EX-99.1 2 financials-q22017.htm EXHIBIT 99.1 Exhibit


EXHIBIT 99.1






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Condensed Consolidated
Financial Statements
(unaudited)
June 30, 2017




Shopify Inc.
Condensed Consolidated Balance Sheets
(unaudited)
Expressed in US $000’s except share amounts
 
 
 
As at 
 
 
 
June 30, 2017
 
December 31, 2016
 
Note
 
$
 
$
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
4
 
199,397

 
84,013

Marketable securities
4
 
733,020

 
308,401

Trade and other receivables
 
 
12,599

 
9,599

Merchant cash advances receivable, net
5
 
32,839

 
11,896

Other current assets
 
 
16,382

 
8,989

 
 
 
994,237

 
422,898

Long-term assets
 
 
 
 
 
Property and equipment, net
 
 
44,235

 
45,719

Intangible assets, net
12
 
18,444

 
6,437

Goodwill
6
 
20,317

 
15,504

 
 
 
82,996

 
67,660

Total assets
 
 
1,077,233

 
490,558

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable and accrued liabilities
 
 
57,118

 
45,057

Current portion of deferred revenue
 
 
25,771

 
20,164

Current portion of lease incentives
 
 
1,354

 
1,311

 
 
 
84,243

 
66,532

Long-term liabilities
 
 
 
 
 
Deferred revenue
 
 
1,125

 
922

Lease incentives
 
 
12,728

 
12,628

Deferred tax liability
12
 
1,693

 
—

 
 
 
15,546

 
13,550

Commitments and contingencies
8
 

 

Shareholders’ equity
 
 
 
 
 
Common stock, unlimited Class A subordinate voting shares authorized, 85,404,395 and 77,030,952 issued and outstanding; unlimited Class B multiple voting shares authorized, 13,122,943 and 12,374,528 issued and outstanding
9
 
1,051,490

 
468,494

Additional paid-in capital
 
 
32,541

 
27,009

Accumulated other comprehensive income (loss)
10
 
4,250


(1,818
)
Accumulated deficit
 
 
(110,837
)
 
(83,209
)
Total shareholders’ equity
 
 
977,444

 
410,476

Total liabilities and shareholders’ equity
 
 
1,077,233

 
490,558


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



2



Shopify Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Expressed in US $000’s, except share and per share amounts


 
 
 
Three months ended
 
Six months ended
 
 
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
Note
 
$
 
$
 
$
 
$
Revenues
 
 
 
 
 
 
 
 
 
Subscription solutions
 
 
71,598

 
43,674

 
133,678

 
82,380

Merchant solutions
 
 
80,057

 
42,973

 
145,356

 
76,989

 
 
 
151,655

 
86,647

 
279,034

 
159,369

Cost of revenues
 
 
 
 
 
 
 
 
 
Subscription solutions
 
 
13,688

 
9,098

 
25,942

 
17,330

Merchant solutions
 
 
51,127

 
30,026

 
94,011

 
54,431

 
 
 
64,815

 
39,124

 
119,953

 
71,761

Gross profit
 
 
86,840

 
47,523

 
159,081

 
87,608

Operating expenses
 
 
 
 
 
 
 
 
 
Sales and marketing
 
 
54,872

 
29,413

 
100,206

 
57,421

Research and development
 
 
32,714

 
16,732

 
59,308

 
30,402

General and administrative
 
 
15,161

 
10,037

 
29,935

 
18,156

Total operating expenses
 
 
102,747

 
56,182

 
189,449

 
105,979

Loss from operations
 
 
(15,907)

 
(8,659)

 
(30,368)

 
(18,371)

Other income
 
 
 
 
 
 
 
 
 
Interest income, net
 
 
1,435

 
231

 
2,150

 
434

Foreign exchange gain (loss)
 
 
442

 
(11)

 
590

 
569

 
 
 
1,877

 
220

 
2,740

 
1,003

Net loss
 
 
(14,030)

 
(8,439)

 
(27,628)

 
(17,368)

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on cash flow hedges
10
 
4,631

 
(80)

 
6,068

 
141

Comprehensive loss
 
 
(9,399)

 
(8,519)

 
(21,560)

 
(17,227)

 
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share attributable to shareholders
11
 
$
(0.15
)
 
$
(0.10
)
 
$
(0.30
)
 
$
(0.21
)
Weighted average shares used to compute basic and diluted net loss per share attributable to shareholders
11
 
94,290,538

 
81,349,248

 
92,277,895

 
80,918,872


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


3



Shopify Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)
Expressed in US $000’s except share amounts
 
Common Stock  
 
Additional
Paid-In Capital
$
 
Accumulated Other Comprehensive Income
$
 
Accumulated Deficit
$
 
Total
$
 
Shares
 
Amount $
 
As at December 31, 2015
80,089,858

 
231,452

 
11,719

 
—

 
(47,854
)
 
195,317

Exercise of stock options
1,652,012

 
4,021

 
(2,189
)
 
—

 
—

 
1,832

Stock-based compensation
—

 
—

 
8,657

 
—

 
—

 
8,657

Vesting of restricted shares
41,347

 
172

 
—

 
—

 
—

 
172

Net loss and comprehensive loss for the period
—

 
—

 
—

 
141

 
(17,368
)
 
(17,227
)
As at June 30, 2016
81,783,217

 
235,645

 
18,187

 
141

 
(65,222
)
 
188,751

 
Common Stock  
 
Additional
Paid-In Capital
$
 
Accumulated Other Comprehensive Income (Loss)
$
 
Accumulated Deficit
$
 
Total
$
 
Shares
 
Amount $
 
As at December 31, 2016
89,405,480

 
468,494

 
27,009

 
(1,818
)
 
(83,209
)
 
410,476

Exercise of stock options
2,365,894

 
12,040

 
(5,108
)
 
—

 
—

 
6,932

Stock-based compensation
—

 
—

 
21,539

 
—

 
—

 
21,539

Vesting of restricted share units
430,964

 
10,899

 
(10,899
)
 
—

 
—

 
—

Issuance of Class A subordinate voting shares, net of offering costs of $15,518
6,325,000

 
560,057

 
—

 
—

 
—

 
560,057

Net loss and comprehensive loss for the period
—

 
—

 
—

 
6,068

 
(27,628
)
 
(21,560
)
As at June 30, 2017
98,527,338

 
1,051,490

 
32,541

 
4,250

 
(110,837
)
 
977,444


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

4



Shopify Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Expressed in US $000’s
 
 
 
Six months ended
 
 
 
June 30, 2017
 
June 30, 2016
 
Note
 
$
 
$
Cash flows from operating activities
 
 
 
 
 
Net loss for the period
 
 
(27,628)

 
(17,368)

Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
Amortization and depreciation
 
 
9,887

 
5,834

Stock-based compensation
 
 
20,808

 
8,375

Provision for uncollectible receivables related to merchant cash advances
 
 
1,922

 
441

Vesting of restricted shares
 
 
—

 
172

Unrealized foreign exchange gain
 
 
(901)

 
(1,161)

Changes in operating assets and liabilities:
 
 
 
 
 
Trade and other receivables
 
 
(2,978)

 
1,779

Merchant cash advances receivable
 
 
(22,865)

 
(4,494)

Other current assets
 
 
348

 
(787)

Accounts payable and accrued liabilities
 
 
10,595

 
8,020

Deferred revenue
 
 
5,810

 
3,913

Lease incentives
 
 
143

 
1,481

Net cash provided by (used in) operating activities
 
 
(4,859)

 
6,205

Cash flows from investing activities
 
 
 
 
 
Purchase of marketable securities
 
 
(638,212)

 
(81,393)

Maturity of marketable securities
 
 
213,609

 
49,457

Acquisitions of property and equipment
 
 
(5,290)

 
(10,057)

Acquisitions of intangible assets
 
 
(2,024)

 
(1,256)

Acquisition of businesses, net of cash acquired
12
 
(15,718)

 
(7,969)

Net cash provided by (used in) investing activities
 
 
(447,635)

 
(51,218)

Cash flows from financing activities
 
 
 
 
 
Proceeds from the exercise of stock options
 
 
6,932

 
1,832

Proceeds from public offering, net of issuance costs
1
 
560,057

 
—

Net cash provided by financing activities
 
 
566,989

 
1,832

Effect of foreign exchange on cash and cash equivalents
 
 
889

 
1,251

Net increase (decrease) in cash and cash equivalents
 
 
115,384

 
(41,930)

Cash and cash equivalents – Beginning of Period
 
 
84,013

 
110,070

Cash and cash equivalents – End of Period
 
 
199,397

 
68,140

 
 
 
 
 
 
Non-cash investing activities:
 
 
 
 
 
Acquired property and equipment remaining unpaid
 
 
970

 
1,099

Capitalized stock-based compensation
 
 
731

 
282


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

5

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


1.
Nature of Business

Shopify Inc. (“Shopify” or the “Company”) was incorporated as a Canadian corporation on September 28, 2004. The Company’s mission is to make commerce better for everyone. The Company provides the leading cloud-based, multi-channel commerce platform designed for small and medium-sized businesses. Using a single interface, the Company’s merchants can design, set up and manage their business across multiple sales channels, including web and mobile storefronts, social media storefronts, marketplaces and physical retail locations. The Company’s platform provides merchants with a single view of their business and customers across all of their sales channels and enables them to manage products and inventory, process orders and payments, ship orders, build customer relationships and leverage analytics and reporting. The Company’s platform is engineered to enterprise-level standards and functionality while being designed for simplicity.

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

Public Offerings

In May 2017, the Company completed a public offering, in which it issued and sold 5,500,000 Class A subordinate voting shares at a public offering price of $91.00 per share. Subsequently, in June 2017, the Company issued and sold 825,000 Class A subordinate voting shares at the same price as a result of the underwriters' exercise of their over-allotment option. The Company received total net proceeds of $560,057 after deducting underwriting discounts and commissions of $14,390 and other offering expenses of $1,128.


2.
Basis of Presentation and Consolidation

These unaudited condensed consolidated financial statements include the accounts of the Company and its directly and indirectly held wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
These unaudited condensed consolidated financial statements of the Company have been presented in United States dollars ("USD") and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), including the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of its financial position, results of operations and comprehensive loss, cash flows and changes in shareholders’ equity for the interim periods. The financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016. The unaudited condensed consolidated balance sheet at December 31, 2016 was derived from the audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements.

The interim results for the three and six months ended June 30, 2017 are not necessarily indicative of the results expected for the full fiscal year.

3.
Significant Accounting Policies

Except as described below, there have been no material changes to the Company’s significant accounting policies during the three and six months ended June 30, 2017, as compared to the significant accounting policies described in the Company’s annual consolidated financial statements for the year ended December 31, 2016.


6

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


Use of Estimates

The preparation of consolidated financial statements, in accordance with U.S. GAAP, requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items that are subject to estimation and assumptions include: estimates related to refundable tax credits; provision for uncollectable receivables related to merchant cash advances and chargebacks on Shopify Payments transactions that are unrecoverable from merchants; recoverability of deferred tax assets; fair values of assets and liabilities acquired in business combinations; fair value of acquired intangible assets; capitalization of software development costs; estimated useful lives of property and equipment and intangible assets; estimates relating to the recoverability of lease inducements; and assumptions used when employing the Black-Scholes valuation model to estimate the fair value of shares and stock-based awards. Actual results may differ from the estimates made by management.

Concentration of Credit Risk

The Company’s cash and cash equivalents, marketable securities, trade and other receivables, merchant cash advances, and foreign exchange forward contracts subject the Company to concentrations of credit risk. Management mitigates this risk associated with cash and cash equivalents by making deposits and entering into foreign exchange forward contracts only with large Canadian and United States banks and financial institutions that are considered to be highly credit worthy. Management mitigates the risks associated with marketable securities by complying with its investment policy, which stipulates minimum rating requirements, maximum investment exposures and maximum maturities. Due to the Company’s diversified merchant base, there is no particular concentration of credit risk related to the Company’s trade receivables and merchant cash advances receivable. Trade, merchant cash advances and other receivables are monitored on an ongoing basis to ensure timely collection of amounts. The Company has mitigated some of the risks associated with Shopify Capital by entering into an agreement with a third party to insure merchant cash advances offered by Shopify Capital. There are no receivables from individual merchants accounting for 10% or more of revenues or receivables.

Interest Rate Risk

Certain of the Company’s cash equivalents and marketable securities earn interest. The Company’s trade and other receivables, accounts payable and accrued liabilities and lease liabilities do not bear interest. The Company is not exposed to material interest rate risk.
    
Foreign Exchange Risk

The Company’s exposure to foreign exchange risk is primarily related to fluctuations between the Canadian Dollar ("CAD") and the USD. The Company is exposed to foreign exchange fluctuations on the revaluation of foreign currency assets and liabilities. The Company may use foreign exchange derivative products to manage the impact of foreign exchange fluctuations. By their nature, derivative financial instruments involve risk, including the credit risk of non-performance by counter parties.

Accounting Pronouncements Adopted in the Period

Effective January 1, 2017, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting", which simplifies the accounting for stock based compensation, including forfeitures and the classification of employee taxes paid on the statement of cash flows. Upon adoption, the Company elected not to change its policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate. Additional amendments under this ASU, such as the related accounting for income taxes, the minimum statutory withholding tax requirements and the classification in the statement of cash flows had no impact on the Company's consolidated financial statements.

7

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


Recent Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-9 “Revenue from Contracts with Customers.” The new accounting standards update requires an entity to apply a five step model to recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, as well as a cohesive set of disclosure requirements that would result in an entity providing comprehensive information about the nature, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, updating the implementation guidance on principal versus agent considerations in the new revenue recognition standard. This update clarifies that an entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The update also includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients”, which provides clarification on how to assess collectability, present sales taxes, treat non-cash consideration, and account for completed and modified contracts at the time of transition. ASU 2016-12 also clarifies that an entity retrospectively applying the guidance in Topic 606 is not required to disclose the effect of the accounting change in the period of adoption. All accounting standard updates become effective for reporting periods beginning after December 15, 2017. Early adoption is permitted starting January 1, 2017. The Company continues to assess the impact of the adoption of this new revenue standard on the consolidated financial statements and related disclosures, but believes that as a result of adoption, the Company may be required to capitalize sales commissions and expense on a straight-line basis over the term of identifiable contracts. The Company will also need to provide expanded disclosures relating to the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The Company is also assessing any financial reporting system changes and related controls that would be necessary to implement the new revenue standard. The Company anticipates adopting the standard effective January 1, 2018 using the full retrospective approach.

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, "Leases", which requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. The standard requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This standard also requires classification of all cash payments within operating activities in the statement of cash flows. A modified retrospective transition approach is required for operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The standard is effective for annual periods beginning after December 15, 2018. Early adoption is permitted. The Company believes that this standard will have a material impact on its consolidated balance sheets and continues to assess the impact that adoption of this standard will have on the statement of operations and comprehensive loss.

In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", which simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The standard is effective for annual periods beginning after December 15, 2019 including interim periods within those periods and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.






8

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


4.
Financial Instruments

As at June 30, 2017, the Company’s financial instruments, measured at fair value on a recurring basis, were as follows:
 
Fair Value Measurements Using  
Level 1    
$
 
Level 2    
$
 
Level 3    
$
Assets:
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
US federal bonds
20,173

 
—

 
—

Corporate bonds and commercial paper
—

 
67,129

 
—

Marketable securities:
 
 
 
 
 
U.S. term deposits
65,150

 
—

 
—

U.S. federal bonds
91,573

 
—

 
—

Corporate bonds and commercial paper
—

 
576,171

 
—

Derivatives:
 
 
 
 
 
Foreign exchange forward contracts
—

 
4,276

 
—


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

As at December 31, 2016, the Company’s financial instruments, measured at fair value on a recurring basis, were as follows: 
 
Fair Value Measurements Using  
Level 1   
$ 
 
Level 2
$
 
Level 3
$
Assets:
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Corporate bonds and commercial paper
—

 
9,994

 
—

Marketable securities:
 
 
 
 
 
U.S. term deposits
46,385

 
—

 
—

U.S. federal bonds
70,667

 
—

 
—

Corporate bonds and commercial paper
—

 
191,345

 
—

Derivatives:
 
 
 
 
 
Foreign exchange forward contracts
—

 
(1,818
)
 
—


As at June 30, 2017 the Company held foreign exchange forward contracts to convert USD into CAD, with a total notional value of $133,276 (December 31, 2016 - $104,344), to fund a portion of its operations. The foreign exchange forward contracts have maturities of twelve months or less. The fair value of foreign exchange forward contracts and corporate bonds was based upon Level 2 inputs, which included period-end mid-market quotations for each underlying contract as calculated by the financial institution with which the Company has transacted. The quotations are based on bid/ask quotations and represent the discounted future settlement amounts based on current market rates. There were no transfers between Levels 1, 2 and 3 during the six months ended June 30, 2017 and December 31, 2016.
    
    



9

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


Derivative Instruments and Hedging

The Company has a hedging program to mitigate the impact of foreign currency fluctuations on future cash flows and earnings. Under this program the Company has entered into foreign exchange forward contracts with certain financial institutions and designated those hedges as cash flow hedges. As of June 30, 2017, $4,250 of unrealized gains related to the effective portion of changes in the fair value of foreign exchange forward contracts designated as cash flow hedges were included in accumulated other comprehensive loss and other current assets on the condensed consolidated balance sheet. This amount is expected to be reclassified into earning over the next twelve months. In the three and six months ended June 30, 2017, $557 and $946, respectively, of realized losses (2016 - realized gains of $252 and $582, respectively) related to the maturity of foreign exchange forward contracts designated as cash flow hedges were included in operating expenses. Under the current hedging program, the Company is hedging cash flows associated with payroll and facility costs.

5.
Merchant Cash Advances Receivable
 
June 30, 2017
 
December 31, 2016
Merchant cash advances ("MCA") receivable, gross
$
35,200

 
$
12,924

Allowance for uncollectible MCA receivable
(2,361
)
 
(1,028
)
Merchant cash advances receivable, net
$
32,839

 
$
11,896


The following table summarizes the activities of the Company’s allowance for uncollectible MCA receivable:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Allowance for uncollectible MCA receivable, beginning of the period
$
1,296

 
$
71

 
$
1,028

 
$
22

Provision for uncollectible MCA receivable
1,330

 
392

 
1,922

 
441

MCA receivable charged off
(265
)
 
—

 
(589
)
 
—

Allowance for uncollectible MCA receivable, end of the period
$
2,361

 
$
463

 
$
2,361

 
$
463























10

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


6.
Goodwill

The Company’s goodwill was recognized upon the acquisitions of various companies including, but not limited to, Oberlo UAB, which was acquired during the six months ended June 30, 2017, Kit CRM Inc. and Boltmade Inc., both acquired during the year ended December 31, 2016. Goodwill is attributable to the Company’s single reporting unit.
No goodwill impairment was recognized in the six-month period ended June 30, 2017 and for the year ended December 31, 2016.
The changes in the carrying amount of goodwill as of June 30, 2017 and December 31, 2016 are as follows:
 
June 30, 2017
 
December 31, 2016
 
$  
 
$  
Balance, beginning of the year
15,504

 
2,373

Acquisition of Kit CRM Inc.
—

 
6,929

Acquisition of Boltmade, Inc.
—

 
5,450

Acquisition of Oberlo UAB
4,813

 
—

Other Acquisitions
—

 
752

Balance, end of the period
20,317

 
15,504


7.
Credit Facility

In the first quarter of 2017, the Company increased its revolving credit facility with Royal Bank of Canada to $8,000 CAD, and added an additional letter of credit. The credit facility bears interest at the Royal Bank Prime Rate plus 0.30%. As at June 30, 2017 the effective rate was 3.00%, and no cash amounts have been drawn under this credit facility.

8.
Commitments and Contingencies

Operating Leases

The Company has entered into various non-cancellable operating leases for certain offices with contractual lease periods expiring between 2018 and 2036. Rent expense was $2,556 and $2,020 for the three months ended June 30, 2017 and 2016, respectively; and $5,025 and $3,873 for the six months ended June 30, 2017 and 2016, respectively.

Amounts of minimum future annual rental payments under non-cancellable operating leases in each of the next five years and thereafter are as follows:  
Fiscal Year
Amount
$
Remainder of 2017
6,195
2018
15,089
2019
23,102
2020
26,689
2021
27,342
Thereafter
244,818
Total future minimum lease payments
343,235

11

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts




Litigation and Loss Contingencies

The Company accrues estimates for loss contingencies when losses are probable and reasonably estimable. From time to time, the Company may become a party to litigation and subject to claims incidental to the ordinary course of business, including intellectual property claims, labour and employment claims and threatened claims, breach of contract claims, tax and other matters. The Company currently has no material pending litigation or claims. The Company is not aware of any litigation matters or loss contingencies that would be expected to have a material adverse effect on the business, consolidated financial position, results of operations, or cash flows.

9.
Shareholders’ Equity

Common Stock Authorized

The Company is authorized to issue an unlimited number of Class A subordinate voting shares and an unlimited number of Class B multiple voting shares. The Class A subordinate voting shares have one vote per share and the Class B multiple voting shares have 10 votes per share. The Class B multiple voting shares are convertible into Class A subordinate voting shares on a one-for-one basis at the option of the holder. Class B multiple voting shares will also automatically convert into Class A subordinate voting shares in certain other circumstances.

Preferred Shares

The Company is authorized to issue an unlimited number of preferred shares issuable in series. Each series of preferred shares shall consist of such number of shares and having such rights, privileges, restrictions and conditions as may be determined by the Company’s Board of Directors prior to the issuance thereof. Holders of preferred shares, except as otherwise provided in the terms specific to a series of preferred shares or as required by law, will not be entitled to vote at meetings of holders of shares.

Stock-Based Compensation

As at June 30, 2017 there were 6,170,841 shares reserved for issuance under the Company's Stock Option Plan and Long Term Incentive Plan.


12

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


The following table summarizes the stock option and Restricted Share Unit ("RSU") award activities under the Company's share-based compensation plans for the six months ended June 30, 2017:

 
Shares Subject to Options Outstanding
 
Outstanding RSUs
 
Number of Options (1)
 
Weighted Average Exercise Price
$
 
Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (2)
$
 
Weighted Average Grant Date Fair Value
$
 
Outstanding RSUs
 
Weighted Average Grant Date Fair Value
$
December 31, 2016
9,899,393

 
9.74

 
6.78

 
328,003

 
—

 
2,360,817

 
29.97

Stock options granted
825,824

 
68.35
 
—

 
—

 
34.04

 
—

 
—

Stock options exercised
(2,365,894
)
 
2.93
 
—

 
—

 
—

 
—

 
—

Stock options forfeited
(113,012
)
 
26.60
 
—

 
—

 
—

 
—

 
—

RSUs granted
—

 
—

 
—

 
—

 
—

 
687,543

 
70.74

RSUs settled
—

 
—

 
—

 
—

 
—

 
(430,964
)
 
25.29

RSUs forfeited
—

 
—

 
—

 
—

 
—

 
(84,889
)
 
34.36

June 30, 2017
8,246,311

 
17.33
 
7.14

 
573,709

 
—

 
2,532,507

 
41.69

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercisable as of June 30, 2017
4,475,480

 
4.16
 
5.87

 
370,316

 
 
 
 
 
 
(1) As at June 30, 2017 5,160,249 of the outstanding stock options were granted under the Company's Legacy Option Plan and are exercisable for Class B multiple voting shares, and 3,086,062 of the outstanding stock options were granted under the Company's Stock Option Plan and are exercisable for Class A subordinate voting shares.
(2) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company's stock as of June 30, 2017 and December 31, 2016.

The following table illustrates the classification of stock-based compensation expense in the Consolidated Statements of Operations and Comprehensive Loss, which includes both stock-based compensation and restricted share-based compensation expense.  
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
$
 
$
 
$
 
$
Cost of revenues
261

 
129
 
475

 
234

Sales and marketing
2,004

 
942
 
3,485

 
1,506

Research and development
7,255

 
3,035
 
13,088

 
5,066

General and administrative
2,081

 
980
 
3,760

 
1,741

 
11,601

 
5,086
 
20,808

 
8,547



13

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


10.    Changes in Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated other comprehensive income (loss), which is reported as a component of shareholders’ equity, for the six months ended June 30, 2017 and 2016:
 
Gains and Losses on Cash Flow Hedges
(all amounts net of tax)
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
Balance, beginning of the period
$
(1,818
)
 
$
—

 
 
 
 
Other comprehensive income before reclassifications
5,122

 
723

Amounts reclassified from accumulated other comprehensive income (loss)
946

 
(582
)
Other comprehensive income, net of tax
6,068

 
141

Balance, end of the period
$
4,250

 
$
141


11.
Net Loss per Share

The Company applies the two-class method to calculate its basic and diluted net loss per share as both classes of its voting shares are participating securities with equal participation rights and are entitled to receive dividends on a share for share basis.

The following table summarizes the reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of shares outstanding.
    
 
Three months ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Basic and diluted weighted average number of shares outstanding
94,290,538

 
81,349,248

 
92,277,895

 
80,918,872

The following items have been excluded from the diluted weighted average number of shares outstanding because they are anti-dilutive:


 


 


 
 
Stock options
8,246,311

 
10,456,015

 
8,246,311

 
10,456,015

Restricted share units
2,532,507

 
1,815,409

 
2,532,507

 
1,815,409

Restricted shares
—

 
6,891

 
—

 
6,891

 
10,778,818

 
12,278,315

 
10,778,818

 
12,278,315


In the three and six months ended June 30, 2017 and 2016, the Company was in a loss position and therefore diluted loss per share is equal to basic loss per share.

12.
Business Acquisitions

Oberlo UAB

On April 28, 2017, the Company completed the acquisition of Oberlo UAB ("Oberlo"), a company that facilitates product sourcing and dropshipping, based in Vilnius, Lithuania. The Company acquired 100 percent of the outstanding shares of Oberlo in exchange for cash consideration of $17,239. The transaction was

14

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts


accounted for as a business combination. The operations of Oberlo have been consolidated into the Company's results as of the acquisition date.

The following table summarizes the preliminary purchase price allocation of the Oberlo assets acquired and liabilities assumed at the acquisition date:
 
2017
 
Amount
$  
Net closing working capital:
 
Cash
1,521

Accounts Receivable
1,603

Accounts Payable
(885
)
Estimated fair value of identifiable assets acquired:
 
Acquired technology
11,590

Customer relationships
395

Goodwill
4,813

Deferred tax liability on acquired intangibles
(1,798
)
Total purchase price
17,239



The acquired technology, the Oberlo app, was valued at $11,590 and customer relationships were valued at $395 using a discounted cash flow methodology, and are being amortized over 3 and 2 years, respectively. Goodwill from the Oberlo acquisition is primarily attributable to the expected synergies that will result from integrating the Oberlo solution with the Company's platform, and the acquisition of an assembled workforce. None of the goodwill recognized is expected to be deductible for income tax purposes. The deferred tax liability relates to the taxable difference on the acquired intangible assets which are amortized over 3 and 2 years.

13.
Comparative Figures
    
Certain comparative figures have been reclassified in order to conform to the current period presentation.

15