EX-99.1 2 exhibit991financialstateme.htm EX-99.1 Document

EXHIBIT 99.1




shopify_logoxblack.jpg

Condensed Consolidated
Financial Statements
(unaudited)
September 30, 2022



Shopify Inc.
Condensed Consolidated Balance Sheets
(unaudited)
Expressed in US $000’s except share amounts

As at 
September 30, 2022December 31, 2021
Note$$
Assets
Current assets
Cash and cash equivalents41,378,2512,502,992
Marketable securities43,563,1815,265,101
Trade and other receivables, net5241,183192,209
Merchant cash advances, loans and related receivables, net6666,053470,722
Income taxes receivable1511,9965,023
Other current assets152,322103,273
6,012,9868,539,320
Long-term assets
Property and equipment, net7128,461105,526
Right-of-use assets, net7349,740196,388
Intangible assets, net17410,819138,496
Deferred tax assets1543,25048,369
Equity and other investments ($1,180,067 and $3,412,166, carried at fair value)
42,421,7473,955,545
Goodwill81,836,282356,528
5,190,2994,800,852
Total assets11,203,28513,340,172
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities596,114456,688
Income taxes payable154,45813,505
Deferred revenue5287,625216,792
Lease liabilities717,02415,748
905,221702,733
Long-term liabilities
Deferred revenue5299,625162,932
Lease liabilities7369,131246,776
Convertible senior notes9912,724910,963
Deferred tax liabilities1523,576183,427
1,605,0561,504,098
Commitments and contingencies7, 11
Shareholders’ equity
Common stock, unlimited Class A subordinate voting shares authorized, 1,190,042,395 and 1,139,544,920, issued and outstanding; unlimited Class B restricted voting shares authorized, 81,975,651 and 119,426,670 issued and outstanding; 1 Founder share authorized, 1 and nil issued and outstanding (1)(2)
138,653,0118,040,099
Additional paid-in capital(23,409)161,074
Accumulated other comprehensive loss14(38,012)(5,974)
Retained earnings101,4182,938,142
Total shareholders’ equity8,693,00811,133,341
Total liabilities and shareholders’ equity11,203,28513,340,172
(1) Prior period share amounts have been adjusted to reflect the ten-for-one share split ("Share Split") effected in June 2022. See Note 13 for details.
(2) As a result of the implementation of the updated governance structure in June 2022, Class B multiple voting shares are now described as Class B restricted voting shares.

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


2


Shopify Inc.
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income
(unaudited)
Expressed in US $000’s, except share and per share amounts
Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Note$$$$
Revenues
Subscription solutions376,301 336,208 1,087,505 991,126 
Merchant solutions989,899 787,532 2,777,381 2,240,706 
1,366,200 1,123,740 3,864,886 3,231,832 
Cost of revenues
Subscription solutions82,313 67,355 245,096 188,764 
Merchant solutions621,555 447,476 1,664,179 1,254,583 
703,868 514,831 1,909,275 1,443,347 
Gross profit662,332 608,909 1,955,611 1,788,485 
Operating expenses
Sales and marketing302,476 237,949 932,749 626,082 
Research and development412,359 221,028 1,062,687 580,471 
General and administrative255,125 128,722 493,114 273,790 
Transaction and loan losses37,738 25,311 100,611 53,903 
Total operating expenses1,007,698 613,010 2,589,161 1,534,246 
(Loss) income from operations(345,366)(4,101)(633,550)254,239 
Other income (expense), net
Interest income20,884 4,516 39,578 10,438 
Interest expense9(877)(872)(2,620)(2,615)
Net realized (loss) gain on equity and other investments4(1,088)— 122,695 — 
Net unrealized gain (loss) on equity and other investments4173,008 1,340,842 (2,522,912)3,369,535 
Foreign exchange (loss) gain(3,694)67 (11,431)(2,286)
Total other income (expense), net188,233 1,344,553 (2,374,690)3,375,072 
(Loss) income before income taxes(157,133)1,340,452 (3,008,240)3,629,311 
(Provision for) recovery of income taxes15(1,276)(192,020)171,516 (343,341)
Net (loss) income(158,409)1,148,432 (2,836,724)3,285,970 
Net (loss) income per share attributable to shareholders(1):
Basic 16$(0.12)$0.92 $(2.24)$2.64 
Diluted16$(0.12)$0.90 $(2.24)$2.58 
Weighted average shares used to compute net (loss) income per share attributable to shareholders(1):
Basic161,269,425,2261,250,714,6001,263,885,3721,242,970,690
Diluted161,269,425,2261,276,191,8821,263,885,3721,272,637,457
Other comprehensive loss
Unrealized loss on cash flow hedges14(28,895)(12,508)(31,979)(19,947)
Tax effect on unrealized loss on cash flow hedges14— 3,315 (59)5,287 
Total other comprehensive loss (28,895)(9,193)(32,038)(14,660)
Comprehensive (loss) income(187,304)1,139,239 (2,868,762)3,271,310 
(1) Prior period share and per share amounts have been adjusted to reflect the Share Split effected in June 2022. See Note 13 for details.

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 (Loss)
$		Retained Earnings
$		Total
$
Note
Shares(1)
Amount
$
As at December 31, 20201,225,288,710 6,115,232 261,436 8,770 15,285 6,400,723 
Adjustment related to the adoption of ASU 2020-06, Debt— — (158,810)— 8,198 (150,612)
As at January 1, 20211,225,288,710 6,115,232 102,626 8,770 23,483 6,250,111 
Exercise of stock options3,497,300 35,681 (12,756)— — 22,925 
Stock-based compensation— — 69,156 — — 69,156 
Vesting of restricted share units2,687,110 66,113 (66,113)— — — 
Issuance of Class A subordinate voting shares, net of offering costs of $7,742, net of tax of $2,7901311,800,000 1,543,958 — — — 1,543,958 
Net income and comprehensive income for the period— — — (2,724)1,258,445 1,255,721 
As at March 31, 20211,243,273,120 7,760,984 92,913 6,046 1,281,928 9,141,871 
Exercise of stock options2,689,580 31,828 (11,463)— — 20,365 
Stock-based compensation— — 81,958 — — 81,958 
Vesting of restricted share units1,671,700 45,012 (45,012)— — — 
Net income and comprehensive income for the period— — — (2,743)879,093 876,350 
As at June 30, 20211,247,634,400 7,837,824 118,396 3,303 2,161,021 10,120,544 
Exercise of stock options6,741,840 45,588 (16,434)— — 29,154 
Stock-based compensation— — 81,340 — — 81,340 
Vesting of restricted share units1,375,320 47,278 (47,278)— — — 
Net income and comprehensive income for the period— — — (9,193)1,148,432 1,139,239 
As at September 30, 20211,255,751,560 7,930,690 136,024 (5,890)3,309,453 11,370,277 
(1) Prior period share amounts have been adjusted to reflect the Share Split effected in June 2022. See Note 13 for details.









4








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 (Loss)
$		Retained Earnings
$		Total
$
Shares(1)
Amount
$
As at December 31, 20211,258,971,590 8,040,099 161,074 (5,974)2,938,142 11,133,341 
Exercise of stock options1,055,130 10,707 (4,421)— — 6,286 
Stock-based compensation— — 117,989 — — 117,989 
Vesting of restricted share units1,339,300 100,072 (100,072)— — — 
Net loss and comprehensive loss for the period— — — 6,387 (1,474,408)(1,468,021)
As at March 31, 20221,261,366,020 8,150,878 174,570 413 1,463,734 9,789,595 
Exercise of stock options316,540 3,085 (1,534)— — 1,551 
Stock-based compensation— — 139,419 — — 139,419 
Vesting of restricted share units1,182,360 90,597 (90,597)— — — 
Issuance of the Founder share1 — — — — — 
Net loss and comprehensive loss for the period— — — (9,530)(1,203,907)(1,213,437)
As at June 30, 20221,262,864,921 8,244,560 221,858 (9,117)259,827 8,717,128 
Exercise of stock options739,465 7,455 (4,035)— — 3,420 
Stock-based compensation— — 149,990 — — 149,990 
Vesting of restricted share units2,764,061 199,002 (199,002)— — — 
Issuance of shares related to business acquisitions5,649,600 201,994 (192,220)— — 9,774 
Net loss and comprehensive loss for the period— — — (28,895)(158,409)(187,304)
As at September 30, 20221,272,018,047 8,653,011 (23,409)(38,012)101,418 8,693,008 
(1) Prior period share amounts have been adjusted to reflect the Share Split effected in June 2022. See Note 13 for details.

The accompanying notes are an integral part of these condensed consolidated financial statements.
5


Shopify Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Expressed in US $000’s

Nine months ended
September 30, 2022September 30, 2021
Note$$
Cash flows from operating activities
Net (loss) income for the period(2,836,724)3,285,970
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Amortization and depreciation60,69844,067
Stock-based compensation407,398232,454
Amortization of debt offering costs91,7611,756
Impairment of right-of-use assets and leasehold improvements7—30,145
Provision for transaction and loan losses53,56225,723
Deferred income tax (recovery) expense(181,230)306,849
Revenue related to non-cash consideration5(86,547)(37,425)
Net loss (gain) on equity and other investments42,443,295(3,369,535)
Unrealized foreign exchange loss25,9483,741
Changes in operating assets and liabilities:
Trade and other receivables(75,388)(30,267)
Merchant cash advances, loans and related receivables(247,976)(307,245)
Other current assets(44,619)(27,301)
Non-cash consideration received in exchange for services5(273,201)(257,577)
Accounts payable and accrued liabilities96,94739,392
Income taxes receivable and payable(17,671)13,593
Deferred revenue294,073286,946
Lease assets and liabilities(12,159)2,684
Net cash (used in) provided by operating activities(391,833)243,970
Cash flows from investing activities
Purchase of marketable securities(3,568,229)(5,616,479)
Maturity of marketable securities5,273,9443,965,755
Purchase of equity and other investments4(630,135)(642,566)
Acquisitions of property and equipment(42,394)(24,813)
Acquisition of businesses, net of cash acquired17(1,753,748)(49,800)
Net cash used in investing activities(720,562)(2,367,903)
Cash flows from financing activities
Proceeds from public equity offerings, net of issuance costs13—1,541,168
Proceeds from the exercise of stock options11,25772,444
Net cash provided by financing activities11,2571,613,612
Effect of foreign exchange on cash and cash equivalents(23,603)(3,663)
Net decrease in cash and cash equivalents(1,124,741)(513,984)
Cash and cash equivalents – Beginning of Period2,502,9922,703,597
Cash and cash equivalents – End of Period1,378,2512,189,613
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities included in cash flows from operating activities32,54319,612
Lease liabilities arising from obtaining right-of-use assets171,71040,626
Acquired property and equipment remaining unpaid3,0904,780
Cash paid for income taxes, net26,11222,749
Cash paid for interest575712

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

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. Shopify is a leading provider of essential internet infrastructure for commerce, offering trusted tools to start, grow, market, and manage a retail business of any size. Shopify makes commerce better for everyone with a platform and services that are engineered for simplicity and reliability, while delivering a better shopping experience for consumers everywhere. The Company's software enables merchants to run their business across all of their sales channels, including web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces. The Shopify platform provides merchants with a single view of their business and customers across all of their sales channels and enables them to manage products and inventory, process orders and payments, fulfill and ship orders, build customer relationships, source products, leverage analytics and reporting, and access financing, all from one integrated back office.

Founded in Ottawa, Canada, the Company's principal place of business is the internet.

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 the fair statement of its financial position, results of operations and comprehensive (loss) income, changes in shareholders' equity and cash flows 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, 2021. The condensed consolidated balance sheet at December 31, 2021 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 nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full fiscal year.

3.Significant Accounting Policies

Except for the additions to the stock-based compensation accounting policy, which are discussed below, there have been no material changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2022, as compared to the significant accounting policies described in the Company’s annual consolidated financial statements for the year ended December 31, 2021.

Stock-Based Compensation

On September 1, 2022, the Company launched its new employee compensation system ("Flex Comp"), which provides employees with a single total compensation amount that is to be allocated between cash, stock options and restricted share units ("RSUs") at the discretion of the employees, subject to certain restrictions around minimum and maximum allocations between cash and stock-based compensation. For the portion of their total compensation that employees allocate to stock-based compensation, the Company began granting stock options and RSUs quarterly that generally vest on a monthly basis over a period of
7

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

three months. The related stock-based compensation cost is recognized as an operating expense over the requisite service period.

Flex Comp is optional for current employees. For those who choose not to enter into the new system there is no change to their compensation or the related stock-based compensation accounting as described in the significant accounting policies of the Company's annual consolidated financial statements for the year ended December 31, 2021.

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. Actual results may differ from the estimates made by management. Significant estimates, judgments and assumptions in these condensed consolidated financial statements include: key judgments related to revenue recognition in determining whether the Company is the principal or an agent to the arrangements with merchants; estimates of expected credit losses related to financial assets measured at amortized cost, including contract balances and merchant cash advances and loans; certain inputs used to fair value acquired intangible assets, including royalty rates, discount rates, revenue growth rates, gross margins, net margins, and estimated costs; inputs used to fair value equity and other investments in private companies and debt securities, as well as estimates and judgments involved in applying the measurement alternative, including the Company's assessment to evaluate whether an investment is impaired through analyzing market conditions, business results and other qualitative measures and to measure the amount of that impairment, when applicable, by developing certain key assumptions, including revenue growth rates, revenue multiples based on market comparables and a discount for lack of marketability; probabilities of achieving performance milestones associated with non-cash revenue consideration from strategic partnerships; estimates involved in evaluating the recoverability of the Company's right-of-use assets and leasehold improvements, including, but not limited to, the estimated useful lives of right-of-use assets and leasehold improvements; the incremental borrowing rate applied to lease payments; and the probability and amount of loss contingencies.

Concentration of Credit Risk

The Company’s cash and cash equivalents, marketable securities, trade and other receivables, merchant cash advances, loans and related receivables, equity and other investments, debt securities and foreign exchange derivative products subject the Company to concentrations of credit risk. Management mitigates this risk associated with cash and cash equivalents by making deposits and entering into foreign exchange derivative products only with large banks and financial institutions that are considered to be highly creditworthy. Management mitigates the risks associated with marketable securities by adhering to its investment policy, which stipulates minimum rating requirements, maximum investment exposures and maximum maturities. Due to the Company’s diversified merchant base, there is no particular concentration of credit risk related to the Company’s trade and other receivables and merchant cash advances and loans receivable. Trade and other receivables and merchant cash advances and loans receivable are monitored on an ongoing basis to ensure timely collection of amounts. The Company notes that its exposure to collectibility risk by customers impacted by the Russian invasion of Ukraine is financially immaterial. The Company has mitigated some of the risks associated with Shopify Capital by opening insurance policies with Export Development Canada ("EDC"), a wholly-owned corporation of the Government of Canada, who is AAA rated as at September 30, 2022. The Company’s policies cover certain merchant cash advances and loans, subject under certain policies to minimum claim requirements and regional restrictions. The Company pays EDC a monthly premium based on total eligible dollars advanced, and records this as general and administrative expense in the condensed consolidated statements of operations and comprehensive (loss) income. All policies include a deductible set at either a specified dollar loss threshold or calculated as a percentage of eligible advances issued. After considering the Company’s deductible and the insurer's maximum liability under the policies, the majority of the Company's gross outstanding balance
8

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

of merchant cash advances and loans as at September 30, 2022 is covered. The receivable related to insurance recoveries, if any, is included in the merchant cash advances, loans and related receivables balance. The Company mitigates the risks associated with its equity and other investments and debt securities through its diligence process performed prior to investing. The Company has a high concentration of credit risk associated with a small number of equity and other investments that are impacted by fluctuations in their fair values or by observable changes or impairments. There are no receivables from individual merchants accounting for 10% or more of revenues or receivables.

Equity and Other Investments Risk

The Company holds equity and other investments that are subject to a wide variety of market-related risks that could substantially reduce or increase the fair value of our holdings. The Company's equity and other investments in public companies are recorded at fair value, which is subject to market price volatility. The Company's equity investments in private companies are recorded using the measurement alternative and are assessed each reporting period for observable price changes and impairments, which may involve estimates and judgments given the lack of readily available market data. Certain equity investments in private companies are in the early stages of development and are inherently risky due to their lack of operational history. Our debt investments in convertible notes of private companies are recorded at fair value, which are impacted by the underlying entities' valuations and interest rates.

Foreign Exchange Risk

The Company's results of operations and foreign currency assets and liabilities are exposed to foreign currency fluctuations.

While the majority of the Company's revenues, cost of revenues, and operating expenses are denominated in USD, a significant portion are denominated in foreign currencies. Due to offering Shopify Payments, subscriptions, and other billings to select countries in local currency, a significant proportion of revenue transactions are denominated in British pound sterling ("GBP"), Euros ("EUR"), and Canadian dollars ("CAD"). Furthermore, as the Company's operations continue to be heavily weighted in CAD and as operations continue to expand internationally, a significant proportion of operating expenses are also incurred in the aforementioned foreign currencies.

The following table summarizes the effects on revenues, cost of revenues, operating expenses, and (loss) income from operations of a 10% strengthening(1) of all foreign currencies the Company transacts in versus the USD without considering the impact of the Company's hedging activities and factoring in any potential changes in demand for the Company's solutions as a result of fluctuations in exchange rates:
Nine months ended
September 30, 2022September 30, 2021
GAAP Amounts As Reported
$
Exchange Rate Effect (2)
$
At 10% Stronger Rates (3)
$
GAAP Amounts As Reported
$
Exchange Rate Effect (2)
$
At 10% Stronger Rates (3)
$
Revenues3,864,886 50,120 3,915,006 3,231,832 42,371 3,274,203 
Cost of revenues(1,909,275)(30,057)(1,939,332)(1,443,347)(28,085)(1,471,432)
Operating expenses(2,589,161)(87,501)(2,676,662)(1,534,246)(63,051)(1,597,297)
(Loss) income from operations(633,550)(67,438)(700,988)254,239 (48,765)205,474 
(1) A 10% weakening of the foreign currencies versus the USD would have an equal and opposite impact on the Company's revenues, cost of revenues, operating expenses and (loss) income from operations as presented in the table.
(2) Represents the increase or decrease in GAAP amounts reported resulting from a 10% strengthening in foreign exchange rates relative to the USD.
(3) Represents the outcome that would have resulted had the foreign exchange rates relative to the USD in those periods been 10% stronger than they actually were, excluding the impact of our hedging program and without factoring in any potential changes in demand for the Company's solutions as a result of changes in exchange rates.
9

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


Although foreign currency fluctuations associated with revenues and costs may partially offset one another in earnings, the Company uses foreign exchange derivative products to mitigate a portion of the remaining exposure of foreign currency fluctuations as discussed in Note 4. By their nature, derivative financial instruments involve risk, including the credit risk of non-performance by counterparties.

4.Financial Instruments

Debt Securities

The Company holds certain debt securities that are classified as held-to-maturity at the time of purchase as the Company has both the positive intent and ability to hold to maturity. The fair value of 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.

The Company also holds debt securities in the form of convertible notes in private companies presented within equity and other investments on the condensed consolidated balance sheets. These debt securities are classified as available-for-sale for which the Company has elected to apply the fair value option. The fair values were determined based on binomial pricing models for which the Company was required to develop its own assumptions, including the underlying entities' valuations.

The following tables summarize debt securities by significant investment classification:
As at September 30, 2022
Carrying Value
Cash EquivalentsMarketable SecuritiesEquity and Other InvestmentsFair Value
$$$$
Level 1:
U.S. term deposits—625,000—629,320
U.S. federal bonds and agency securities9,971772,856—781,572
Canadian federal bonds and agency securities23,179697,039—720,833
Corporate bonds and commercial paper192,492——192,469
225,6422,094,895—2,324,194
Level 2:
Corporate bonds and commercial paper—1,468,286—1,468,489
Level 3:
Convertible notes in private companies——218,120218,120
225,6423,563,181218,1204,010,803
The fair values of marketable securities above include accrued interest of $9,876, which is excluded from the carrying amounts. The accrued interest is included in trade and other receivables in the condensed consolidated balance sheets. Additional accrued interest of $10,161 recognized on the convertible notes in private companies is included in the carrying amount and fair value above.

In the three and nine months ended September 30, 2022, $639 of unrealized gains and $30,419 of unrealized losses, respectively, associated with the Company's convertible notes in private companies were recorded within "net unrealized gain (loss) on equity and other investments" in the condensed consolidated statement of operations and comprehensive (loss) income ($3,675 of unrealized gains for the three and nine months ended September 30, 2021). Additionally, interest income of $2,257 and $6,464 was recorded
10

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

within "interest income" in the condensed consolidated statement of operations and comprehensive (loss) income ($2,000 for the three and nine months ended September 30, 2021).

As at December 31, 2021
Carrying Value
Cash EquivalentsMarketable SecuritiesEquity and Other InvestmentsFair Value
$$$$
Level 1:
Corporate bonds and commercial paper267,953——268,090
U.S. term deposits—900,000—901,689
U.S. federal bonds and agency securities—680,436—681,629
Canadian federal bonds and agency securities50,1381,215,646—1,268,139
318,0912,796,082—3,119,547
Level 2:
Corporate bonds and commercial paper—2,469,019—2,475,051
Level 3:
Convertible notes in private companies——205,878205,878
318,0915,265,101205,8785,800,476
The fair values above include accrued interest of $13,067, which is excluded from the carrying amounts. The accrued interest is included in trade and other receivables in the condensed consolidated balance sheets. Additional accrued interest of $4,000 recognized on the convertible notes in private companies is included in the carrying amount and fair value above.

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

Equity Investments with Readily Determinable Fair Values

The Company holds equity investments in public companies that were obtained through a combination of direct investment and strategic partnerships.

Equity investments with readily determinable fair values are comprised of:
September 30, 2022December 31, 2021
Level 1Level 3TotalLevel 1Level 3Total
$$$$$$
Affirm Holdings, Inc.380,783—380,7832,041,126—2,041,126
Global-E Online Ltd.479,24299,463578,705741,775423,3871,165,162
Other2,459—2,459———
862,48499,463961,9472,782,901423,3873,206,288

In the three and nine months ended September 30, 2022, $28,013 and $162,969, respectively, were transferred from Level 3 to Level 1 due to the vesting of warrants associated with an investment in a strategic partnership (September 30, 2021 - $79,277 and $89,377). The equity investments categorized as Level 3 in the fair value hierarchy represent Global-E unvested warrants that require the application of a discount for lack of marketability which was 11% at September 30, 2022 (December 31, 2021 - 15%).

11

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

Adjustments related to equity and other investments with readily determinable fair values for the three and nine months ended September 30, 2022 and 2021 were as follows:

Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Balance, beginning of the period800,722 2,374,043 3,206,288 — 
Adjustments related to equity and other investments with readily determinable fair values:
Investments received not tied to services(1)
— — 105,268 — 
Investments received as non-cash consideration in exchange for services— — 29,577 — 
Purchases of equity and other investments15 25 57 25 
Sale of equity and other investments(3,082)— (3,082)— 
Net unrealized gains (losses)164,292 1,337,167 (2,376,161)3,360,680 
Transfers from measurement alternative (2)(3)
— — — 350,530 
Balance, end of the period961,947 3,711,235 961,947 3,711,235 
(1) During the nine months ended September 30, 2022, certain private investments were acquired by third-party investors resulting in the deemed sale of equity and other investments in the period and the receipt of shares in certain public companies. Any resulting realized gains or losses were presented as "net realized (loss) gain on equity and other investments" in the condensed consolidated statement of operations and comprehensive (loss) income.
(2) Effective January 13, 2021, the Company's investment in Affirm no longer qualified for the use of the measurement alternative as the fair value of the investment became readily determinable.
(3) Effective May 12, 2021, the Company's investment in Global-E no longer qualified for the use of the measurement alternative as the fair value of the investment became readily determinable.

Equity Investments without Readily Determinable Fair Values

The carrying value of equity investments in private companies without readily determinable fair values are:
September 30, 2022December 31, 2021
$$
Total initial value1,354,755 539,221 
Cumulative gross unrealized gains48,895 38,880 
Cumulative gross unrealized losses and impairment(161,970)(34,722)
Total carrying value of equity and other investments without readily determinable fair values (1)
1,241,680 543,379 
(1) As at September 30, 2022, three investments in private companies represent $975,754 (December 31, 2021 - $348,278) of the total carrying value of equity and other investments without readily determinable fair values.

12

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

Adjustments related to equity and other investments without readily determinable fair values for the three and nine months ended September 30, 2022 and 2021 were as follows:
Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Balance, beginning of the period927,745 422,278 543,379 173,454 
Adjustments related to equity and other investments without readily determinable fair values:
Purchases of equity and other investments110,472 40,667 593,579 442,541 
Investments received as non-cash consideration in exchange for services196,475 65,277 243,624 257,577 
Gross unrealized gains6,988 — 12,241 31,902 
Sales of equity and other investments(1)
— — (13,480)— 
Transfers to readily determinable fair values (2)(3)
— — — (350,530)
Gross unrealized losses and impairments(4)
— — (137,663)(26,722)
Balance, end of the period1,241,680 528,222 1,241,680 528,222 
(1) During the nine months ended September 30, 2022, certain private investments were acquired by third-party investors resulting in the deemed sale of equity and other investments in the period. Any resulting realized gains or losses were presented as "net realized (loss) gain on equity and other investments" in the condensed consolidated statement of operations and comprehensive (loss) income.
(2) Effective January 13, 2021, the Company's investment in Affirm no longer qualified for the use of the measurement alternative as the fair value of the investment became readily determinable.
(3) Effective May 12, 2021, the Company's investment in Global-E no longer qualified for the use of the measurement alternative as the fair value of the investment became readily determinable.
(4) The Company applied certain valuation methods based on information available, including the market approach and option pricing models in order to quantify the level of impairment. This required the Company to develop certain key assumptions, including revenue growth rates, revenue multiples based on market comparables and a discount for lack of marketability. Non-public information, made available to the Company from investee companies, was supplemented with estimates such as volatility, expected time to liquidity and the rights and obligations of the securities the Company holds.

As at September 30, 2022, included in the total $1,241,680 of equity and other investments without readily determinable fair values, $402,366 was remeasured at fair value and was classified within Level 3 of the fair value measurement hierarchy on a non-recurring basis.

Derivative Instruments and Hedging

As at September 30, 2022, the Company held foreign exchange forward contracts and options for USD, GBP and CAD with a total notional value of $583,786 (December 31, 2021 - $586,547), to fund a portion of its operations. The foreign exchange forward contracts and options have maturities of twelve months or less. The fair value of foreign exchange forward contracts and options was based upon Level 2 inputs, which included period-end mid-market quotations for each underlying contract as calculated by the financial institution with which the Company has transacted. The quotations are based on bid/ask quotations and represent the discounted future settlement amounts based on current market rates.

Derivative Instruments Designated as Hedges

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 and options with certain financial institutions and designated those hedges as cash flow hedges. The Company is hedging cash flows associated with payroll and facility costs.

13

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

The fair values of outstanding derivative instruments were as follows:
September 30, 2022December 31, 2021
$$
Level 2:
Foreign exchange forward contracts and options assets (classified in other current assets)8,160 1,824 
Foreign exchange forward contract liabilities (classified in accounts payable and accrued liabilities)35,700 5,926 

Unrealized gains and unrealized losses related to changes in the fair value of foreign exchange forward contracts and options designated as cash flow hedges were as follows:
September 30, 2022September 30, 2021
$$
Unrealized gains— 1,684 
Unrealized losses(35,700)(5,291)
Total net unrealized (losses) gains(35,700)(3,607)

These unrealized gains and losses were included in accumulated other comprehensive (loss) income, other current assets, and accounts payable and accrued liabilities on the condensed consolidated balance sheet. These amounts are expected to be reclassified into earnings over the next twelve months.

Realized losses and realized gains related to the maturity of foreign exchange forward contracts and options designated as cash flow hedges were as follows:
Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Realized (losses) gains in cost of revenues(148)219 (420)1,071 
Realized (losses) gains in operating expenses(4,391)3,921 (10,770)21,548 
(4,539)4,140 (11,190)22,619 

Derivatives Instruments Not Designated as Hedges

During the first quarter of 2022, the Company entered into a commodity swap contract with a producer to fund renewable energy production and to obtain renewable energy certificates. The contract guarantees the producer a minimum price per megawatt hour with any differences between market prices and this minimum price being settled in cash between the producer and the Company on a monthly basis. The Company's maximum commitment over the remaining life of the contract, ending May 31, 2032, is $10,737.

14

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

5.Contract Balances
    
When revenue is recognized, the Company records a receivable that is included in trade and other receivables on the condensed consolidated balance sheet. Trade receivables and unbilled revenues, net of allowance for credit losses, were as follows:
 September 30, 2022December 31, 2021January 1, 2021
$$$
Unbilled revenues, net100,354 86,795 50,073 
Trade receivables, net57,957 40,342 13,449 
Indirect taxes receivable54,380 39,142 45,961 
Other receivables18,616 12,863 3,706 
Accrued interest9,876 13,067 7,563 
 241,183 192,209 120,752 
    
Unbilled revenues represent amounts not yet billed to merchants related to subscription fees for Plus merchants, transaction fees and shipping and fulfillment charges, as at the condensed consolidated balance sheet date.

The allowance for credit losses reflects the Company's best estimate of probable losses inherent in the unbilled revenues and trade receivables accounts. The Company determined the provision based on known troubled accounts, historical experience, supportable forecasts of collectibility and other currently available evidence.

Activity in the allowance for credit losses was as follows:
Three months ended
Nine months ended
 September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Allowance, beginning of the period8,856 6,425 6,944 6,041 
Provision for credit losses related to uncollectible receivables7,165 1,521 11,745 6,654 
Write-offs(1,816)(2,361)(4,484)(7,110)
Allowance, end of the period14,205 5,585 14,205 5,585 

15

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

Changes in total deferred revenue were as follows:
Three months ended
Nine months ended
 September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Balance, beginning of the period413,412 318,481 379,724 128,815 
Deferral of revenue264,298 129,383 363,321 337,730 
Recognition of deferred revenue(90,460)(69,528)(155,795)(88,209)
Balance, end of the period587,250 378,336 587,250 378,336 
Current portion287,625 203,853 
Long term portion299,625 174,483 
587,250 378,336 

The opening balances of total current and long-term deferred revenue were $107,809 and $21,006, respectively, as of January 1, 2021.

As at September 30, 2022, the long-term deferred revenue, excluding non-cash consideration received, will be recognized ratably over the remaining terms of the contracts with the customers, which range from two to five years.

The Company has received non-cash consideration in the form of equity investments in exchange for services to be rendered as part of strategic partnerships. As the Company is required to provide referral services and other services to support the partners' merchant offerings over the period of the performance obligations, revenue is deferred and recognized over time on a ratable basis over the expected terms of the contracts. Within total deferred revenue outlined above, non-cash consideration represents a significant portion of the balance as at September 30, 2022. The table below summarizes the gross changes in deferred revenue associated with this non-cash consideration received for the three and nine months ended September 30, 2022 and 2021.

Three months ended
Nine months ended
 September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Balance, beginning of the period253,635 195,075 230,574 20,896 
Non-cash consideration received in exchange for services196,475 65,277 273,201 257,577 
Revenue recognized related to non-cash consideration(32,882)(19,304)(86,547)(37,425)
Balance, end of the period417,228 241,048 417,228 241,048 
Current portion136,948 81,505 
Long term portion280,280 159,543 
417,228 241,048 

The Company will recognize this revenue ratably over the remaining terms of the respective strategic partnership service agreements, which range from three to seven years.

16

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts
6.Merchant Cash Advances, Loans and Related Receivables
    
September 30, 2022December 31, 2021January 1, 2021
$$$
Merchant cash advances receivable, gross510,942 439,289 218,840 
Related receivables— — 819 
Allowance for credit losses related to uncollectible merchant cash advances receivable(52,491)(38,264)(15,816)
Loans receivable, gross221,885 72,751 43,644 
Allowance for credit losses related to uncollectible loans receivable(14,283)(3,054)(2,764)
Merchant cash advances, loans and related receivables, net666,053 470,722 244,723 

Merchant Cash Advances

The following table summarizes the activities of the Company’s allowance for credit losses related to uncollectible merchant cash advances receivable:
Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Allowance, beginning of the period46,784 26,570 38,264 15,816 
Provision for credit losses related to uncollectible merchant cash advances receivable15,252 10,283 38,007 25,708 
Merchant cash advances receivable charged off, net of recoveries(9,545)(3,235)(23,780)(7,906)
Allowance, end of the period52,491 33,618 52,491 33,618 

Loans

The following table summarizes the activities of the Company’s allowance for credit losses related to uncollectible loans receivable:
Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Allowance, beginning of the period8,846 3,347 3,054 2,764 
Provision for credit losses related to uncollectible loans receivable7,171 213 14,638 1,421 
Loans receivable charged off, net of recoveries(1,734)(705)(3,409)(1,330)
Allowance, end of the period14,283 2,855 14,283 2,855 

The following table presents the delinquency status of the principal amount of merchant loans by year of origination. The delinquency status is determined based on the number of days past the expected or contractual repayment date for which the Company anticipates to receive the amounts outstanding. The "current" category represents balances that are within 29 days of the contractual repayment dates, or within 29 days of the expected repayment date.
17

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts
September 30, 2022
Year of origination
20222021TotalPercent
Current$207,948 $1,499 $209,447 94.4 %
30-59 Days2,050 244 2,294 1.0 %
60-89 Days1,516 275 1,791 0.8 %
90-179 Days2,461 396 2,857 1.3 %
180+ Days4,212 1,284 5,496 2.5 %
Total$218,187 $3,698 $221,885 100.0 %

December 31, 2021
Year of origination
20212020TotalPercent
Current$69,350 $— $69,350 95.3 %
30-59 Days1,114 — 1,114 1.5 %
60-89 Days419 — 419 0.6 %
90-179 Days576 — 576 0.8 %
180+ Days1,292 — 1,292 1.8 %
Total$72,751 $— $72,751 100.0 %

The Company maintains an internal monitoring list related to its outstanding loans. A merchant's ability and willingness to repay the financing receivables outstanding under the program is analyzed for a variety of factors that include, but are not limited to: current or expected age of the financing, merchant subscription or financing status, merchant GMV trends and other changes to merchant credit profiles. The Company charges off receivables outstanding under the program when the merchant receivable is included on its internal monitoring list for a period of 90 consecutive days.

For certain Shopify Capital loans, there is a fixed maximum repayment term. For certain other Shopify Capital loans, the Company calculates an expected repayment date. Using the merchant's contractual or expected repayment date, the Company calculates an effective interest rate based on the merchant's expected future payment volume to determine how much of a merchant's repayment to recognize as revenue and how much to apply against the merchant's receivable balance. In the three and nine months ended September 30, 2022, $13,210 and $27,915 (September 30, 2021 - $4,992 and $13,635), respectively, of revenue recognized as merchant solutions revenue required the application of an effective interest rate, per ASC 310.

7.Leases

The Company has office, commercial and warehouse leases in Canada, the United States, Singapore, Ireland and other countries in Europe and Asia. These leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 10 years. As at September 30, 2022, an additional warehouse lease is set to commence later in 2022, at which point the Company's right-of-use assets and lease liabilities will increase. All of the Company's leases are operating leases.

18

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts
The components of lease expense were as follows:
Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Operating lease expense6,882 5,320 18,261 16,041 
Variable lease expense, including non-lease components3,922 3,038 9,896 9,210 
Total lease expense10,804 8,358 28,157 25,251 

As at September 30, 2022, the weighted average remaining lease term is 11 years and the weighted average discount rate is 4.4% (December 31, 2021 - 11 years and 3.3%, respectively).

During the nine months ended September 30, 2022, the Company terminated portions of leased office space consisting of leases recognized on the condensed consolidated balance sheet as well as future committed lease space. The terminations resulted in gains of $2,324 which is recorded as an offset within the total lease expense disclosed above.

Net sublease income for the three and nine months ended September 30, 2022 was $838 and $2,388 (September 30, 2021 - $526 and $852), which is recorded as an offset within the total lease expense disclosed above.

During the three months ended September 30, 2021, the Company identified leased office space for which it has ceased use. The Company recorded impairment charges of $28,436 related to its right-of-use assets and $1,709 related to its leasehold improvements in these spaces. These impairment charges were determined by comparing the asset groups' fair values made up of the right-of-use assets and leasehold improvements, to their carrying values as of the impairment measurement date, as required under ASC 360, Property, Plant and Equipment. Fair value was determined based on the present value of the estimated future cash flows. These estimates may vary from the actual amounts due to termination or sublease agreements ultimately executed, if at all, which may result in an adjustment to the charges. These charges were recorded as general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income.

19

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts
Maturities of lease liabilities as at September 30, 2022 were as follows:
Fiscal YearOffices
$		Warehouses and Commercial Spaces
$		Total
$
Remainder of 20228,979 1,353 10,332 
202334,807 21,804 56,611 
202444,200 38,176 82,376 
202547,553 39,121 86,674 
202648,525 40,133 88,658 
Thereafter269,754 294,566 564,320 
Total future minimum payments453,818 435,153 888,971 
Minimum payments related to leases that have not yet commenced— (140,961)(140,961)
Minimum payments related to variable lease payments, including non-lease components(188,664)(68,359)(257,023)
Imputed interest(39,310)(65,522)(104,832)
Total lease liabilities225,844 160,311 386,155 

Operating lease maturity amounts included in the table above do not include sublease proceeds expected to be received under our various sublease agreements with third parties. Under the agreements initiated with third parties, the Company expects to receive sublease proceeds of $827 in the remainder of 2022 and $19,042 thereafter.

8.Goodwill

The Company's goodwill relates to acquisitions of various companies including, but not limited to, Deliverr, Inc. ("Deliverr") which was acquired on July 8, 2022, 6 River Systems, Inc. ("6RS") which was acquired on October 17, 2019 and Donde Fashion, Inc. ("Donde") which was acquired on July 20, 2021.

The Company completed its annual impairment test of goodwill as of September 30, 2022. The Company exercised its option to bypass the qualitative assessment pursuant to ASC 350, Intangibles - Goodwill and Other, and perform a quantitative analysis. The Company determined that the consolidated business is represented by a single reporting unit and concluded that the estimated fair value of the reporting unit, determined using market capitalization,was greater than its carrying amount.

No goodwill impairment was recognized in the three and nine months ended September 30, 2022 or in the year ended December 31, 2021.

20

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts
The gross changes in the carrying amount of goodwill as of September 30, 2022 and December 31, 2021 are as follows:
September 30, 2022December 31, 2021
 $$
Balance, beginning of the period356,528 311,865 
Acquisition of Deliverr1,437,664 — 
Acquisition of Donde— 37,567 
Other acquisitions(1)
42,090 7,096 
Balance, end of the period1,836,282 356,528 
(1) During the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company completed individually immaterial acquisitions that resulted in goodwill being recognized.

9.Convertible Senior Notes

In September 2020, the Company issued $920,000 aggregate principal amount of 0.125% convertible senior notes due 2025 (the "Notes"). The net proceeds from the issuance of the Notes were $907,950 after deducting underwriting fees and offering costs.

The interest on the Notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2021. The Notes will mature on November 1, 2025, unless earlier redeemed or repurchased by the Company or converted pursuant to their terms.

The Notes have a conversion rate of 6.9440 Class A subordinate voting shares per one thousand dollars of principal amount of Notes, which is equivalent to a conversion price of approximately $144.01 per share, adjusted to give effect to the Share Split. The conversion rate is subject to adjustment following the occurrence of certain specified events, as set out or defined in the supplemental indenture governing the Notes. In addition, upon the occurrence of a make-whole fundamental change prior to the maturity date or upon our issuance of a notice of redemption, as set out or defined in the supplemental indenture governing the Notes, the Company will, in certain circumstances, increase the conversion rate by a number of additional Class A subordinate voting shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.

The Company accounts for the Notes as a single unit of account on the balance sheet. The carrying value of the liability is represented by the face amount of the Notes, less total offering costs, plus any amortization of offering costs. Total offering costs upon issuance of the Notes were $12,050 and are amortized to interest expense using the effective interest rate method over the contractual term of the Notes. Interest expense is recognized at an annual effective interest rate of 0.38% over the contractual term of the Notes.

The net carrying amount of the outstanding Notes was as follows:
September 30, 2022December 31, 2021
$$
Principal920,000 920,000 
Unamortized offering costs(7,276)(9,037)
Net carrying amount912,724 910,963 

21

Shopify Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Expressed in US $000's except share and per share amounts
The following table sets forth the interest expense recognized related to the outstanding Notes:
Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Contractual interest expense290 287 859 859 
Amortization of offering costs587 585 1,761 1,756 
Total interest expense related to the outstanding Notes877 872 2,620 2,615 

As at September 30, 2022, the estimated fair value of the Notes was approximately $761,760 (December 31, 2021 - $1,165,410). The estimated fair value was determined based on the last executed trade for the Notes of the reporting period in an over-the-counter market, which is considered as Level 2 in the fair value hierarchy.

10.Credit Facility

The Company has a revolving credit facility with Royal Bank of Canada for $8,000 CAD. The credit facility bears interest at the Royal Bank Prime Rate plus 0.30%. As at September 30, 2022 and December 31, 2021, the effective rate was 5.75% and 2.75%, respectively, and no cash amounts were drawn under this credit facility.

11.Litigation and Loss Contingencies

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.

On August 31, 2022, a jury in the U.S. District Court for the District of Delaware returned a verdict finding that the Company infringed three web technology patents owned by Express Mobile, Inc. The Company has challenged the verdict through post-trial motions and the Plaintiff has moved for interest on the amount of the verdict.

On December 1, 2021, five publishers of educational materials and two of their respective parent companies ("the Plaintiffs") filed a claim against the Company in the U.S. District Court for the Eastern District of Virginia for contributory and vicarious copyright infringement and contributory trademark infringement. The action has been settled amicably between the parties, and terms of the settlement agreement are confidential. The case was dismissed with prejudice on October 5, 2022.

The Company has recorded a total expense, including potential interest, of $97,000 in the three months ended September 30, 2022 associated with both litigation contingencies.

12.Related Parties

In January 2022, the Company entered a strategic partnership with a private company totaling $97,149, which is comprised of a $50,000 cash investment in the private company and the receipt of $47,149 in non-cash consideration to provide services for a duration of three years. A member of the Company's board of directors also serves as a director on the board of the aforementioned private company. For the three and nine months ended September 30, 2022, the Company recognized revenue of $4,041 and $10,924, respectively, from the private company.

22

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

13.Shareholders’ Equity

Founder Share

On June 7, 2022, the Company's shareholders approved an update to the Company's governance structure pursuant to a plan of arrangement under the Canada Business Corporations Act (the "Arrangement"). Under the terms of the Arrangement, on June 9, 2022 the Company created a new class of share, designated as the Founder share, and issued such Founder share to Tobias Lütke. The Founder share provides Mr. Lütke with a variable number of votes that, when combined with the Class B multiple voting shares (which are now described as Class B restricted voting shares as a result of the Company's updated governance structure) beneficially owned by him, his immediate family and his affiliates, will represent 40% of the aggregate voting power attached to all of the Company's outstanding shares.

Share Split

On June 7, 2022, the Company's shareholders approved a ten-for-one split of the Company's Class A subordinate voting shares and Class B restricted voting shares. Each shareholder of record on June 22, 2022 received nine additional Class A subordinate voting shares and Class B restricted voting shares, as applicable, for every one share held, distributed after close of trading on June 28, 2022. All share and per share amounts presented herein have been retroactively adjusted to reflect the impact of the Share Split.

Public Offerings

In February 2021, the Company completed a public offering in which it issued and sold 11,800,000 Class A subordinate voting shares at a public offering price of $131.50 per share, adjusted to give effect to the Share Split. The Company received total net proceeds of $1,541,168 after deducting offering fees and expenses of $10,532.

Common Stock Authorized

The Company is authorized to issue an unlimited number of Class A subordinate voting shares, an unlimited number of Class B restricted voting shares and one Founder share. The Class A subordinate voting shares have one vote per share, the Class B restricted voting shares have 10 votes per share and the Founder share has a variable number of votes per share. The Class B restricted voting shares are convertible into Class A subordinate voting shares on a one-for-one basis at the option of the holder. Class B restricted voting shares will also automatically convert into Class A subordinate voting shares in certain other circumstances. The Founder share cannot convert into either Class A subordinate voting shares or Class B restricted voting shares.

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.

Employee Compensation System

On September 1, 2022, the Company launched Flex Comp which provides employees with a single total compensation reward amount that is to be allocated between cash, stock options and RSUs at the discretion of the employees, subject to certain restrictions around minimum allocations of cash and stock-based compensation. The majority of the Company's employees were eligible and entered into Flex Comp and all previously granted but unvested stock options and RSUs of these employees were forfeited in connection
23

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

with the new system on September 1, 2022. The Company applied modification accounting resulting in stock-based compensation cost equal to, or greater than, the original grant date fair value of the modified awards being recognized as an operating expense over the requisite service period. The modification did not result in a one-time expense on the date Flex Comp was launched because none of the requisite service period had been completed as of that date. Employee elections for allocating their total compensation reward between cash and stock-based compensation currently occur on a quarterly basis, which may result in the split between these awards varying from quarter to quarter.

Stock-Based Compensation

In 2008, the Board of Directors adopted and the Company’s shareholders approved the Fourth Amended and Restated Stock Option Plan ("Legacy Option Plan"). Immediately prior to the completion of the Company’s May 2015 Initial Public Offering ("IPO"), and in connection with the closing of the offering, each option outstanding under the Legacy Option Plan became exercisable for one Class B restricted voting share. Following the closing of the Company’s IPO, no further awards were made under the Legacy Option Plan. The Legacy Option Plan continues to govern awards granted thereunder.

The Company’s Board of Directors and shareholders approved a stock option plan, as well as a long term incentive plan, each of which became effective upon the closing of the Company's IPO on May 27, 2015. On May 30, 2018 and on May 26, 2021, the Company’s Board of Directors and shareholders amended both of these plans.

The Second Amended and Restated Stock Option Plan ("SOP") allows for the grant of options to the Company’s officers, directors, employees and consultants. All options granted under the SOP will have an exercise price determined and approved by the Company’s Board of Directors at the time of grant, which shall not be less than the market price of the Class A subordinate voting shares at such time. For purposes of the SOP, the market price of the Class A subordinate voting shares shall be the volume weighted average trading price of the Class A subordinate voting shares on the NYSE for the five trading days ending on the last trading day before the day on which the option is granted. Options granted under the SOP are exercisable for Class A subordinate voting shares. Both the vesting period and term of the options in the SOP are determined by the Board of Directors at the time of grant. Options granted under the SOP between November 2017 and August 2022 have been approved with a three year vesting schedule with one-third vesting after one year and the remainder vesting evenly over the remaining 24 months. As a result of Flex Comp, certain options in the aforementioned plans were forfeited and their associated vesting schedules were ended. For employees that allocated a portion of their new total compensation reward to obtain options, such options are granted quarterly and generally vest on a monthly basis over a period of three months.

On October 17, 2019, the Company approved the issuance of rollover options, from treasury, under the 6 River Systems 2016 Amended and Restated Stock Option and Grant Plan, adopted on closing of the acquisition of 6RS. On July 8, 2022, the Company approved the issuance of rollover options, from treasury, under the Deliverr, Inc. 2017 Stock Option and Grant Plan, adopted on closing of the acquisition of Deliverr.

The Second Amended and Restated Long Term Incentive Plan ("LTIP") provides for the grant of share units, or LTIP Units, consisting of RSUs, performance share units ("PSUs"), and deferred share units ("DSUs"). Each LTIP Unit represents the right to receive one Class A subordinate voting share in accordance with the terms of the LTIP. Unless otherwise approved by the Board of Directors, RSUs will vest as to one-third each on the first, second and third anniversary dates of the date of grant. Prior to November 2017 all RSU grants were approved with a four-year vesting schedule with 25% vesting after one year and the remainder vesting evenly over the remaining 36 months. RSUs granted between November 2017 and August 2022 have been approved with three-year vesting schedules. As a result of Flex Comp, certain RSUs were forfeited and their associated vesting schedules were ended. For employees that allocated a portion of their new total compensation reward to obtain RSUs, the RSUs are granted
24

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

quarterly and generally vest on a monthly basis over a period of three months. A PSU participant’s grant agreement will describe the performance criteria established by the Company’s Board of Directors that must be achieved for PSUs to vest to the PSU participant, provided the participant is continuously employed by or in the Company’s service or the service or employment of any of the Company’s affiliates from the date of grant until such PSU vesting date. As at September 30, 2022, there have been $nil PSUs granted. DSUs will be granted solely to directors of the Company, at their option, in lieu of their Board retainer fees. DSUs will vest upon a director ceasing to act as a director.

As at September 30, 2022 there were 302,996,281 shares reserved for issuance under the Company's SOP and LTIP.

The following table summarizes the stock option and RSU award activities under the Company's share-based compensation plans for the nine months ended September 30, 2022:
Shares Subject to Options OutstandingOutstanding 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 RSUsWeighted Average Grant Date Fair Value
$
December 31, 202111,538,665 34.52 5.671,190,972 — 8,438,183 107.63 
Stock options granted(3)
6,104,953 34.82 — — — — — 
Stock options exercised(2,111,135)5.33 — — — — — 
Stock options forfeited(4)
(1,706,595)73.02 — — — — — 
RSUs granted(3)
— — — — — 19,657,764 45.24 
RSUs settled— — — — — (5,285,721)73.72 
RSUs forfeited(5)
— — — — — (12,878,709)75.46 
September 30, 202213,825,888 34.36 6.79 156,013 — 9,931,517 43.83 
Stock options exercisable as of September 30, 20228,204,902 25.04 5.24 119,239 
(1) As at September 30, 2022 1,502,785 of the outstanding stock options were granted under the Company's Legacy Option Plan and are exercisable for Class B restricted voting shares, 10,124,499 of the outstanding stock options were granted under the Company's Stock Option Plan and are exercisable for Class A subordinate voting shares, 160,900 of the outstanding stock options were granted under the 6 River Systems 2016 Amended and Restated Stock Option and Grant Plan and are exercisable for Class A subordinate voting shares, and 2,037,704 of the outstanding stock options were granted under the Deliverr 2017 Stock Option and Grant Plan and are exercisable for Class A subordinate voting shares.
(2) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company's Class A subordinate voting shares as of September 30, 2022 and December 31, 2021.
(3) Effective September 1, 2022, each employee that decided to enter into Flex Comp now receives a quarterly grant that generally vests on a monthly basis over a period of three months. Of the stock options granted, 2,251,863 related to the Deliverr acquisition, 879,640 related to Flex Comp and the remainder related to other compensation grants. Of the RSUs granted, 1,209,192 related to the Deliverr acquisition, 2,371,857 related to Flex Comp and the remainder related to other compensation grants.
(4) 690,158 of the stock options forfeited in the nine months ended September 30, 2022 related to employees that decided to enter into Flex Comp and 41,186 related to the reduction in workforce. The remainder related to standard voluntary and involuntary exits.
(5) 10,227,545 of the RSUs forfeited in the nine months ended September 30, 2022 related to employees that decided to enter into Flex Comp and 428,777 related to the reduction in workforce. The remainder related to standard voluntary and involuntary exits.

As at September 30, 2022 the Company had issued 10,468 DSUs under its LTIP.

In connection with the acquisition of 6RS, 1,220,800 Class A subordinate voting shares were issued with trading restrictions, adjusted to give effect to the Share Split. The restrictions on these shares are lifted over time and are being accounted for as stock-based compensation as the vesting is contingent on continued
25

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

employment and therefore related to post-combination services. As at September 30, 2022, 610,400 of the Class A subordinate voting shares remained restricted.

In connection with the acquisition of Deliverr, 5,397,628 Class A subordinate voting shares were issued with trading restrictions. The restrictions on these shares are lifted over time and are being accounted for as stock-based compensation as the vesting is contingent on continued employment and therefore related to post-combination services. As at September 30, 2022, 5,397,628 of the Class A subordinate voting shares remained restricted.

In connection with other acquisitions, 251,972 Class A subordinate voting shares were issued with trading restrictions. The restrictions on these shares are lifted over time and are being accounted for as stock-based compensation as the vesting is contingent on continued employment and therefore related to post-combination services. As at September 30, 2022, 251,972 of the Class A subordinate voting shares remained restricted.

The following table illustrates the classification of stock-based compensation expense in the condensed consolidated statements of operations and comprehensive (loss) income, which includes both stock-based compensation and restricted share-based compensation expense.  
Three months endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
$$$$
Cost of revenues
2,2601,6996,6864,851
Sales and marketing
16,77210,32948,66828,853
Research and development
105,12454,194285,160147,230
General and administrative
25,83415,11866,88451,520
149,99081,340407,398232,454

26

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

14.Changes in Accumulated Other Comprehensive (Loss) Income

The following table summarizes the changes in accumulated other comprehensive (loss) income, which is reported as a component of shareholders’ equity, for the nine months ended September 30, 2022 and 2021:
Accumulated Other Comprehensive (Loss) Income
Nine months ended
September 30, 2022September 30, 2021
$$
Balance, beginning of the period(5,974)8,770 
Other comprehensive (loss) income before reclassifications(43,169)2,672 
Loss (gain) on cash flow hedges reclassified from accumulated other comprehensive (loss) income to earnings were as follows:
Cost of revenues420 (1,071)
Sales and marketing2,500 (5,869)
Research and development5,892 (12,297)
General and administrative2,378 (3,382)
Tax effect on unrealized loss (gain) on cash flow hedges(59)5,287 
Other comprehensive loss, net of tax(32,038)(14,660)
Balance, end of the period(38,012)(5,890)

15.Income Taxes

The Company's provision for, or recovery of, income taxes is determined by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period.

The Company updates its estimate of the annual effective tax rate each quarter and makes cumulative adjustments if its estimated annual tax rate changes. The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which the Company operates, valuation allowances against deferred tax assets, the recognition and derecognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where the Company conducts business.

The Company had a provision for income taxes of $1,276 in the three months ended September 30, 2022, on account of earnings in jurisdictions outside of North America. The Company had a recovery of income taxes of $171,516 in the nine months ended September 30, 2022 primarily as a result of the unrealized loss on equity and other investments.

During the three months ended March 31, 2022, the Company recorded a valuation allowance in Canada against its net deferred income tax assets, which arose due to the overall unrealized loss on the Company's equity and other investments.

The Company had a provision for income taxes of $192,020 and $343,341 in the three and nine months ended September 30, 2021, respectively, as a result of the unrealized gain on equity and other investments, ongoing operations, other discrete items, primarily related to tax benefits for share-based compensation, the impairment of right-of-use assets and fixed assets, the Company's ability to carry-back losses to prior years in Canada, and the recognition of deferred tax assets in Canada.
27

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


16.Net Income per Share

The Company applies the two-class method to calculate its basic and diluted net income per share as Class A subordinate voting shares and Class B restricted 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 endedNine months ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Numerator:
Net (loss) income$(158,409)$1,148,432 $(2,836,724)$3,285,970 
After tax effect of debt interest(1)
— 641 — 1,922 
Net (loss) income after tax effected debt interest$(158,409)$1,149,073 $(2,836,724)$3,287,892 
Denominator(2):
Basic weighted average number of shares outstanding
1,269,425,2261,250,714,6001,263,885,3721,242,970,690
Weighted average effect of dilutive securities:
Stock options—14,465,853—17,625,768
Restricted share units—4,613,855—5,643,549
Convertible senior notes—6,388,480—6,388,480
Deferred share units—9,094—8,970
Diluted weighted average number of shares
1,269,425,2261,276,191,8821,263,885,3721,272,637,457
Net (loss) income per share(2):
Basic
$(0.12)$0.92 $(2.24)$2.64 
Diluted
$(0.12)$0.90 $(2.24)$2.58 
Common stock equivalents excluded from net (loss) income per diluted share because they are anti-dilutive(2):
Stock options13,825,888162,096 13,825,888308,302 
Restricted share units9,931,51710,477 9,931,51752,581 
Convertible senior notes6,388,480— 6,388,480— 
Deferred share units10,468— 10,468— 
30,156,353172,57330,156,353360,883 
(1) When the Notes are dilutive, the after tax effect of debt interest is added back to net income to calculate diluted net income per share.
(2) Prior period share and per share amounts have been adjusted to reflect the Share Split effected in June 2022. See Note 13 for details.

28

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

17.Business Acquisitions

Deliverr, Inc.

On July 8, 2022, the Company completed the acquisition of Deliverr, a company based in San Francisco, California, that provides fulfillment services to ecommerce retailers. By adding Deliverr's software, which includes machine learning and optimization technology, the Company intends to accelerate the development of Shopify Fulfillment Network. The Company acquired 100 percent of the outstanding shares of Deliverr in exchange for cash consideration of $1,961,864 and $9,774 in Shopify Class A subordinate voting shares. In connection with the transaction, a further $293,688 in restricted shares, RSUs and stock options were issued and are being accounted for as stock-based compensation as they are related to post-combination services. The transaction was accounted for as a business combination.

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

Amount
$
Fair value of net tangible assets and liabilities:
Cash263,850 
Trade and other receivables, net7,317 
Other current assets5,645 
Property and equipment, net12,833 
Accounts payable and accrued liabilities(20,360)
Other current and long-term liabilities(309)
Fair value of identifiable intangible assets:
Acquired technology255,000 
Customer relationships29,000 
Other intangibles4,000 
Net deferred tax liability on acquired intangibles(23,002)
Goodwill1,437,664 
Total purchase price1,971,638 

The acquired technology was valued at $255,000 using a relief-from-royalty methodology, the customer relationships were valued at $29,000 using a cost approach and other intangibles were valued at $4,000 using a relief-from-royalty methodology, and are being amortized over six, five and three years, respectively. Goodwill from the Deliverr acquisition is primarily attributable to the expected synergies that will result from integrating the Deliverr software with Shopify Fulfillment Network, and the acquisition of the assembled workforce. None of the goodwill recognized is deductible for income tax purposes. The deferred tax liability relates to the taxable temporary difference on the acquired intangible assets.

Donde Fashion, Inc.

On July 20, 2021, the Company completed the acquisition of software company Donde, a Delaware corporation, and its subsidiary Donde Mobile R&D Ltd. With this acquisition, the Company added engineering talent to expand its research and development capabilities. The Company acquired 100 percent of the outstanding shares of Donde in exchange for cash consideration of $50,687. The transaction was accounted for as a business combination. The operations of Donde have been consolidated into the Company’s results as of the acquisition date.
29

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 purchase price allocation of the Donde assets acquired and liabilities assumed at the acquisition date:
 Amount
$
Cash887 
Accounts payable and other current liabilities(7,377)
Technology24,000 
Net deferred tax liability on acquired intangibles(4,390)
Goodwill37,567 
Total purchase price50,687 

The acquired technology was valued at $24,000 using a cost approach and is being amortized over three years. Goodwill from the Donde acquisition is primarily attributable to the expected synergies that will result from integrating Donde and its assembled workforce. None of the goodwill recognized is deductible for income tax purposes. The deferred tax liability relates to the taxable temporary difference on the acquired intangible assets.

30