015				Amount				%
		(in thousands, except percentages)
Sales and marketing		$	9,718			$	13,540			$	3,822				39.3	%
Percentage of total revenues			51.7	%			36.3	%

Sales and marketing expenses increased $3.8 million, or 39.3%, for the three months ended March 31, 2015 compared to the same period in 2014, primarily due to an increase of $2.5 million in marketing programs, such as Google AdWords and advertisements on social media, to support the growth of our business. In addition, employee-related costs increased by $1.0 million in the three months ended March 31, 2015 resulting from a 85.8% increase in sales and marketing headcount, which increased from 155 employees at March 31, 2014 to 288 employees at March 31, 2015. Facilities expenses increased $0.1 million in the three months ended March 31, 2015 relative to the three months ended March 31, 2014 as a result of the facilities expansion required to support the growth in our employee base.

 

63

---

Table of Contents

Research and Development

 

		Three Months Ended March 31,								Change
		2014				2015				Amount				%
		(in thousands, except percentages)
Research and Development		$	6,086			$	7,313			$	1,227				20.2	%
Percentage of total revenues			32.4	%			19.6	%

Research and development expenses increased $1.2 million, or 20.2%, for the three months ended March 31, 2015 compared to the same period in 2014, primarily due to an increase of $0.9 million in employee-related costs resulting from a 42.7% increase in research and development headcount, which increased from 171 employees at March 31, 2014 to 244 employees at March 31, 2015. Facilities expenses increased $0.3 million in the three months ended March 31, 2015 relative to the three months ended March 31, 2014 as a result of the facilities expansion required to support the growth in our employee base.

General and Administrative

 

		Three Months Ended March 31,								Change
		2014				2015				Amount				%
		(in thousands, except percentages)
General and administrative		$	1,796			$	4,189			$	2,393				133.2	%
Percentage of total revenues			9.5	%			11.2	%

General and administrative expenses increased $2.4 million, or 133.2%, for the three months ended March 31, 2015 compared to the same period in 2014, primarily due to an increase of $0.9 million in employee-related costs resulting from a 76.6% increase in headcount, which increased from 47 employees at March 31, 2014 to 83 employees at March 31, 2015. Also contributing to the increase in general and administrative expenses was a $0.2 million increase in facilities expense, a $0.5 million increase in professional service fees and a $0.1 million increase in software license costs which all increased as a result of the growth of our business. In 2014, we determined that we owed amounts related to sales and use taxes in various U.S. states and local jurisdictions. During the three months ended March 31, 2015 we registered in applicable states, filed voluntary disclosure agreements and began charging sales taxes to our merchants. In the three months ended March 31, 2015, we recognized sales taxes of $0.6 million within general and administrative expenses, while no sales tax expense was recognized for the three months ended March 31, 2014.

Other Income (Expense)

 

		Three Months Ended March 31,								Change
		2014				2015				Amount				%
		(in thousands, except percentages)
Other expense		$	(393	)		$	(1,054	)		$	(661	)			*
Percentage of total revenues			(2.1	)%			(2.8	)%

 

*	Not a meaningful comparison

Other expense increased by $0.7 million in the three months ended March 31, 2015 compared to the same period in 2014. In the three months ended March 31, 2015, we recognized $1.1 million of foreign exchange losses due to fluctuations in foreign exchange rates, whereas in the three months ended March 31, 2014, we recognized $0.4 million of foreign exchange losses.

 

64

---

Table of Contents

Results of Operations for the Years Ended December 31, 2013 and 2014

Revenues

 

		Year Ended December 31,								Change
		2013				2014				Amount				%
		(in thousands, except percentages)
Revenues:
Subscription solutions		$	38,339			$	66,668			$	28,329				73.9	%
Merchant solutions			11,913				38,350				26,437				221.9	%
Total revenues		$	50,252			$	105,018			$	54,766				109.0	%
Percentage of total revenues:
Subscription solutions			76.3	%			63.5	%
Merchant solutions			23.7	%			36.5	%
Total revenues			100.0	%			100.0	%

Subscription Solutions

Subscription solutions revenues increased $28.3 million, or 73.9%, from 2013 to 2014. The increase was primarily a result of growth in the number of new merchants using our platform in 2014. As at December 31, 2014, we had 144,670 merchants using our platform, an increase from 84,073 merchants using our platform as at December 31, 2013.

Merchant Solutions

Merchant solutions revenues increased $26.4 million, or 221.9%, from 2013 to 2014. During 2014, Shopify Payments processed approximately $983 million of credit card payments, generating $27.1 million of revenue, compared with approximately $126 million of credit card payments processed in 2013, generating $3.6 million of revenue. Shopify Payments was released in the third quarter of 2013. Additionally, transaction fees of $7.4 million were recognized in 2014, up from $5.5 million in 2013, which is attributable to the increase in GMV processed through our platform during the year. Merchant solutions also includes the sale of POS hardware, which increased by $1.1 million in 2014 compared to 2013, as a result of growing our POS customer base and from having a full year of POS hardware sales in 2014 versus five months in 2013.

Cost of Revenues

 

		Year Ended December 31,								Change
		2013				2014				Amount				%
		(in thousands, except percentages)
Cost of revenues:
Subscription solutions		$	8,504			$	16,790			$	8,286				97.4	%
Merchant solutions			5,009				26,433				21,424				427.7	%
Cost of revenues		$	13,513			$	43,223			$	29,710				219.9	%
Percentage of total revenues:
Cost of subscription solutions			16.9	%			16.0	%
Cost of merchant solutions			10.0	%			25.2	%
Cost of revenues			26.9	%			41.2	%

 

65

---

Table of Contents

Cost of Subscription Solutions

Cost of subscription solutions increased $8.3 million, or 97.4%, from 2013 to 2014. The increase was primarily due to an increase in the costs necessary to support a greater number of merchants using our platform, resulting in a $3.8 million increase in employee-related costs, a $1.5 million increase in payments to third-party theme developers and domain registration providers, a $1.2 million increase in amortization from our investment in software and hardware relating to our data centers, a $0.9 million increase in credit card fees for processing merchant billings and a $0.7 million increase in third-party server costs.

Cost of Merchant Solutions

Cost of merchant solutions increased $21.4 million, or 427.7%, from 2013 to 2014. The increase was primarily due to the increase in GMV processed through Shopify Payments as well as the sale of POS hardware, which resulted in payment processing fees and hardware cost of revenues increasing by $20.9 million and $1.0 million, respectively, from 2013 to 2014. These increased costs of revenues were partially offset by a $0.4 million reduction in employee-related costs between 2013 and 2014 as a result of completing development work in 2013 that was not recurring in 2014.

Gross Profit

 

		Year Ended December 31,								Change
		2013				2014				Amount				%
		(in thousands, except percentages)
Gross profit		$	36,739			$	61,795			$	25,056				68.2	%
Percentage of total revenues			73.1	%			58.8	%

Gross profit increased $25.1 million, or 68.2%, from 2013 to 2014. As a percentage of total revenues, gross profit decreased from 73.1% in 2013 to 58.8% in 2014, principally due to the introduction of additional merchant solutions at the end of 2013, which accelerated in 2014. The additional merchant solutions created a change in the revenue mix. Merchant solutions are intended to supplement subscription solutions by providing additional value to our merchants and increasing their use of our platform. The lower gross margin percentage on merchant solutions is due to the third-party costs associated with providing these solutions.

Operating Expenses

Sales and Marketing

 

		Year Ended December 31,								Change
		2013				2014				Amount				%
		(in thousands, except percentages)
Sales and marketing		$	23,351			$	45,929			$	22,578				96.7	%
Percentage of total revenues			46.5	%			43.7	%

Sales and marketing expenses increased $22.6 million, or 96.7%, from 2013 to 2014, primarily due to an increase of $18.0 million in marketing programs, such as Google AdWords and advertisements on social media, to support the growth of our business. In addition, employee-related costs increased $2.8 million in 2014 resulting from a 86.5% increase in sales and marketing headcount, which increased from 126 employees in 2013 to 235 employees in 2014. Facilities expenses increased $1.5 million in 2014 relative to 2013 as a result of the facilities expansion required to support the growth in our employee base.

 

66

---

Table of Contents

Research and Development

 

		Year Ended December 31,								Change
		2013				2014				Amount				%
		(in thousands, except percentages)
Research and development		$	13,682			$	25,915			$	12,233				89.4	%
Percentage of total revenues			27.2	%			24.7	%

Research and development expenses increased $12.2 million, or 89.4%, from 2013 to 2014, primarily due to an increase of $9.3 million in employee-related costs resulting from a 42.5% increase in research and development headcount, which increased from 153 employees in 2013 to 218 employees in 2014. Facilities expenses increased $3.4 million in 2014 compared to 2013 as a result of the facilities expansion required to support the growth in our employee base.

General and Administrative

 

		Year Ended December 31,								Change
		2013				2014				Amount				%
		(in thousands, except percentages)
General and administrative		$	3,975			$	11,566			$	7,591				191.0	%
Percentage of total revenues			7.9	%			11.0	%

General and administrative expenses increased $7.6 million, or 191.0%, from 2013 to 2014, primarily due to an increase of $3.3 million in employee-related costs resulting from an 83.8% increase in headcount, which increased from 37 employees in 2013 to 68 employees in 2014. Also contributing to the increase in general and administrative expenses was a $0.9 million increase in facilities expense, a $0.9 million increase in professional service fees and a $0.2 million increase in amortization of software as a result of the growth of our business, including the need for additional software licenses to support our larger employee base. General and administrative expenses also increased by $2.2 million in 2014 as a result of an accrual for sales and use tax in the fourth quarter. In 2014, we determined that we owed amounts related to sales and use taxes in various U.S. states and local jurisdictions. As a result, we recorded a sales tax liability of $2.2 million, which has been included in general and administrative expenses for the year ended December 31, 2014. During the first quarter of 2015, we commenced the necessary steps to register in applicable states, file voluntary disclosure agreements and begin to charge sales taxes to our merchants.

Other Income (Expense)

 

		Year Ended December 31,								Change
		2013				2014				Amount				%
		(in thousands, except percentages)
Other expense		$	(568	)		$	(696	)		$	(128	)			22.5	%
Percentage of total revenues			(1.1	)%			(0.7	)%

Other expense increased by $0.1 million in 2014 as compared to 2013. In 2014, we recognized $0.7 million of foreign exchange losses due to fluctuations in foreign exchange rates, whereas in 2013 we recognized $0.5 million of foreign exchange losses. Interest income net of interest expense and loss on the disposal of assets were relatively flat between the two periods.

 

67

---

Table of Contents

Results of Operations for the Years Ended December 31, 2012 and 2013

Revenues

 

		Year Ended December 31,								Change
		2012				2013				Amount				%
		(in thousands, except percentages)
Revenues:
Subscription solutions		$	19,200			$	38,339			$	19,139				99.7	%
Merchant solutions			4,513				11,913				7,400				164.0	%
Total revenues		$	23,713			$	50,252			$	26,539				111.9	%
Percentage of total revenues:
Subscription solutions			81.0	%			76.3	%
Merchant solutions			19.0	%			23.7	%
Total revenues			100.0	%			100.0	%

Subscription Solutions

Subscription solutions revenues increased by $19.1 million, or 99.7%, from 2012 to 2013. The increase was primarily a result of growth in the number of new merchants using our platform in 2013. As at December 31, 2013, we had 84,073 merchants using our platform, an increase from the 41,295 merchants using our platform as at December 31, 2012.

Merchant Solutions

Merchant solutions revenues increased $7.4 million, or 164.0%, from 2012 to 2013. The launch of Shopify Payments in the third quarter of 2013 contributed to the increase. During 2013, Shopify Payments processed approximately $126 million in credit card payments, generating $3.6 million in revenue. Additionally, transaction fees of $5.5 million were recognized in 2013, up from $3.2 million in 2012. The increase in transaction fees was a result of processing $1.6 billion of GMV during 2013, up from $0.7 billion of GMV processed during 2012. Merchant solutions also includes partner referral fees, which increased to $2.3 million in 2013, from $1.1 million in 2012, due to more of our merchants using the services of partners. The launch of Shopify POS in the third quarter of 2013 also contributed $0.2 million in revenue from the sale of POS hardware.

Cost of Revenues

 

		Year Ended December 31,								Change
		2012				2013				Amount				%
		(in thousands, except percentages)
Cost of revenues:
Subscription solutions		$	4,291			$	8,504			$	4,213				98.2	%
Merchant solutions			485				5,009				4,524				932.8	%
Cost of revenues		$	4,776			$	13,513			$	8,737				182.9	%
Percentage of total revenues:
Cost of subscription solutions			18.1	%			16.9	%
Cost of merchant solutions			2.0	%			10.0	%
Cost of revenues			20.1	%			26.9	%

 

68

---

Table of Contents

Cost of Subscription Solutions

Cost of subscription solutions increased $4.2 million, or 98.2%, from 2012 to 2013. The increase was primarily due to an increase in the costs necessary to support the greater number of merchants using our platform, resulting in a $1.8 million increase in employee-related costs stemming from increased headcount, a $0.7 million increase in credit card fees for processing merchant billings, a $0.6 million increase in payments to third-party theme developers, a $0.5 million increase in third-party server costs and a $0.4 million increase in amortization from our investment in software and hardware relating to our data and network infrastructure.

Cost of Merchant Solutions

Cost of merchant solutions increased $4.5 million, or 932.8%, from 2012 to 2013. The increase was primarily due to the release of Shopify Payments and Shopify POS hardware during the year, which resulted in $3.6 million in payment interchange and processing fees and $0.2 million in hardware costs, respectively. Additionally, employee-related costs increased by $0.4 million from 2012 to 2013 due to increased headcount required to support higher transaction volumes in 2013 and the release of Shopify Payments and Shopify POS.

Gross Profit

 

		Year Ended December 31,								Change
		2012				2013				Amount				%
		(in thousands, except percentages)
Gross profit		$	18,937			$	36,739			$	17,802				94.0	%
Percentage of total revenues			79.9	%			73.1	%

Gross profit increased $17.8 million, or 94.0%, from 2012 to 2013. As a percentage of total revenues, gross profit decreased from 79.9% in 2012 to 73.1% in 2013, principally due a change in the mix of services provided on account of the introduction of additional merchant solutions, such as Shopify Payments, in 2013. Merchant solutions are intended to supplement subscription solutions by providing additional value to our merchants and increasing their use of our platform. The lower gross margin percentage on merchant solutions is due to the third-party costs associated with providing these solutions.

Operating Expenses

Sales and Marketing

 

		Year Ended December 31,								Change
		2012				2013				Amount				%
		(in thousands, except percentages)
Sales and marketing		$	12,262			$	23,351			$	11,089				90.4	%
Percentage of total revenues			51.7	%			46.5	%

Sales and marketing expenses increased $11.1 million, or 90.4%, from 2012 to 2013, primarily due to an increase of $6.9 million in marketing programs to support the growth of our business. In addition, employee-related costs increased by $3.4 million in 2013 resulting from a 157.1% increase in sales and marketing headcount, from 49 employees in 2012 to 126 employees in 2013. Facilities expenses increased $0.6 million in 2013 relative to 2012 as a result of the facilities expansion required to support the growth in our employee base.

 

69

---

Table of Contents

Research and Development

 

		Year Ended December 31,								Change
		2012				2013				Amount				%
		(in thousands, except percentages)
Research and development		$	6,452			$	13,682			$	7,230				112.1	%
Percentage of total revenues			27.2	%			27.2	%

Research and development expenses increased $7.2 million, or 112.1%, from 2012 to 2013, primarily due to an increase of $6.8 million in employee-related costs resulting from a 142.9% increase in research and development headcount, from 63 employees in 2012 to 153 employees in 2013, a $0.2 million increase in direct computer costs to support our growing workforce and a $0.7 million increase in facilities expense for additional office space.

General and Administrative

 

		Year Ended December 31,								Change
		2012				2013				Amount				%
		(in thousands, except percentages)
General and administrative		$	1,737			$	3,975			$	2,238				128.8	%
Percentage of total revenues			7.3	%			7.9	%

General and administrative expenses increased $2.2 million, or 128.8%, from 2012 to 2013, primarily due to an increase of $1.4 million in employee-related costs resulting from a 236.4% increase in headcount, from 11 employees in 2012 to 37 employees in 2013, a $0.4 million increase in facilities expense for additional office space and $0.2 million in retention bonuses paid to personnel acquired as part of an acquisition in 2013.

Other Income (Expense)

 

		Year Ended December 31,								Change
		2012				2013				Amount				%
		(in thousands except percentages)
Other income (expense)		$	282			$	(568	)		$	(850	)			*
Percentage of total revenues			1.2	%			(1.1	)%

 

*	Not a meaningful comparison.

Other income (expense) decreased by $0.9 million in 2013 as compared to 2012, from income of $0.3 million in 2012 to an expense of $0.6 million in 2013. The decrease was primarily due to fluctuations in foreign exchange rates. In 2012, we realized $0.2 million of foreign exchange gains whereas in 2013 we realized $0.5 million of foreign exchange losses.

 

70

---

Table of Contents

Quarterly Results of Operations

The following table sets forth selected unaudited quarterly statements of operations data for each of the nine quarters ended March 31, 2015. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this prospectus and, in the opinion of management, reflects all adjustments, which includes only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with U.S. GAAP. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.

 

		Three Months Ended,
		Mar 31, 2013				Jun 30, 2013				Sep 30, 2013				Dec 31, 2013				Mar 31, 2014				Jun 30, 2014				Sep 30, 2014				Dec 31, 2014				Mar 31, 2015
		(in thousands, except per share data)
Revenues
Subscription solutions		$	7,523			$	8,666			$	10,082			$	12,068			$	13,053			$	15,567			$	17,690			$	20,358			$	22,352
Merchant solutions			1,630				1,963				2,653				5,667				5,757				8,113				9,656				14,824				14,996
			9,153				10,629				12,735				17,735				18,810				23,680				27,346				35,182				37,348
Cost of revenues(1)
Subscription solutions			1,611				1,819				2,344				2,730				3,284				3,842				4,615				5,049				5,033
Merchant solutions			180				204				869				3,756				3,898				5,523				6,492				10,520				10,749
			1,791				2,023				3,213				6,486				7,182				9,365				11,107				15,569				15,782
Gross profit			7,362				8,606				9,522				11,249				11,628				14,315				16,239				19,613				21,566
Operating expenses:
Sales and marketing(1)			4,233				5,132				6,158				7,828				9,718				12,569				11,433				12,209				13,540
Research and development(1)(2)			1,992				2,366				4,106				5,218				6,086				6,647				6,563				6,619				7,313
General and administrative(1)			620				871				1,052				1,432				1,796				2,138				2,352				5,280				4,189
			6,845				8,369				11,316				14,478				17,600				21,354				20,348				24,108				25,042
Income (loss) from operations			517				237				(1,794	)			(3,229	)			(5,972	)			(7,039	)			(4,109	)			(4,495	)			(3,476	)
Other income (expense):
Interest income, net			6				13				6				17				10				12				15				20				11
Loss on asset disposal			—				—				—				(73	)			—				1				—				(101	)			—
Foreign exchange gain (loss)			(274	)			(418	)			252				(97	)			(403	)			146				(174	)			(222	)			(1,065	)
			(268	)			(405	)			258				(153	)			(393	)			159				(159	)			(303	)			(1,054	)
Net income (loss) and comprehensive income (loss)		$	249			$	(168	)		$	(1,536	)		$	(3,382	)		$	(6,365	)		$	(6,880	)		$	(4,268	)		$	(4,798	)		$	(4,530	)
Net income (loss) per common share—basic(3)		$	0.01			$	0.00			$	(0.04	)		$	(0.09	)		$	(0.16	)		$	(0.18	)		$	(0.11	)		$	(0.12	)		$	(0.12	)
Net income (loss) per common share—diluted(3)		$	0.00			$	0.00			$	(0.04	)		$	(0.09	)		$	(0.16	)		$	(0.18	)		$	(0.11	)		$	(0.12	)		$	(0.12	)

 

(1)	Includes stock-based compensation expense as follows:

 

		Three Months Ended,
		Mar 31, 2013				Jun 30, 2013				Sep 30, 2013				Dec 31, 2013				Mar 31, 2014				Jun 30, 2014				Sep 30, 2014				Dec 31, 2014				Mar 31, 2015
		(in thousands)
Cost of revenues		$	9			$	9			$	35			$	60			$	40			$	65			$	54			$	100			$	59
Sales and marketing			33				33				137				151				133				157				161				245				174
Research and development			104				104				430				514				869				628				513				766				779
General and administrative			23				23				47				54				73				118				156				365				428
Total stock-based compensation expense		$	169			$	169			$	649			$	779			$	1,115			$	968			$	884			$	1,476			$	1,440

 

71

---

Table of Contents

(2)	Net of refundable tax credits as follows:

 

		Three Months Ended,
		Mar 31, 2013				Jun 30, 2013				Sep 30, 2013				Dec 31, 2013				Mar 31, 2014				Jun 30, 2014				Sep 30, 2014				Dec 31, 2014				Mar 31, 2015
		(in thousands)
Refundable tax credits		$	150			$	167			$	241			$	333			$	240			$	240			$	240			$	575			$	300

 

(3)	Does not give effect to the conversion of our Series A, Series B and Series C convertible preferred shares into common shares, which will occur upon the consummation of this offering.

The following table sets forth selected unaudited quarterly statements of operations data as a percentage of total revenues for each of the nine quarters ended March 31, 2015.

 

		Three Months Ended,
		Mar 31, 2013				Jun 30, 2013				Sep 30, 2013				Dec 31, 2013				Mar 31, 2014				Jun 30, 2014				Sep 30, 2014				Dec 31, 2014				Mar 31, 2015
Revenues
Subscription solutions			82.2	%			81.5	%			79.2	%			68.0	%			69.4	%			65.7	%			64.7	%			57.9	%			59.8	%
Merchant solutions			17.8	%			18.5	%			20.8	%			32.0	%			30.6	%			34.3	%			35.3	%			42.1	%			40.2	%
			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues
Subscription solutions			17.6	%			17.1	%			18.4	%			15.4	%			17.5	%			16.2	%			16.9	%			14.4	%			13.5	%
Merchant solutions			2.0	%			1.9	%			6.8	%			21.2	%			20.7	%			23.3	%			23.7	%			29.9	%			28.8	%
			19.6	%			19.0	%			25.2	%			36.6	%			38.2	%			39.5	%			40.6	%			44.3	%			42.3	%
Gross profit			80.4	%			81.0	%			74.8	%			63.4	%			61.8	%			60.5	%			59.4	%			55.7	%			57.7	%
Operating expenses
Sales and marketing			46.2	%			48.3	%			48.4	%			44.1	%			51.7	%			53.1	%			41.8	%			34.7	%			36.3	%
Research and development			21.8	%			22.3	%			32.2	%			29.4	%			32.4	%			28.1	%			24.0	%			18.8	%			19.6	%
General and administrative			6.8	%			8.2	%			8.3	%			8.1	%			9.5	%			9.0	%			8.6	%			15.0	%			11.2	%
			74.8	%			78.7	%			88.9	%			81.6	%			93.6	%			90.2	%			74.4	%			68.5	%			67.1	%
Income (loss) from operations			5.6	%			2.2	%			(14.1	)%			(18.2	)%			(31.7	)%			(29.7	)%			(15.0	)%			(12.8	)%			(9.4	)%
Interest income, net			0.1	%			0.1	%			0.0	%			0.1	%			0.1	%			0.1	%			0.1	%			0.1	%			0.0	%
Loss on asset disposal			—				—				—				(0.4	)%			—				—				—				(0.3	)%			—
Foreign exchange gain (loss)			(3.0	)%			(3.9	)%			2.0	%			(0.5	)%			(2.1	)%			0.6	%			(0.6	)%			(0.6	)%			(2.8	)%
			(2.9	)%			(3.8	)%			2.0	%			(0.8	)%			(2.0	)%			0.7	%			(0.5	)%			(0.8	)%			(2.8	)%
Net income (loss) and comprehensive income (loss)			2.7	%			(1.6	)%			(12.1	)%			(19.0	)%			(33.8	)%			(29.0	)%			(15.5	)%			(13.6	)%			(12.2	)%

We believe that year-over-year comparisons are more meaningful than our sequential results due to seasonality in our business. See “—Factors Affecting the Comparability of our Results—Seasonality.” While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date. As a result of the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future, and that historical patterns in our business may not be a reliable indicator of our future performance.

Quarterly Revenue and Gross Margin Trends

Our quarterly revenue increased sequentially for each period presented, primarily due to sales of new subscriptions to our platform as well as the introduction and growth of merchant solutions. We cannot assure you that this pattern of sequential growth in revenue will continue.

Our gross margin has declined over the past nine quarters primarily due to the impact of Shopify Payments. Merchant solutions are intended to supplement subscription solutions by providing additional

 

72

---

Table of Contents

value to our merchants and increasing their use of our platform. As a result, while our total revenues have increased in recent periods as a result of offering Shopify Payments, our cost of revenues has increased in these periods. Although merchant solutions generally have a lower gross margin than subscription solutions, we believe that our merchant solutions make it easier for our merchants to start a business and grow on our platform. See “—Factors Affecting the Comparability of our Results—Change in Revenue Mix.”

Quarterly Operating Expenses Trends

Total operating expenses generally increased sequentially for each period presented primarily due to the addition of personnel in connection with the expansion of our business as well as additional marketing initiatives to attract potential merchants.

Liquidity and Capital Resources

The following table summarizes our total cash, cash equivalents and short-term investments as at December 31, 2012, 2013 and 2014 and as at March 31, 2014 and 2015 as well as our operating, investing and financing activities for the years ended December 31, 2012, 2013 and 2014 and the three months ended March 31, 2014 and 2015.

 

		Year Ended December 31,												Three Months Ended March 31,
		2012				2013				2014				2014				2015
		(in thousands)
Cash, cash equivalents and short-term investments (end of period)		$	17,655			$	83,529			$	59,662			$	80,853			$	59,161
Net cash provided by (used in):
Operating activities		$	2,041			$	1,396			$	(801	)		$	(568	)		$	3,966
Investing activities			(2,795	)			(5,332	)			(40,366	)			(1,835	)			1,152
Financing activities			57				70,053				140				76				55
Effect of foreign exchange on cash and cash equivalents			36				(243	)			(549	)			(349	)			(978	)
Net increase (decrease) in cash and cash equivalents			(661	)			65,874				(41,576	)			(2,676	)			4,195
Short-term investments, as of period end			—				—				17,709				—				(4,696	)
Net increase (decrease) in cash, cash equivalents and short-term investments		$	(661	)		$	65,874			$	(23,867	)		$	(2,676	)		$	(501	)

To date, we have financed our operations primarily through private placements of convertible preferred shares and issuances of common shares, raising approximately $90.0 million from investors to date, of which we have utilized $29.8 million through March 31, 2015.

In 2011, we entered into a revolving credit facility with a Canadian chartered bank that is annually renewable. In 2013, the borrowing limit on this credit facility was increased to C$1.5 million. This credit facility is secured by cash and cash equivalents and its interest rate is tied to the Bank of Canada prime lending rate plus 0.3%. As at the date of this prospectus, no amounts were drawn on this credit facility and C$1.05 million under the facility was pledged as collateral for letters of credit.

In March 2015, we entered into a credit facility with Silicon Valley Bank, which provides for a $25.0 million revolving line of credit bearing interest at the U.S. prime rate, as established by the Wall Street Journal plus or minus 25 basis points per annum. The credit facility is collateralized by substantially all of our assets (including the stock of our subsidiaries), excluding our intellectual property which is subject to a negative pledge. As at the date of this prospectus, no amounts have been drawn under this credit facility and we are in compliance with all of the covenants contained therein.

 

73

---

Table of Contents

As at March 31, 2015, we had cash, cash equivalents and short-term investments of $59.2 million. We believe our existing cash, cash equivalents and short-term investments, together with the proceeds of this offering, will be sufficient to meet our operating working capital and capital expenditure requirements over the next 12 months. Our future financing requirements will depend on many factors including our growth rate, subscription renewal activity, the timing and extent of spending to support development of our platform and the expansion of sales and marketing activities. Although we currently are not a party to any agreement and do not have any understanding with any third-parties with respect to potential investments in, or acquisitions of, businesses or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Cash Flows Provided by Operating Activities

Our largest source of operating cash is from subscription solutions. These payments are typically paid to us at the beginning of the applicable agreement’s term. We also generate significant cash flows from our payment processing fee arrangements, which are received on a daily basis as transactions are processed. Our primary uses of cash from operating activities are for employee-related expenditures, marketing programs and leased facilities.

Net cash provided by operating activities in the three months ended March 31, 2015 was $4.0 million, reflecting a $1.1 million increase in deferred revenue resulting from growth in our subscription sales, a $1.5 million decrease in trade and other receivables attributable to the receipt of refundable tax credits during the period, a $3.2 million increase in accounts payable and accruals attributable to increased expenses associated with the growth of the business as well as a sales tax accrual and a $0.6 million increase in lease incentives relating to initial rent-free periods and leasehold incentives on our new office leasing arrangements. Cash provided by operating activities was partially offset by a $2.0 million increase in other current assets caused by timing of prepaid contract renewals and deposits on purchases along with deferred offering costs for direct incremental costs associated with the proposed offering as well as our net loss of $4.5 million less non-cash items consisting of $1.4 million in stock-based compensation, $1.5 million in amortization of property, equipment and intangible assets, and a $1.2 million unrealized foreign exchange loss.

Net cash used in operating activities in the three months ended March 31, 2014 was $0.6 million, reflecting our net loss of $6.4 million less non-cash items consisting of $1.1 million in stock-based compensation, $1.0 million in amortization of property, equipment and intangible assets, and a $0.3 million unrealized foreign exchange loss. This was offset by a $0.3 million increase in trade and other receivables attributable to the growth of our business, a $0.2 million increase in other current assets caused by timing of prepaid contract renewals and deposits on purchases, a $0.8 million increase in deferred revenue resulting from growth in our subscription sales, a $2.8 million increase in accounts payable and accruals attributable to increased expenses associated with the growth of the business and a $0.3 million increase in lease incentives relating to initial rent-free periods and leasehold incentives on our new office leasing arrangements.

Net cash provided by operating activities in 2014 reflected our net loss of $22.3 million, offset by non-cash items consisting of $4.4 million in stock-based compensation and $4.7 million in amortization of property, equipment and intangible assets. Cash provided from operating activities included a $2.8 million increase in deferred revenue resulting from growth in our subscription sales, a $6.0 million increase in accounts payable and accruals attributable to increased expenses associated with the growth of the business as well as a sales tax accrual and a $7.3 million increase in lease incentives relating to initial rent-free periods and leasehold incentives on our new office leasing arrangements. Cash provided by operating activities was partially offset by a $3.9 million increase in trade and other receivables attributable to the growth of refundable tax credits and a $0.4 million increase in other current assets caused by timing of prepaid contract renewals and deposits on purchases.

 

74

---

Table of Contents

Net cash provided by operating activities in 2013 reflected our net loss of $4.8 million, offset by non-cash items consisting of $1.8 million in stock-based compensation, $1.5 million in depreciation of property and equipment, $0.3 million in amortization of intangibles and a $0.2 million change in lease liabilities. Cash provided from operating activities in 2013 included a $1.9 million increase in deferred revenue resulting from growth in subscription sales and a $2.3 million increase in accounts payable and accruals attributable to increased expenses associated with the growth of the business along with accrued year-end employee bonuses. Cash provided by operating activities in 2013 was partially offset by a $1.2 million increase in trade and other receivables attributable to the growth the business and a $0.7 million increase in other current assets due to business activities associated with the growth of the business.

Net cash provided by operating activities in 2012 reflected our net loss of $1.2 million, offset by non-cash items consisting of $0.4 million in stock-based compensation, $0.7 million in depreciation of property and equipment and $0.1 million in amortization of intangibles. Cash provided by operating activities in 2012 included a $1.8 million increase in deferred revenue resulting from growth in subscription sales and a $1.3 million increase in accounts payable and accruals attributable to increased expenses associated with the growth of the business. Cash provided by operating activities in 2012 was partially offset by a $0.6 million increase in trade and other receivables, a $0.2 million increase in other current assets due to business activities associated with the growth of the business and an unrealized gain on foreign exchange of $0.1 million.

Cash Flows Used in Investing Activities

To date, cash flows used in investing activities have primarily related to purchases of computer and hosting equipment, leasehold improvements and furniture and fixtures to support our expanding infrastructure and workforce as well as capitalized software development costs.

Net cash provided by investing activities in the three months ended March 31, 2015 was $1.2 million, reflecting disposals of $4.7 million in short-term investments as a result of maturing investments. This was offset by $2.5 million used to purchase property and equipment, which primarily consists of expenditures on leasehold improvements, equipment used in our data centers to support our expanding merchant base and equipment to support our growing workforce. Additionally, $0.3 million was spent on capitalized software development costs associated with internal use software and software to support the growth of the business, while a further $0.7 million was used to purchase intangible assets to complement our platform.

Net cash used in investing activities in the three months ended March 31, 2014 was $1.8 million, reflecting $1.6 million used to purchase property and equipment, which primarily consists of expenditures on leasehold improvements, equipment used in our data centers to support our expanding customer base and equipment to support our growing workforce. Additionally, $0.3 million was spent on capitalized software development costs associated with internal use software and software to support the growth of the business.

In 2014, cash used in investing activities included $20.6 million used to purchase property and equipment, which primarily consists of expenditures on leasehold improvements, equipment used in our data centers to support our expanding customer base and equipment to support our growing workforce. Additionally, $1.9 million was spent on capitalized software development costs associated with internal use software and software to support the growth of the business. We also made net purchases of $17.7 million in short-term securities to earn interest on excess cash and diversify our cash holdings to mitigate credit risk. A further $0.2 million was used to purchase intangible assets to complement our platform.

In 2013, cash used in investing activities included $3.5 million for the acquisition of equipment used in our data centers, equipment to support our growing workforce and expenditures on leasehold improvements. Additionally, in 2013, $0.7 million was spent on capitalized software development costs associated with internal use software, $0.3 million was spent on software to support the growth of the business and $0.8 million was used in connection with the acquisition of Jet Cooper Ltd. and Atatomic Inc.

 

75

---

Table of Contents

In 2012, cash used in investing activities included $1.7 million for the acquisition of equipment used in our data centers, equipment to support our growing workforce and expenditures on leasehold improvements. Additionally, $0.3 million was spent on software to support the growth of our business and $0.8 million was used in connection with the acquisition of Select Start Studios Inc.

Cash Flows From Financing Activities

To date, cash flows from financing activities have related to proceeds from private placements and exercises of stock options.

Net cash provided by financing activities in the three months ended March 31, 2015 was $0.1 million, reflecting $0.1 million in proceeds from the issuance of common shares as a result of stock option exercises.

Net cash provided by financing activities in the three months ended March 31, 2014 was $0.1 million, reflecting $0.1 million in proceeds from the issuance of common shares as a result of stock option exercises.

In 2014, we received $0.1 million in proceeds from the issuance of common shares as a result of stock option exercises.

In 2013, we received $69.8 million in net proceeds from the issuance of Series C convertible preferred shares and $0.3 million in proceeds from the issuance of common shares as a result of stock option exercises.

In 2012, we received $0.1 million in proceeds from the issuance of common shares as a result of stock option exercises.

Contractual Obligations and Contingencies

Our principal commitments consist of obligations under our credit facility and operating leases for equipment and office space. The following table summarizes our contractual obligations as of March 31, 2015:

 

		Payments Due by Period
		Less Than 1 Year				1 to 3 Years				3 to 5 Years				More Than 5 Years				Total
		(in thousands)
Bank indebtedness		$	—			$	—			$	—			$	—			$	—
Operating lease obligations(1)			3,789				13,470				15,104				46,694				81,057
Total contractual obligations		$	3,789			$	13,470			$	15,104			$	46,694			$	81,057

 

(1)	Consists of payment obligations under our office leases in Ottawa, Toronto, Montreal and Kitchener-Waterloo.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Our exposure to foreign exchange risk is primarily related to fluctuations between the Canadian dollar and the United States dollar. We are exposed to foreign exchange fluctuations on the revaluation of foreign currency assets and liabilities. We use foreign exchange derivative products to facilitate the conversion of U.S. dollars into Canadian funds for operational purposes. By their nature, derivative financial instruments involve risk, including the credit risk of non-performance by counterparties.

 

76

---

Table of Contents

Interest Rate Sensitivity

We had cash, cash equivalents and short-term investments totaling $59.2 million as of March 31, 2015, of which $34.5 million was invested in money market funds and corporate bonds. The cash and cash equivalents are held for 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.

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, revenue, costs and expenses and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we re-evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss below.

Revenue Recognition

Our sources of revenue consist of subscription solutions and merchant solutions. Arrangements with merchants do not provide the merchant with the right to take possession of the software supporting our platform at any time and are therefore accounted for as service contracts. Our subscription solutions contracts do not provide for refunds or any other rights of return to merchants in the event of cancellations.

We recognize revenue when all of the following criteria are met:

 

•

there is persuasive evidence of an arrangement;

 

•

the services have been or are being provided to the customer;

 

•

the amount of fees to be paid by the customer is fixed or determinable; and

 

•

the collection is reasonably assured.

We follow the guidance provided in ASC 605-45, Principal Agent Considerations for determining whether we should recognize revenue based on the gross amount billed to a merchant or the net amount retained. This determination is a matter of judgment that depends on the facts and circumstances of each arrangement. We recognize revenue from the sales of apps on a net basis as it has been determined that we are the agent in the arrangement with merchants. All other revenue is reported on a gross basis, as we have determined we are the principal in the arrangement, in that we are the primary obligor for providing services, assume the risk of any loss or changes in costs and have pricing flexibility.

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.

We capitalize certain development costs incurred in connection with our internal use software. These capitalized costs are related to the development of our software platform that we host and which is accessed

 

77

---

Table of Contents

by our merchants on a subscription basis as well as material internal infrastructure software. Costs incurred in the preliminary stages of development are expensed as incurred. We capitalize all direct and incremental costs incurred during the application phase, until such time as the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing.

We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional features and functionality. Maintenance costs are expensed as incurred.

Internal use software is amortized on a straight-line basis over its estimated useful life of two to three years.

Refundable Tax Credits

Tax credits related to SR&ED costs are accounted for using the flow-through method. Refundable tax credits are accounted for in the period in which the related expenditures are incurred as a direct reduction of research and development or capitalized costs. Non-refundable tax credits, which may only be used to reduce future taxes otherwise payable, are recorded as an income tax recovery in the period in which their realization is considered more likely than not. As a public company, we will no longer be eligible for refundable tax credits under SR&ED.

Stock-Based Compensation

We have granted stock-based awards, including stock options and restricted shares, to our employees, certain consultants and members of our board of directors. Stock-based compensation is measured based on the fair value of the awards on the grant date and recognized in our consolidated statement of operations over the period during which the recipient is required to perform services in exchange for the award, generally the vesting period.

We estimate the fair value of stock options granted using the Black-Scholes option-pricing model, single option approach. Our option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying shares, the expected term of the awards, the expected volatility of the price of our shares, risk-free interest rates and the expected dividend yield of our shares. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

In connection with historical acquisitions, we have also issued restricted shares. The restricted shares vest evenly, on a month-by-month basis, and are contingent on future services being provided. As a result, the restricted shares are considered post business combination services and are accounted for as compensation expense and not as part of purchase accounting. The fair value of the restricted shares was derived from the fair value of our common shares, which was determined by our third-party 409A valuations at or around the same time as the related transactions and in combination with other available market data.

The following weighted-average assumptions were used to determine stock-based compensation expense in the periods presented below:

 

		Year Ended December 31,												Three Months Ended March 31,
		2012				2013				2014				2014				2015
Expected volatility			55.0	%			73.9	%			62.4	%			*				59.7	%
Risk-free rate			1.09	%			1.67	%			1.82	%			*				1.70	%
Dividend yield			Nil				Nil				Nil				*				Nil
Average expected life			6.04				6.06				5.73				*				5.67
Fair value of common shares		$	0.36			$	3.64			$	8.40				*				$10.72

 

*	No options granted in the period.

 

78

---

Table of Contents

The assumptions are based on the following for each of the periods presented:

 

•

Expected Volatility—Since we have no significant trading history by which to determine the volatility of our share price, we estimate volatility for option grants by evaluating the average historical volatility of peer group companies for the period immediately preceding the option grant.

 

•

Risk-Free Interest Rate—The risk-free interest rate was based on the United States Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

 

•

Dividend Yield—We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future and, therefore, used an expected dividend yield of zero.

 

•

Average Expected Life—We elected to use the simplified method to compute the expected term due to our limited history of exercise activity and because our stock options meet the criteria of “plain-vanilla” options as defined by the SEC. The simplified method calculates the expected term by taking the average of the vesting term and the original contractual term of the awards.

 

•

Fair Value of Common Shares—Given the absence of an active market for our shares prior to our initial public offering, we estimated the fair value of our shares as discussed in more detail below.

 

•

Forfeiture—We estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly.

If any assumptions used in the Black-Scholes model change significantly, stock option compensation expense for future awards may differ materially compared with the expense for awards granted previously.

Share Valuations

Given the absence of an active market for our shares prior to our initial public offering, the fair value of the shares underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share equal to the fair value of our shares underlying those options on the date of grant. Such estimates will not be necessary to determine the fair value of new awards once the underlying shares begin trading. Valuations of our shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountant Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we used in the valuation model were based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors in determining the fair value of our shares as of the date of each option grant, including the following factors:

 

•

contemporaneous valuations performed at periodic intervals by independent, third-party specialists;

 

•

the prices, preferences and privileges of our convertible preferred shares relative to our common shares;

 

•

current business conditions and projections;

 

•

stage of development;

 

•

likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company, given prevailing market conditions and the nature and history of our business;

 

•

market multiples of comparable companies in our industry;

 

•

industry information such as market size and growth;

 

•

secondary sales of our shares in arm’s length transactions;

 

79

---

Table of Contents

•

adjustments, if any, necessary to recognize a lack of marketability for our shares; and

 

•

macroeconomic conditions.

Prior to December 31, 2014, in connection with each business valuation, the enterprise value of our business was determined using the market-based approach. The market-based approach considers multiples of financial metrics based on a selected peer group of publicly traded technology companies. The peer group of companies was selected based on their similarity to us relative to size, business model, industry, business description and developmental stage. From time to time, we updated the set of comparable companies as new or more relevant information became available.

A revenue multiple was used to determine our enterprise value under the market-based approach. From the enterprise value we add cash and subtract debt to determine our equity value. Once the equity value is determined, value is allocated among the various classes of securities to arrive at the fair value of the common shares.

We also considered an appropriate discount adjustment to recognize the lack of marketability and liquidity due to the fact that shareholders of private companies do not have access to trading markets similar to those enjoyed by shareholders of public companies. As well, we considered additional factors when determining any changes in fair value between the most recent valuation report and the grant dates including, when available, the prices paid in any recent transactions involving our equity securities, as well as our operating and financial performance, current industry conditions and the market performance of comparable publicly traded companies.

Beginning in 2015, we applied the hybrid method, which combines the market-based approach and the probability-weighted expected return method, or PWERM, to determine the value of our common shares. We made this change as greater certainty developed regarding a possible liquidity event. Under the PWERM, the value of our common shares is estimated based on analysis of future values for the enterprise assuming various possible future events, such as an initial public offering. The future value was discounted to its present value using an appropriate risk adjusted rate based on the Company’s stage of development. Additionally, we applied a discount for lack of marketability. Under the hybrid method, the per share values calculated under the market-based approach and PWERM are probability-weighted to determine the fair value of our common shares.

In connection with the preparation of our financial statements for the years ended December 31, 2013 and 2014, we estimated the fair values of our common shares for financial reporting purposes in light of our rapidly improving financial performance and prospects, our evolving belief that an initial public offering was increasingly viable and the generally improving conditions in the capital markets. Due to these factors as well as the recent availability of more relevant comparable companies, resulting in higher revenue multiples, management re-evaluated the fair value of common shares using the market based approach. As a result, we determined that, solely for financial reporting purposes, the fair value of our common shares was higher than the fair values determined in good faith by our board of directors for each of the option grant dates in 2013 and 2014.

Information regarding stock-based awards granted to our employees since January 1, 2014 is summarized as follows:

 

Grant Date		Number of Awards				Exercise Price per Share for Options Granted				Deemed Fair Value Per Common Share
April 2, 2014			603,500			$	3.77			$	6.02
June 26, 2014			446,750			$	4.22			$	7.52
October 1, 2014			409,750			$	5.17			$	8.18
December 17, 2014			1,525,495			$	6.22			$	9.65
March 14, 2015			435,750			$	10.72			$	10.72

 

80

---

Table of Contents

Recently Issued Accounting Standards not yet Adopted

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-9 “Revenue from Contracts with Customers.” The new accounting standards update requires an entity to apply a five step model to recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, as well as a cohesive set of disclosure requirements that would result in an entity providing comprehensive information about the nature, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard becomes effective for reporting periods beginning after December 15, 2016, with no early adoption permitted. We are currently assessing the impact of this new standard.

JOBS Act

We qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified exemptions from various requirements that are otherwise applicable generally to public companies in the United States. These provisions include:

 

•

an exemption permitting us to include in an initial public offering registration statement less than five years of selected financial data; and

 

•

an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting.

The JOBS Act also permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have not elected to avail ourselves of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards. This election is irrevocable.

We will remain an emerging growth company until the earliest of:

 

•

the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion;

 

•

the last day of our fiscal year following the fifth anniversary of the completion of this offering;

 

•

the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or

 

•

the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our Class A subordinate voting shares and Class B multiple voting shares that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter.

We have availed ourselves in this prospectus of the reduced reporting requirements described above with respect to selected financial data. As a result, the information that we provide shareholders may be less comprehensive than what you might receive from other public companies that are not emerging growth companies. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

81

---

Table of Contents

LETTER FROM TOBI

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.

 

82

---

Table of Contents

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

 

83

---

Table of Contents

BUSINESS

Overview

Shopify provides a leading cloud-based commerce platform designed for small and medium-sized businesses. Merchants use our software to run their business across all of their sales channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops. While we started Shopify to help merchants design, set up and manage their online stores, we have expanded far beyond that. Whether a merchant is starting their business online or offline, we provide a platform for merchants to create an omni-channel experience that helps showcase the merchant’s brand and grow its business. 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, build customer relationships and leverage analytics and reporting. Merchants can also use Shopify Mobile, our iPhone and Android application, to manage their business on the go.

Technology and the internet are transforming commerce. Consumers now expect to be able to transact anywhere, anytime on any device and the experience needs to be simple, seamless and secure. Consumers quickly become accustomed to the standards set by the largest and most innovative merchants and expect a comparable experience with all merchants, even those that have only been in business for one day. Without the latest technology, it is difficult for merchants to meet the rising demands of consumers.

We built our platform from the ground up to address the growing challenges facing merchants with the aim of making previously complex tasks simple. The Shopify platform has been engineered to enterprise-level standards and functionality while being designed for simplicity and ease-of-use. Our platform provides merchants with an intuitive user experience that requires no up-front training to implement and use, enabling merchants to set up their shops in less than 15 minutes. We help our merchants own their brand and make the consumer experience memorable.

We believe the Shopify platform is mission critical for all of our merchants and they depend on us for the latest technology. Our platform is able to manage large spikes in traffic that accompany events such as new product releases, holiday shopping seasons and flash sales, and has been benchmarked to process at least 10,000 requests per second based on results from platform load testing. We are constantly innovating and enhancing our platform. Our continuously deployed, multi-tenant architecture ensures that all of our merchants are always using the latest technology.

A rich ecosystem of app developers, theme designers and other partners has evolved around the Shopify platform. The platform’s functionality is highly extensible and can be expanded through our application program interface, or API, and the over 900 apps available in the Shopify App Store. This ecosystem helps drive the growth of our merchant base, which in turn further accelerates growth of the ecosystem.

 

84

---

Table of Contents

Our mission is to make commerce better for everyone and we believe we can help merchants of nearly all sizes and retail verticals realize their potential. While our platform can scale to meet the needs of large merchants, we focus on selling to small and medium-sized businesses, or SMBs. As of March 31, 2015, we had 162,261 merchants from approximately 150 countries, representing growth of 68.2% in the number of merchants using our platform relative to March 31, 2014. In 2014, our platform processed Gross Merchandise Volume, or GMV, of $3.8 billion, representing an increase of 132.9% from the year ended December 31, 2013. In the three months ended March 31, 2015, our platform processed GMV of $1.3 billion, representing an increase of 107.8% from the three months ended March 31, 2014.

Our business has experienced rapid growth. Our total revenue increased from $23.7 million in 2012, to $50.3 million in 2013 and to $105.0 million in 2014, representing year-over-year increases of 111.9% and 109.0%, respectively. In addition, our total revenue for the three months ended March 31, 2015 was $37.3 million, an increase of 98.5% from the three months ended March 31, 2014 We had net losses of $1.2 million in 2012, $4.8 million in 2013, $22.3 million in 2014, $6.4 million in the three months ended March 31, 2014 and $4.5 million in the three months ended March 31, 2015.

Industry Overview and Trends

Technology and the internet are transforming commerce.

Consumers Have Changed How They Shop

How consumers discover, learn about and ultimately purchase products has transformed and continues to evolve as technology continues to advance. Consumers now dictate how, when and where to interact with merchants. A consumer may discover a product on social media, read reviews and blogs using a tablet, visit a nearby brick-and-mortar store to see the product in person, compare prices using a mobile phone, and end up purchasing the product from yet a different merchant. Forrester Research anticipated that in 2014 more than half of all U.S. retail sales would be web-impacted regardless of where the transaction ultimately took place.

Consumers have more choices than ever before with regard to what they buy and who they buy from. The internet has enabled consumers to increasingly interact with merchants around the globe to find and

 

85

---

Table of Contents

purchase products that allow them to express their own unique personalities, styles and interests. Good experiences bring consumers back for more and attract new consumers through word of mouth and online reviews. A disappointing experience may lead to the permanent loss of customers and a damage to the merchant’s reputation on social media.

Merchants Face Significant Challenges from Heightened Consumer Expectations

Consumer expectations are high for all merchants, regardless of whether the merchant has been in business for only one day or if the merchant is the largest, most established and most innovative retailer in the world. Consumers quickly become accustomed to the latest technologies and expect a high quality experience in all of their interactions with every merchant. Consumers have convenient access to more merchants than ever, which raises the stakes for merchants to meet these heightened expectations. Consumers will abandon a website that is not loaded quickly and are loathe to return to a website that has trouble with performance. The consequence of not meeting expectations can be the permanent loss of customers.

The challenges facing merchants continue to grow and include:

 

•

Selling Across Different Channels. Consumers expect to be able to transact through multiple sales channels without losing functionality or experience. They expect to be able to seamlessly access a merchant’s online store from their mobile device, tablet and computer, and expect the same breadth of information from online channels as they would receive in a brick-and-mortar store. A merchant’s failure to deliver a mobile optimized online store can frustrate consumers and lead them to shop elsewhere. From a merchant’s perspective, as consumers look to interact across different channels, it becomes increasingly important that the merchant has a single view of its business and customers. The technical requirements to deliver this are complex and involve the synchronization of back-end systems such as those related to customer information, inventory, orders, products, payments and other data that originate in different sales channels.

 

•

Making Transacting Simple, Seamless and Secure. Consumers expect every interaction to be quick, problem-free, intuitive and secure. From the consumer’s perspective, merchants are responsible for the entire retail experience, regardless of whether the merchant or a third party provides the solution. If a merchant uses a third-party hosting provider that crashes or causes the merchant’s website to be slow, the consumer will hold the merchant accountable and will be more likely to shop somewhere else. If a consumer tries to purchase a product from a brick-and-mortar store but in-store inventory is unavailable, a merchant should be able to search its dynamic inventory count and ship the product to the consumer’s home before the consumer looks elsewhere. If the security of a consumer’s payment details and personal information is compromised or security measures add complexity and delay to the experience, the consumer may not return.

 

•

Keeping up with the Latest Technology and Innovating. Technology is undergoing continuous change. As the most innovative retailers improve the consumer experience, the consumer begins to expect a similarly improved experience from all merchants. If the most innovative retailers are selling directly on social media, consumers expect all merchants to do so. If the most innovative merchants arm their store clerks with mobile point-of-sale, or POS, systems, all merchants are expected to offer similar efficiency or risk frustrating consumers. If a consumer is left saying “When I shop with this other merchant, I can do this. Why can’t I do it with you?,” the consumer will likely shop elsewhere.

 

•

Building and Growing Their Brand. In a world where consumers have more choices than ever before, a merchant’s brand is increasingly important. A merchant needs to stand out from the crowd. If a consumer searches a third-party marketplace or ecommerce site and selects a merchant’s product from among thousands of search results, the consumer is more likely to remember the brand of the third-party site than the brand of the merchant. Experiences that enable merchants to connect directly with consumers allow merchants to make a memorable impression. A merchant’s brand and personality must shine through in every interaction to help build customer loyalty.

 

86

---

Table of Contents

•

Scaling Their Business. As merchants increase their customer base and sales channels and awareness of their brand grows, merchants must be able to handle increased traffic and ensure availability 24 hours a day, seven days a week. In addition, merchants must be able to handle large spikes in traffic that accompany events such as new product releases, holiday shopping seasons and flash sales. If a merchant’s store is unavailable—whether due to software upgrades, maintenance or otherwise—or the experience impaired, the consumer will likely shop elsewhere.

 

•

Managing Their Business Anytime, Anywhere. To keep pace with consumer demands, merchants need to be able to manage their business on the go using their mobile devices. Customers expect it to be quick and simple to connect with merchants anywhere in the world at any time. If a customer emails the merchant with a query about a product, the customer will only wait so long for a response before becoming frustrated and looking elsewhere. Increasingly, merchants need to manage multiple sales channels. While they can’t be physically present everywhere at once, they need to be virtually omnipresent. If a merchant is at their pop-up shop and is not aware a customer just placed an order through the merchant’s online store for the last item in stock, the merchant risks selling the item through the pop-up shop and disappointing the online customer.

The overriding problem facing merchants is that merchants want to be experts in the products they sell, but are instead forced to be experts in technology in order to prosper.

Existing Alternatives are Inadequate

Traditionally, merchants have been forced to address their commerce needs through one of two means:

 

•

Complex Software Built for Enterprise Merchants. Software built for the largest merchants is not designed for SMBs. It is expensive and complex, requires significant technical knowledge and training to install and maintain, and typically takes a long time to deploy.

 

•

Cobbled Together Patchwork. Whether a merchant is starting from scratch or building on top of legacy solutions, the process of piecing together a patchwork of disparate technologies is time consuming, complicated and costly. For example, to establish an online store a merchant may need to use one vendor for domain registration and hosting, a second vendor for website design, a third vendor for search engine optimization, a fourth vendor for security, a fifth vendor to provide a payment gateway and a sixth vendor for analytics. As the merchant sells across other sales channels, additional point applications from different vendors would need to be patched together and the complexity mounts. For example, to add a POS solution, the merchant must find a seventh vendor for POS hardware, an eighth vendor for POS software and a ninth vendor for POS credit card readers to help complete the transaction. And a tenth vendor to try to synchronize the inventory and data. The result is a system that, by its nature, lacks full integration between the applications provided by the various vendors and may only be as good as its weakest component.

The Opportunity

Our mission is to make commerce better for everyone and we believe we can help merchants of nearly all sizes and retail verticals realize their potential. While our platform can scale to meet the needs of large merchants, we focus on selling to SMBs. We have merchants in approximately 150 countries, including merchants in our key geographies: the United States, Canada, the United Kingdom, Western Europe, Australia and New Zealand. According to AMI Partners, in 2014, there were approximately 10 million merchants with less than 500 employees operating in our key geographies, and approximately 46 million such merchants worldwide. As of March 31, 2015, we had 162,261 merchants and our annualized revenue per merchant based on the three months ended March 31, 2015 was approximately $1,000.

We believe that our market will expand as we continue to inspire entrepreneurs to start new businesses and provide the technology that enables them to do so. In addition, we expect our average revenue per merchant to continue to increase as our merchants grow and we further expand our offerings.

 

87

---

Table of Contents

Our Solution

We provide a leading cloud-based commerce platform designed for SMBs. Merchants use our software to run their business across all of their sales channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops. Whether a merchant is starting their business online or offline, we provide a platform for merchants to create an omni-channel experience that helps showcase the merchant’s brand and grow their business. 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, build customer relationships and leverage analytics and reporting. Merchants can also use Shopify Mobile, our iPhone and Android application, to manage their business on the go.

Our platform has been engineered to enterprise-level standards and functionality while being designed for simplicity and ease-of-use. We have also designed our platform with a robust technical infrastructure able to manage large spikes in traffic and an application ecosystem to integrate additional functionality. We are constantly innovating and enhancing our platform, with our continuously deployed, multi-tenant architecture ensuring all merchants are always using the latest technology.

We strive to make commerce better for everyone by offering:

 

•

An Omni-Channel Commerce Platform. The Shopify platform enables merchants to sell their products across different sales channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops. Currently, approximately half of our merchants’ storefront traffic comes from mobile devices and approximately one quarter of our merchants have a Facebook Store. Merchants can easily add a new sales channel without the need to install new hardware or software infrastructure. Our platform provides merchants with a single view of their business, combining and synchronizing all their customer, inventory, order, product, payment and other data that originate in these different sales channels.

 

•

A Simplified Merchant Experience. The Shopify platform simplifies commerce technology and makes it accessible for merchants of all sizes. Our platform provides merchants with an intuitive user experience that requires no up-front training to implement and use. Merchants can set up their shop in less than 15 minutes. By integrating multiple channels into a single platform, we are also able to remove the complexities inherent in separate systems and democratize commerce.

 

•

The Latest Technologies, Seamlessly Integrated. The Shopify platform is designed to integrate the latest technologies that a merchant needs to sell products and operate an omni-channel retail business from any device. For example, our platform enables merchants to offer both mobile web and custom mobile applications that seamlessly integrate with other channels. Merchants can also use Shopify Mobile, our iPhone and Android application, to manage their business on the go. Our high-availability, continuously deployed, multi-tenant architecture ensures that all of our merchants are able to operate with the latest features and the newest innovations without any need to patch or upgrade their software. In 2014, we released thousands of updates to our platform that were immediately available to all of our merchants. We continue to add functionality and innovative features to our platform to address new technologies and the rapidly changing needs of merchants.

 

•

A Platform Designed to Launch and Grow Brands. Merchants can launch and build their brand on the Shopify platform and sell direct without any intermediaries or middlemen. Merchants can quickly begin selling and accepting payments in-person using their mobile phone, or they can set up a website and begin taking orders globally. Merchants can select a professional looking storefront design from a curated selection of approximately 100 templates available in the Shopify Theme Store and tailor it to match their brand’s look and feel with just a few clicks. Merchants can also use our internally-developed design language to fully customize their storefront, or hire a partner who is a trusted Shopify Expert to build their storefront for them. Using the Shopify

 

88

---

Table of Contents

platform, a merchant’s brand is always at the forefront of the experience, and we help merchants make that experience memorable to consumers.

 

•

A Platform for Merchant Success. The Shopify platform includes advanced features and resources to help merchants sell more products. Our platform has strong search engine optimization, social media marketing features and advanced analytics built-in. Our in-house Shopify Guru team is also available on chat, email and phone 24/7 to help educate merchants on how to drive traffic to their shops and manage their businesses more effectively. Because our goals are aligned with those of our merchants, we do not restrict merchants with sales limits or bandwidth caps. As merchants begin to sell more, we offer more advanced plans with additional features such as lower payment processing rates and dedicated account management. In February 2014, we began offering our Shopify Plus plan to address the needs of our larger merchants.

 

•

Enterprise-level Security, Scalability and Reliability. The Shopify platform offers security, scalability and reliability that is normally only available to businesses with enterprise-level budgets, while at the same time being easy to use and affordable for smaller businesses. This is important because we believe the Shopify platform is mission critical for all of our merchants. Our merchant’s data is stored in two co-located facilities in geographically dispersed, fault-tolerant data centers with distributed denial of service prevention appliances, intrusion detection systems and 24/7 operational monitoring. We have been certified as a PCI DSS Level 1 compliant service provider, which is the highest level of compliance available, and our platform is audited annually by a third-party qualified security assessor. Our platform has been built to handle large spikes in traffic that accompany events such as new product releases, holiday shopping seasons and flash sales, and has been benchmarked to process at least 10,000 requests per second based on platform load testing.

 

•

An Open Platform with a Thriving Ecosystem. A rich ecosystem of app developers, theme designers and other partners has evolved around the Shopify platform. The Shopify platform’s functionality is highly extensible and can be expanded using our API and apps from the Shopify App Store to offer additional sales channels (e.g. Facebook Store), bolster features in an existing sales channel (e.g. Product Reviews) and to integrate with third-party systems (e.g. Google Shopping). There are over 900 apps that were created either by us or by third-parties that are available in our Shopify App Store and approximately 75% of our merchants have apps installed. Our thriving ecosystem helps drive the growth of our merchant base, which in turn accelerates growth of the ecosystem.

Growth Strategy

Our growth strategy is driven by our mission: make commerce better for everyone. Key elements of our strategy include:

 

•

Grow our Base of Merchants. We believe that we have a significant opportunity to increase the size of our current merchant base. We intend to continue to strategically invest in marketing programs that enhance the awareness of our brand and solutions among businesses at different stages of their lifecycle, from entrepreneurs just starting a business to well-established businesses. We believe it is important to establish relationships early in the business lifecycle and grow along with our merchants. We intend to grow our base of merchants by inspiring entrepreneurship through marketing programs like our Build A Business competition. Approximately 20,000 newly launched businesses entered our last Build A Business competition and sold a combined $100 million worth of products on our platform during the eight-month competition.

 

•

Grow our Merchants’ Revenue. Our goals are closely aligned with the goals of our merchants. The more a merchant sells on our platform, the more revenue we generate as they upgrade plans, add additional sales channels, process more transactions and use additional solutions. We intend to continue to improve our platform to help our merchants sell more and expect to continue to use initiatives such as our Shopify Blog and Shopify Guru programs to educate our merchant base on

 

89

---

Table of Contents

how they can be even more successful using our platform. Last year, the Shopify Blog had over five million page views, making it one of the internet’s top blogs about selling online.

 

•

Continuous Innovation and Expansion of our Platform. Our platform is built to support innovation and the rapid technology changes in commerce. Five years ago, we foresaw the rise of mobile and launched our iPhone-based Shopify Mobile application to allow merchants to manage their business on the go. We intend to continue to build more sales channels and additional functionality to further differentiate our platform. We have recently done this with Shopify Payments, which eliminates the need for merchants to set up and maintain a direct relationship with a third-party payment gateway, gives merchants access to low credit card processing rates and allows us to cross-sell additional solutions to our merchant base. We intend to follow this same approach with other merchant solutions such as shipping.

 

•

Continue to Grow and Develop our Ecosystem. We have a thriving third-party ecosystem that includes app developers, theme designers and other partners that bolster the functionality of our platform. There are currently more than 900 apps available in the Shopify App Store, up from approximately 500 one year ago. We believe that growing our ecosystem will help to further expand our merchant base, which will in turn drive additional growth of our ecosystem.

 

•

Continue to Expand our Partner Programs. We have strong relationships with thousands of design and marketing agencies throughout the world. These agencies build merchants’ web and mobile shops on our platform. They refer merchants to us and we refer work to them using our Shopify Experts directory. We also have a number of resellers that are onboarded to the platform, such as Singtel, Asia’s leading telecommunications group. We intend to strengthen our existing relationships with referral partners and resellers and create new ones with the goal of expanding our overall merchant base.

 

•

Continue to Build for the Long-term. We have a culture of iteration and testing new ideas with a focus on maximizing long-term value. As we continue to build for the future, we may consider focused international expansion, strategic partnerships, new solutions and selective acquisitions.

The Shopify Platform

The cloud-based Shopify platform integrates the features and functionalities that our merchants need to seamlessly sell across different channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops.

Merchants can use their mobile device, tablet or computer to log into an intuitive interface that we call the “admin”. The admin provides an interface into our platform’s robust functionality, including:

 

•

Real-Time Dashboard: Provides merchants with a real-time overview of how their business is performing, where orders are coming from (including by channel and by customer), how different products are performing and what actions need the merchant’s attention.

 

•

Products and Inventory Management: Allows merchants to keep track of all of their products, including adding and removing products, managing and organizing product details, updating prices, changing product descriptions and photos, and tracking inventory.

 

•

Order Processing, Management and Fulfilment: Provides a sales inbox where merchants can process and manage their orders, capture payments and update fulfillment services.

 

•

Shopify Payments (Currently available in the United States, Canada and the United Kingdom): An integrated payment processing solution that allows merchants to accept credit cards at attractive rates. In addition, directly from the Shopify platform, merchants can dispute any chargebacks and have full visibility of cash transfers to their bank account. It also provides flexibility to allow merchants to accept PayPal, Bitcoins and other alternative payment methods. We provide Shopify Payments under payment services provider agreements with Stripe. These agreements renew every

 

90

---

Table of Contents

12 months, unless either party provides a notice of termination prior to the end of the then current term. Under these agreements, we pay Stripe monthly fees based on the value of orders processed through Shopify Payments.

 

•

Payment Gateways: For merchants in locations where Shopify Payments is not yet available, or in situations where the merchant already has a preferred payment processing partner, the Shopify platform connects to over 80 payment gateways, allowing merchants to continue with those relationships.

 

•

Discounts and Gift Cards: Allows merchants to offer discounts and coupons, as well as to sell and manage gift cards.

 

•

Customer Management: Gives merchants a single view of their customers across channels, allowing them to manage those relationships and search and analyze customer information for insights that help merchants provide their customers with more personalized shopping experiences.

 

•

Reporting and Analytics: Gives merchants real-time reports on their products, orders, payments, customers, customer preferences and other matters to gain advanced insights and further their business objectives.

The most frequently used features of the Shopify platform are available on Shopify Mobile, a mobile application for iPhone and Android. Merchants often use Shopify Mobile to view and process their orders while they are on the go.

Our Channel Offerings

 

 

1)

Web, Mobile and Tablet Stores. Our platform provides merchants with an online store that is optimized for web, mobile and tablets using responsive web design practices. Our offering includes integrated web space with unlimited bandwidth and a robust shopping cart with a secure checkout area. We offer a curated selection of approximately 100 customizable storefront templates in our Shopify Theme Store. In addition to offering what we believe is a beautifully designed homepage and product catalog, online stores include an advanced content management system that merchants can use to create and manage a blog or create any number of additional web pages. Our platform has strong search engine optimization and social media marketing features that help drive traffic to our merchants’ shops.

 

2)

Brick-and-Mortar and Pop-up Shops. Shopify POS is a mobile point-of-sale product that we designed for merchants that sell their products in-person at brick-and-mortar, pop-up shops, retail stores, events and craft shows. Shopify POS allows for seamless synchronization with a merchant’s product catalog, inventory, customer database and payment settings. For example, merchants

 

91

---

Table of Contents

using Shopify Payments can simply plug our credit card reader into an iPhone or iPad running Shopify POS and start accepting credit card transactions within minutes. These transactions are then recorded on our platform, giving a merchant a single view of their customers and all of their orders, regardless of the channel in which the transaction took place.

 

3)

Social Media. Merchants can create a storefront on Facebook, allowing the merchant to sell directly to their audience on social media.

 

4)

Mobile Apps. Merchants can use our mobile software development kit to build native mobile applications that offer the in-application purchase of products.

 

5)

Other Channels. The Shopify App Store offers additional sales channels to our merchants such as online marketplaces.

Shopify Apps and API

The Shopify platform’s functionality can be extended and highly customized using any of the more than 900 apps from the Shopify App Store. Merchants can use apps to, for example, access additional sales channels, market products to their customers, bolster content management features, manage inventory or integrate with a wide variety of third-party software. All apps in the Shopify App Store are built on the powerful Shopify API that enables app developers to seamlessly integrate nearly any functionality that a merchant may need into the Shopify platform.

Technology

The Shopify platform is a multi-tenant cloud-based system that is engineered for high scalability, reliability and performance. Open source has played a major role at Shopify from the beginning when our founder was active on the core team that built Ruby on Rails, the technology that is powering much of the Shopify platform.

We host the Shopify platform using a mix of co-located and cloud-based servers. Maintaining the integrity and security of our technology infrastructure is critical to our business, and we plan to invest further in our data center and network infrastructure to meet our merchants’ needs and maintain their trust. The key attributes of the Shopify platform are as follows:

 

•

Security. Credit card processing on the Shopify platform is performed by a dedicated, highly scalable, geographically redundant, high security environment with specialized policies and procedures in place. The environment is designed to be highly isolated and secure and exceeds the requirements of PCI DSS. We have been certified as a PCI DSS Level 1 compliant service provider, which is the highest level of compliance available. We use firewalls, denial of service mitigation appliances, advanced encryption, intrusion detection systems, two-factor authentication and other technology to keep our merchants’ data secure.

 

•

Scalability. The cloud-based architecture of our platform has been designed to support sudden traffic and order spikes from our merchants. We use a technology called “containerization” to efficiently scale our computing resources across our platform. We have benchmarked the Shopify platform to handle at least 10,000 requests per second and 10,000 orders per minute based on platform load testing.

 

•

Reliability. Our platform includes servers in geographically dispersed, co-located data centers that are fault-tolerant and ensure that our platform is highly reliable. Because Shopify is at the heart of our merchants’ businesses, we employ a highly redundant, horizontally scalable, shared architecture to ensure resiliency and high availability.

 

•

Performance. We believe that the faster our merchants’ shops appear to their customers, the more our merchants will sell. We have a dedicated team that is constantly profiling and optimizing the

 

92

---

Table of Contents

performance of the Shopify platform. We leverage content delivery networks with global points of presence to ensure that content and data is delivered quickly to users across the globe. In 2014, online shops hosted on our platform had sub 100 millisecond median response times, which we believe is much lower than the industry average based on the results of a third-party analytics reporting tool. In 2014, our merchants’ shops averaged 300 million unique monthly visitors, 50% of which were from mobile devices, and we processed an average of 5.3 million orders per month for the three months ended March 31, 2015. Our merchants sold an average of 350,000 products daily in the first quarter of 2015. Our merchants’ shops have processed 38 terabytes of daily network traffic and 1.5 terabytes of data per day.

 

•

Deployment. The Shopify platform is “single branch” software, which means that all of our merchants use the latest version of Shopify at all times. The result is that we have no overhead in maintaining older versions of our platform. Our software deployment process enables us to quickly distribute new software as soon as it is ready. This is made possible by our ongoing investment in end-to-end automation and comprehensive test suites.

Our Merchants

 

As of March 31, 2015, we had 162,261 merchants subscribed to our platform from approximately 150 countries. This represents growth of approximately 68.2% from the 96,477 merchants that were subscribed to the platform as of March 31, 2014. Our merchants represent a wide array of retail verticals and business sizes. Our merchants include:

 

•

Best Made Co. Peter Buchanan-Smith’s Best Made Co. sells traditional, sturdy axes that have turned into design icons. Peter launched his business on Shopify when the company was very young and the business has grown rapidly since then. Best Made Co. quickly upgraded to higher monthly plans, implemented Shopify POS for their in-store sales, and switched to Shopify Payments to process credit card transactions. The company saw a 250% increase in monthly sales within a year and a 100% increase the following year.

 

•

Black Milk Clothing. Black Milk Clothing was a start-up whose team had just moved into their first real office when they switched to Shopify. They needed a platform that was cost-effective, scalable as their business expanded and able to handle traffic spikes from product releases. They launched their online store from Australia with the Shopify platform, started shipping worldwide, and the

 

93

---

Table of Contents

brand quickly became popular. As they grew, they launched an additional webstore in the United States, catering to their substantial and steadily-growing fanbase in the region, with their original online store remaining accessible to the rest of the world. Black Milk Clothing also uses Shopify to sell on Facebook, tapping into their social media following to secure additional sales. Black Milk Clothing now employs over 150 people worldwide. They use Shopify Plus, which is designed for our larger merchants.

 

•

GoldieBlox. Debbie Sterling, a Stanford Engineer, was tired of how few female colleagues she had in her field. She created GoldieBlox, a construction toy and book series encouraging young girls to become interested in engineering. She started using the Shopify platform after raising seed money on Kickstarter. They won a Super Bowl ad slot in 2014, and Shopify seamlessly handled resulting traffic spikes of up to 180 times her normal traffic volume without any issues.

 

•

LA Lakers Store. AEG Merchandise is the merchandise partner of the Los Angeles Lakers. They manage the LA Lakers Store and event merchandising for them. Before the start of the 2013-14 season, the Los Angeles Lakers were about to unveil their Hollywood Nights alternate jerseys and as their merchandise partner, AEG Merchandise needed to sell them – fast. Because of Shopify’s quick time-to-market capability, they were able to launch lakersstore.com on time, leading to a highly successful jersey launch. AEG Worldwide has chosen Shopify as its preferred solution, bringing on more than a dozen additional clients including the LA Clippers, the Tough Mudder Shop and the Grammy Store.

 

•

Packer Shoes. Packer Shoes, a family business founded in 1907, sells footwear directly from their retail store in Teaneck, New Jersey. They chose Shopify because of our strong omni-channel capabilities. The Shopify platform enables them to manage all of their inventory, both online and offline, from a single dashboard. They use Shopify POS as their retail POS system and Shopify Payments to accept credit cards both at their brick-and-mortar store as well as their online store.

 

•

theory11. theory11 was founded in 2007 by magician prodigy Jonathan Bayme. They had tried four or five ecommerce platforms but found them inadequate because the feature set was limited, customer support was lacking and flash sales caused performance issues. theory11 switched to Shopify and found the transition to be incredibly smooth. Shopify’s API allowed theory11 to make its own admin dashboard tailored specifically to the needs of its business, along with tools and custom functions that streamlined order processing. theory11 has hosted dozens of large product releases and the Shopify platform has consistently delivered enterprise-level performance.

 

•

DODOcase. DODOcase is a San Francisco-based company that sells bespoke phone and tablet cases and employs traditional bookbinding techniques to make them. They launched their business using Shopify and in their first year they brought in $3 million in sales. They have used several apps from the Shopify App Store to boost their marketing capabilities and Shopify’s API to integrate a product customization tool that allows their customers to design and customize their cases. The majority of DODOcase customers now customize their orders using this app. With their success on Shopify’s platform and our speed to market, DODOcase has been able to quickly launch new products, such as their Smartphone Virtual Reality Kit, to capitalize on timely opportunities.

We believe that the above case studies provide a representative sample of how our merchants have been able to use various features of our platform to grow their respective businesses. References in these case studies to increased visits, growth and sales following implementation of our platform do not necessarily mean that our platform was the only factor contributing to such increases.

 

94

---

Table of Contents

Our Ecosystem

A rich ecosystem of app developers, theme designers and other partners has evolved around the Shopify platform. We have partners located in more than 100 countries that design and customize storefronts, develop apps and enable third-party integration for merchants on the Shopify platform. There are currently more than 900 apps available in the Shopify App Store, up from approximately 500 one year ago. In 2014, more than 5,000 of our partners referred us at least one new merchant, a 50% increase from the year before. Examples of our partners include:

 

•

Bold Apps. Bold Apps began with four people working out of a basement, building apps to sell in the Shopify App Store. The first app they launched was called Product Upsell and allows merchants to easily add targeted upsells to products. This is just one of the 17 apps Bold currently has in the Shopify App Store, with over 25,000 Shopify merchants having used at least one of them. Other popular apps include Social Autopilot, which automates social media postings; Product Discount, to easily implement sales for a merchant’s online store; and Store Location, which allows merchants to add in locations for brick-and-mortar stores. In the span of 18 months, Bold grew to a team of 40 full-time employees because of the amount of business they received from their Shopify-related projects.

 

•

Simplistic. Simplistic works closely with Good Morning America, helping featured merchants set up online stores that are able to handle the significant influx of traffic resulting from their product appearing on the show. Simplistic chose to work exclusively with Shopify because of our reliability, scalability and ability to handle large traffic spikes. To date, Simplistic has created Shopify stores for nearly 60 merchants.

 

•

NewLeaf Labs. Josh Highland founded NewLeaf Labs in 2010 to develop custom applications for small businesses. He then discovered the Shopify platform and began creating SEO-related apps for the Shopify App Store. He now has four apps available to our merchants. He has experienced such success with his apps that he decided to write a book on SEO for Shopify, entitled “Shopify Empire”.

Merchant Acquisition

Our merchant acquisition strategy is primarily focused on marketing that builds awareness of our offerings. Our approach includes a strong emphasis on data and analytics while continuously innovating and testing new ideas to drive growth.

We actively grow our audience through online channels, including paid search, organic search and social media. Our offline channel strategy includes participating in trade shows and local events to generate awareness of our platform. We also invest in content marketing, such as the Shopify Blog, video content, ebooks and free tools, and provide thought leadership to help our merchants succeed and to build our own

 

95

---

Table of Contents

brand. Our Build A Business competition similarly helps increase our brand awareness and merchant acquisition.

In addition to direct channels, we leverage relationships with third-party design agencies, developers and freelancers around the world who actively refer merchants to us.

We also partner with adjacent companies and resellers to sell and offer our solutions to their customers. For example, we partnered with Wix and Wordpress.com to allow them to offer the Shopify platform to their customers. Similarly, we have a channel partnership with SingTel to resell the Shopify platform in Singapore.

Competition

Our market is transforming, competitive and highly fragmented, and we expect competition to increase in the future. We believe the principal competitive factors in our market are:

 

•

vision for commerce and product strategy;

 

•

simplicity and ease of use;

 

•

integration of multiple channels;

 

•

cost-effective solution;

 

•

breadth and depth of functionality;

 

•

pace of innovation;

 

•

ability to scale;

 

•

security and reliability;

 

•

support for a merchant’s brand development; and

 

•

brand recognition and reputation.

With respect to each of these factors, we believe that we compare favorably to our competitors.

We believe no competitor offers an integrated, cloud-based commerce platform with comparable functionality to ours. However, some merchants may elect to piece together technology from other companies that overlaps with certain functions and features that we provide, including:

 

•

ecommerce software vendors;

 

•

content management systems;

 

•

payment processors;

 

•

POS software providers;

 

•

domain registrars; and

 

•

marketplaces.

Intellectual Property

Our intellectual property and proprietary rights are important to our business. In our efforts to safeguard them, we rely on a combination of copyright, trade secret, trademark and other rights in Canada, the United States and other jurisdictions in which we conduct our business. We also have confidentiality and/or license agreements with employees, contractors, merchants, distributors and other third parties, which limit access to and use of our proprietary intellectual property. Though we rely, in part, upon these

 

96

---

Table of Contents

legal and contractual protections, we believe that factors such as the skills and ingenuity of our employees, as well as the functionality and frequent enhancements to our platform, make our intellectual property difficult to replicate.

We have been issued trademark registrations in the United States and Canada covering the trademarks “A shop in minutes, a business for life,” “S & Design” “S Shopify & Design,” and “Shopify.” We have been issued trademark registrations in the European Union covering the trademark “S & Design” and in Australia covering the trademark “Shopify”. We have been issued trademark registration in Canada, covering the trademark, “Do what you do best”.

We are subject to certain risks related to our intellectual property. For more information, see “Risk Factors—Risks Related to our Business and Industry.”

Culture and Employees

If you have ambitious goals, you need an equally ambitious team. Shopify is composed of hundreds of highly talented, deeply caring individuals all working on making commerce better for everyone. Our culture is continuously being redefined with every person that joins our company, but, at our core, we value people who:

 

•

Get shit done

 

•

Build for the long-term

 

•

Focus on simple solutions

 

•

Act like owners

 

•

Thrive on change

In those values, there is a focus on continuous learning and personal development. We are a fast growing company that is constantly trying to get better. We expect to see similar growth from everyone in our team.

We deeply value innovation and experimentation. Every few months we take a break from our regular work and for two full days every employee has free reign to work on whatever project they want as long as it adds value to Shopify. We call these two days “Hack Days”. There is no limit to the creativity or scope of the projects. The only rule is that employees must complete their projects no later than 4:00 p.m. at the end of the second day, at which point teams pitch their finished projects.

We believe that being headquartered in Ottawa, Canada gives us access to a large talent pool. Ottawa is currently home to over 1,800 technology companies and has the highest concentration per capita of scientists and engineers in Canada. We recruit our employees through multiple avenues including internships, campus recruiting and global outreach.

As of March 31, 2015, we had 632 employees. None of our employees is represented by a labor organization or is a party to a collective bargaining arrangement. We consider our relationship with our employees to be excellent.

Facilities

We are headquartered in Ottawa, Canada. We do not own any real property. The following table outlines significant properties that we currently lease:

 

Location

Area (in square feet)

Lease Expiration Date

Use

Ottawa, Canada(1)

137,818

December 31, 2025

Office Space

Toronto, Canada(1)

36,771

August 31, 2021

Office Space

Montreal, Canada

30,663

June 30, 2026

Office Space

Kitchener-Waterloo, Canada

2,968

September 30, 2016

Office Space

 

97

---

Table of Contents

 

(1)	We received leasehold incentives on the Ottawa, Canada and Toronto, Canada leases in the form of rent-free periods and fit-up allowances. These incentives are subject to certain conditions, including that we are not in material default under the applicable lease.

We also lease space in two data centers in the United States.

We believe that our current facilities