SHOPIFY INC. 10-K

Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), "we", "us", "our", "Shopify" and "the Company" refer to Shopify Inc. and its consolidated subsidiaries, unless the context requires otherwise. In this MD&A, we present Shopify's results of operations and cash flows for the fourth quarter and the fiscal years ended December 31, 2024, 2023 and 2022, and our financial position as of December 31, 2024. You should read this MD&A together with our audited consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. Our audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). All amounts are in U.S. dollars ("USD") except where otherwise indicated. Our MD&A is intended to enable readers to gain an understanding of Shopify's results of operations, cash flows and financial position. To do so, we provide information and analysis comparing our results of operations, cash flows and financial position for the most recently completed period with the same period from the preceding fiscal year. We also provide analysis and commentary that we believe will help investors assess our future prospects. In addition, we provide "forward-looking statements" that are not historical facts, but that are based on our current estimates, beliefs and assumptions and which are subject to known and unknown important risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from current expectations, including those discussed under Item 1A. Risk Factors of this Annual Report on Form 10-K. Forward-looking statements are intended to assist readers in understanding management's expectations as of the date of this MD&A and may not be suitable for other purposes See "Forward-looking Statements" in Part I of this Annual Report on Form 10-K for the fiscal year ended December 31, 2024. In this MD&A, references to our "solutions" means the combination of products and services that we offer to merchants, and references to "our merchants" as of a particular date means the total number of unique shops that are paying for a subscription to our platform. Business Overview We believe we can help merchants of all verticals and sizes, from aspirational entrepreneurs to companies with large-scale, direct-to-consumer or B2B operations, or both, realize their potential at all stages of their business life cycle. In the year ended December 31, 2024, our platform facilitated gross merchandise volume ("GMV") of $292.3 billion, representing an increase of 24% from the year ended December 31, 2023. A detailed description of this metric is presented below in the section entitled, "Key Performance Indicators". During the year ended December 31, 2024, our total revenue was $8.9 billion, an increase of 26% versus the year ended December 31, 2023. Our business model has two revenue components: a recurring subscription component we call subscription solutions and a merchant success-based component we call merchant solutions. In the year ended December 31, 2024, subscription solutions revenues accounted for 26% of our total revenues (26% in the year ended December 31, 2023). We offer a range of plans that increase in price depending on additional features and economic considerations. Shopify Plus is offered at a starting rate 46 Table of C ontents that is several times that of our standard Shopify plans. Shopify Plus solves for the complexity of merchants as they grow and scale globally, offering additional functionality and support, including features like Shopify Audiences, B2B features and Launchpad, for ecommerce automation. BarkBox, Vuori, BevMo, Carrier, JB Hi-Fi, Meta, ButcherBox, SKIMS and Supreme are a few of our notable merchants seeking a reliable, cost-effective and scalable commerce solution. The flexibility of our pricing plans is designed to help our merchants grow in a cost-effective manner and to provide more advanced features and support as their business needs evolve. We have also launched localized pricing plans in select countries where we bill in local currency in order to reduce friction and attract more merchants to our platform. Revenue from subscription solutions is generated through the sale of subscriptions to our platform, including variable platform fees, as well as through the sale of subscriptions to our POS Pro offering, the sale of apps, the sale of themes and the registration of domain names. Subscription solutions revenues increased from $1.8 billion in the year ended December 31, 2023 to $2.4 billion in the year ended December 31, 2024, representing an increase of 28% . Our merchants typically enter into monthly subscription agreements. The revenue from these agreements is recognized over time on a ratable basis over the contractual term and therefore we have deferred revenue on our balance sheet. We do not consider this deferred revenue balance to be a good indicator of future revenue. Instead, we believe Monthly Recurring Revenue ("MRR") is most closely correlated with the long-term value of our merchant relationships. As of December 31, 2024, MRR totaled $178 million, representing an increase of 24% relative to MRR at December 31, 2023. A detailed description of this metric is presented below in the section entitled, "Key Performance Indicators". We offer a variety of merchant solutions that are designed to add value to our merchants by passing on our economies of scale and augment our subscription solutions. During the year ended December 31, 2024, merchant solutions revenues accounted for 74% of total revenues ( 74% in the year ended December 31, 2023). We principally generate merchant solutions revenues from payment processing fees and currency conversion fees from Shopify Payments. Shopify Payments is a fully integrated payment processing service that allows our merchants to accept and process payment cards online and offline. In addition to payment processing fees and currency conversion fees from Shopify Payments, we also generate merchant solutions revenue from referral fees from third parties, other transaction services and other services rendered as part of strategic partnerships and Shopify Capital. Shopify Capital helps eligible merchants secure financing and is currently available for merchants in the United States, the United Kingdom, Canada and Australia. The majority of our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform. Merchant solutions revenues increased from $5.2 billion in the year ended December 31, 2023 to $6.5 billion in the year ended December 31, 2024 , representing an increase of 25%. Our business model is driven by our ability to attract new merchants, retain revenue from existing merchants and increase sales to both new and existing merchants. Our merchants represent a wide array of retail verticals, business sizes, and geographies and no single merchant has ever represented more than five percent of our total revenues in a single reporting period. We believe that our future success depends on many factors, including our ability to expand our merchant base; localize features for specific geographies; retain merchants as they grow their businesses on our platform and adopt more features; offer more sales channels that connect merchants with potential customers; develop new solutions to extend our platform’s functionality and catalyze merchants’ sales growth; leverage emerging technologies, including AI; enhance our ecosystem and partner programs; provide a high level of merchant support; hire, retain and motivate qualified personnel; and build with a focus on maximizing long-term value. We have focused on rapidly growing our business and plan to continue making investments to drive future growth. We believe that our investments will increase our revenue base, improve the retention of this base and strengthen our ability to increase sales to our merchants. Building a 100-year company requires a balance between growth and profitability, and we maintain a portfolio of investments with varying time horizons in our cash management program. 47 Table of C ontents Key Performance Indicators Our key performance indicators, which we do not consider to be non-GAAP measures, that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions are MRR and GMV. Our key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies. The following table shows MRR and GMV for the years ended December 31, 2024, 2023 and 2022: Years ended December 31, 2024 2023 2022 (in US $ millions) Monthly Recurring Revenue 178 144 109 Gross Merchandise Volume 292,275 235,910 197,167 Monthly Recurring Revenue We calculate MRR at the end of each period by multiplying the number of merchants who have subscription plans with us at the period end date by the average monthly subscription plan fee, which excludes variable platform fees, in effect on the last day of that period, assuming they maintain their subscription plans the following month. Subscription plans to both our platform and our POS Pro offering are included in this calculation. When applicable, MRR relating to subscription plans billed in a merchant's local currency is converted to USD using the respective currency exchange rate as of the period end date. Prospective merchants that have joined the platform through special new merchant trial incentives, including paid trials, are included in MRR at their trial price while merchants on free trials are excluded from the calculation of MRR through the duration of the free trial. MRR allows us to average our various pricing plans and billing periods into a single, consistent number that we can track over time. We also analyze the factors that make up MRR, specifically the number of paying merchants using our platform and changes in our average revenue earned from subscription plan fees per paying merchant. In addition, we use MRR to forecast monthly, quarterly and annual subscription plan revenue, which makes up the majority of our subscription solutions revenue. We had $178 million of MRR as of December 31, 2024 compared to $144 million as of December 31, 2023 and $109 million as of December 31, 2022, as described above. In the year ended December 31, 2024, the MRR growth rate for the period was lower than the same period in 2023 driven mainly by the effects of the increase in subscription plan pricing for certain plans during the second quarter of 2023 and the lift from paid trial incentives launched in the second half of 2022 that converted in 2023. The amounts associated with prospective merchants on trial incentives were immaterial to MRR as of December 31, 2024, but we expect to continue to see an increase in MRR as these cohorts of merchants convert to full price subscription plans. In the year ended December 31, 2023, we observed a higher MRR growth rate compared to the same period in 2022. The MRR growth rate in the year ended December 31, 2023 was driven mainly by the effects of the increase in subscription plan pricing during the second quarter of 2023 and merchants converting to full price subscription plans that were previously on paid trial incentives. The paid trial incentives initially launched in the second half of 2022. 48 Table of C ontents Gross Merchandise Volume GMV is the total dollar value of orders facilitated through our platform including certain apps and channels for which a revenue-sharing arrangement is in place in the period, net of refunds, and inclusive of shipping and handling, duty and value-added taxes. GMV does not represent revenue earned by us. However, the volume of GMV facilitated through our platform is an indicator of the success of our merchants and the strength of our platform. Our merchant solutions revenues are also directionally correlated with the level of GMV facilitated through our platform. For the year ended December 31, 2024 we facilitated GMV of $292.3 billion (December 31, 2023 - $235.9 billion, December 21, 2022 - $197.2 billion ), representing year-over-year growth 24% (2023 vs 2022 - 20%). In 2024, o ver 57% of our GMV was generated in the United States. On a constant currency basis, in which GMV in the year ended December 31, 2024 is converted using the comparative period's monthly average exchange rates, yea r-over-year growth was 24% (2023 vs 2022 - 16%). Factors Affecting the Comparability of Our Results Change in Revenue Mix As a result of the continued growth of Shopify Payments, referral fees, other transaction services and other services rendered as part of strategic partnerships and Shopify Capital, our revenues from merchant solutions have increased significantly. Merchant solutions are intended to complement subscription solutions by providing additional value to our merchants and increasing their use of our platform. Gross profit margins on Shopify Payments, the biggest driver of merchant solutions revenue, are typically lower than on subscription solutions due to the associated third-party costs of providing this solution. We view this revenue stream as beneficial to our operating margins, as Shopify Payments requires significantly less sales and marketing and research and development expense than Shopify’s core subscription business. The lower margins on merchant solutions compared to subscription solutions means that the continued growth of merchant solutions may cause a decline in our overall gross margin percentage. The sales of our logistics businesses in the second quarter of 2023 impacted the comparability of our results. Seasonality Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants facilitated through our platform. Our merchants typically process additional GMV during the fourth quarter holiday season. As a result, we have historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. While we believe that this seasonality has affected and will continue to affect our quarterly results, our continued growth has partially masked seasonal trends to date. As a result of the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future and that historical patterns in our business may not be a reliable indicator of our future performance. Foreign Currency Fluctuations While the majority of our revenues, cost of revenues and operating expenses are denominated in USD, a significant portion are denominated in foreign currencies. Due to offering Shopify Payments, Shopify Capital, subscriptions and other billings to select countries in local currency, a significant proportion of revenue transactions are denominated in Euros ("EUR"), British pound sterling ("GBP") and Canadian dollars ("CAD"). A significant proportion of operating expenses are also incurred and expected to be included in the aforementioned foreign currencies. To help mitigate the impacts associated with foreign currency fluctuations on future cash flows from operating expenses, we maintain a portfolio of foreign exchange forward contracts and options designated as hedging instruments. As our operations continue to expand internationally, we may be exposed to additional fluctuations in other foreign currencies. Refer to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk—Risks and Uncertainties" below for additional information on the effect on reported results of changes in foreign exchange rates. 49 Table of C ontents Key Components of Results of Operations Revenues We derive revenues from subscription solutions and merchant solutions. Subscription Solutions We principally generate subscription solutions revenues through the sale of subscriptions to our platform, including variable platform fees, as well as through the sale of subscriptions to our POS Pro offering for brick and mortar merchants. We also generate associated subscription solutions revenues from the sale of apps, the registration of domain names and the sale of themes. We offer subscription plans with various price points, for businesses of all sizes from entry level plans to Shopify Plus, enterprise-level and modular plans that cater to higher-volume businesses that offer additional functionality, scalability and support. Our subscription plans typically have a one-month term, although merchants can have annual or multi-year subscription terms. Subscription terms automatically renew unless notice of cancellation is provided in advance. Merchants purchase subscription plans directly from us. We also generate additional subscription solutions revenues from merchants that have subscription plans with us through the sale of apps, the registration of domain names and the sale of themes. Revenues from the sale of apps, the registration of domain names and the sale of themes have been classified within subscription solutions on the basis that they are typically sold at the time the merchant enters into the subscription arrangement or because they are charged on a recurring basis. Merchant Solutions We principally generate merchant solutions revenues from payment processing fees and currency conversion fees from Shopify Payments, referral fees from partners, Shopify Capital and Transaction Fees. Other revenue generating services and products include, but are not limited to, the sale of shipping labels through Shopify Shipping, the sale of point-of-sale ("POS") hardware, advertising on the Shopify App Store and Shop Campaigns, our buyer acquisition offering. In the second quarter of 2023, we sold our logistics businesses. Prior to the sales of these businesses, Shopify Fulfillment Network and Deliverr fulfillment services generated revenue from their respective fulfillment solutions, which included picking, packing and preparing orders for shipment and outbound shipping, as well as additional revenues from inbound shipping, storage, returns processing and other fulfillment-related services as needed by merchants. We also earned revenues from providing cloud-based software on collaborative warehouse fulfillment solutions. For a discussion of how we expect seasonal factors to affect our merchant solutions revenue, see “Factors Affecting the Comparability of our Results—Seasonality". Cost of Revenues Cost of Subscription Solutions Cost of subscription solutions consists primarily of third-party infrastructure, hosting costs and other direct costs, an allocation of costs incurred by both the operations and support functions, including personnel-related costs directly associated with subscription solutions such as salaries, benefits and stock-based compensation, processing fees related to billing our merchants, payments for domain registration and amortization of acquired intangible assets. We expect that the cost of subscription solutions will increase in absolute dollars as we continue to invest in growing our business, and as the number of merchants utilizing the platform increases along with the costs of supporting those merchants. Over time, we expect that our subscription solutions gross margin percentage will fluctuate modestly based on the mix of subscription plans that our merchants select and the timing of expenditures related to infrastructure expansion projects. 50 Table of C ontents Cost of Merchant Solutions Cost of merchant solutions primarily consists of costs that we incur when transactions are processed using Shopify Payments, such as credit card network fees (charged by credit card providers such as Visa, Mastercard and American Express) as well as third-party processing fees. Cost of merchant solutions also consists of rewards earned by merchants through our rewards program, processing fees related to billing our merchants, POS hardware costs, product costs associated with expanding our product offerings, including Shopify Balance, third-party infrastructure and hosting costs, chargeback protection program costs, amortization of acquired intangible assets and an allocation of costs incurred by both the operations and support functions, including personnel-related costs directly associated with merchant solutions such as salaries, benefits and stock-based compensation. In the second quarter of 2023, we sold our logistics businesses. Prior to the sales of these businesses, merchant solutions cost of revenues included amortization of acquired intangible assets relating mostly to the acquired Deliverr, Inc. ("Deliverr") and 6 River Systems, LLC technology, costs associated with picking, packing and preparing orders for shipment, outbound shipping, warehouse storage, overhead costs and other costs for fulfillment-related services as part of our logistics offerings and materials and third-party manufacturing costs associated with fulfillment robots sold to customers rather than leased to customers, which were capitalized and depreciated into cost of revenues. We expect that the cost of merchant solutions will increase in absolute dollars in future periods as the number of merchants utilizing these solutions increases, resulting in a growth in volumes processed. We also expect additional increases as we continue to expand Shopify Payments internationally. Operating Expenses Sales and Marketing Sales and marketing expenses consist primarily of marketing programs, partner referral payments related to merchant acquisitions, costs associated with partner and developer conferences, employee-related expenses for marketing, business development and sales, as well as the portion of merchant support required for the onboarding of prospective new merchants. Other costs within sales and marketing include travel-related expenses and corporate overhead allocations. Costs to acquire merchants are expensed as incurred, however, contract costs associated with Shopify Plus merchants are amortized over the expected life of their relative contract. We plan to continue to expand sales and marketing efforts to attract new merchants, retain revenue from existing merchants and increase revenues from both new and existing merchants. Sales and marketing expenses are expected to increase in absolute dollars but over time, we expect sales and marketing expenses will eventually decline as a percentage of total revenues. Research and Development Research and development expenses consist primarily of employee-related expenses for product management, product development, product design, data analytics, contractor and consultant fees as well as internal use hosting costs and corporate overhead allocations. We continue to focus our research and development efforts on adding new features and solutions, and increasing the functionality and enhancing the ease of use of our platform. While we expect research and development expenses to increase in absolute dollars as we continue to increase the functionality of our platform, over the long term we expect our research and development expenses will eventually decline as a percentage of total revenues. General and Administrative General and administrative expenses consist of employee-related expenses for finance and accounting, legal, administrative, talent and information technology personnel, impairment related to certain office leases we have ceased using, professional services fees, sales and use tax and other indirect taxes, insurance, the provision for expected credit losses on uncollectible receivables, corporate overhead allocations, legal contingencies and other corporate expenses, including sustainability spend. We expect that over time general and administrative expenses will decrease as a percentage of total revenues as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business. 51 Table of C ontents Transaction and Loan Losses Transaction and loan losses consist of expected and actual losses related to Shopify Payments, Shop Pay Installments, Shopify Balance and Shopify Capital. We are exposed to transaction losses on Shopify Payments, Shop Pay Installments and Shopify Balance as a result of unrecovered merchant transactions due to returns and disputes. We are also exposed to Shopify Balance losses when a merchant account experiences unauthorized transactions where funds cannot be recovered or reversed. We are exposed to transaction losses on loans and merchant cash advances offered through Shopify Capital as a result of fraud or uncollectibility. Transaction and loan losses are expected to increase in absolute dollars over time as merchant penetration and adoption grow. Impairment on Sales of Shopify's Logistics Businesses Impairment on sales of Shopify's logistics businesses consists of impairment charges incurred as the result of the sales of our logistics businesses in 2023. Other Income (Expense) Other income (expense) consists primarily of unrealized and realized gains or losses on equity and other investments, losses on our equity method investment in Flexport, Inc. ("Flexport"), transaction gains or losses on foreign currency, interest income and interest expense related to Shopify's convertible senior notes. Equity and other investments in publicly traded companies with readily determinable fair values are carried at fair value at each balance sheet date based on the closing share price at the end of the period. Equity and other investments in private companies without readily determinable fair values are carried at cost less impairments, with subsequent adjustments for observable changes (referred to as the measurement alternative). We also hold investments in convertible notes of private companies which are classified as available-for-sale debt securities, which we have elected to account for under the fair value option. The results from these equity and debt investments may fluctuate from period to period and may cause volatility to our earnings as well as impact comparability of our results from period to period. 52 Table of C ontents Results of Operations The following table sets forth a summary of our condensed consolidated statement of operations for the years ended December 31, 2024, 2023 and 2022: Years ended December 31, 2024 2023 2022 (in US $ millions, except share and per share amounts) Revenues Subscription solutions $ 2,350 $ 1,837 $ 1,488 Merchant solutions 6,530 5,223 4,112 8,880 7,060 5,600 Cost of revenues (1)(2) Subscription solutions 434 354 331 Merchant solutions 3,974 3,191 2,515 4,408 3,545 2,846 Gross profit 4,472 3,515 2,754 Operating expenses Sales and marketing (1)(2)(3) 1,393 1,220 1,230 Research and development (1)(2)(3) 1,367 1,730 1,503 General and administrative (1)(3)(4)(5) 410 491 708 Transaction and loan losses 227 152 135 Impairment on sales of Shopify's logistics businesses — 1,340 — Total operating expenses 3,397 4,933 3,576 Income (loss) from operations 1,075 (1,418) (822) Other income (expense), net 1,153 1,603 (2,801) Income (loss) before income taxes 2,228 185 (3,623) (Provision for) recovery of income taxes (209) (53) 163 Net income (loss) 2,019 132 (3,460) Net income (loss) per share attributable to shareholders: Basic $ 1.57 $ 0.10 $ (2.73) Diluted $ 1.55 $ 0.10 $ (2.73) Shares used to compute net income (loss) per share attributable to shareholders: Basic 1,289,812,124 1,281,554,559 1,266,268,155 Diluted 1,301,509,980 1,295,511,385 1,266,268,155 53 Table of C ontents (1) Includes stock-based compensation expense and related payroll taxes as follows: Years ended December 31, 2024 2023 2022 (in US $ millions) Cost of revenues 4 4 9 Sales and marketing (a) 50 59 65 Research and development (a) 303 497 396 General and administrative 96 76 93 453 636 563 (a) Includes accelerated stock-based compensation of $5 million and $164 million in sales and marketing and research and development, respectively, during the year ended December 31, 2023. (2) Includes amortization of acquired intangibles as follows: Years ended December 31, 2024 2023 2022 (in US $ millions) Cost of revenues 12 35 49 Sales and marketing 1 3 5 Research and development 1 — — 14 38 54 (3) In the year ended December 31, 2023, we had $148 million of severance related costs associated with the reduction in workforce with $28 million in sales and marketing, $102 million in research and development and $18 million in general and administrative. Additionally, in the year ended December 31, 2022, we had $30 million of severance related costs associated with the reduction in workforce with $11 million in sales and marketing, $8 million in research and development and $11 million in general and administrative. (4) In the year ended December 31, 2022, we incurred $97 million of expenses related to legal matters. In the year ended December 31, 2024, we released an accrual for an estimated liability of $55 million associated with a legal matter. (5) In the years ended December 31, 2023 and 2022, we had $38 million and $84 million, respectively, of impairment related costs associated with right-of-use assets and leasehold improvements. Discussion of the Results of Operations Revenues Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) Revenues Subscription solutions 2,350 28 % 1,837 23 % 1,488 Merchant solutions 6,530 25 % 5,223 27 % 4,112 Total revenues 8,880 26 % 7,060 26 % 5,600 Percentage of revenues Subscription solutions 26 % 26 % 27 % Merchant solutions 74 % 74 % 73 % 100 % 100 % 100 % Subscription Solutions Subscription solutions revenues increased for the year ended December 31, 2024 compared to the same period in 2023. The year-over-year increase was primarily a result of growth in MRR, which was driven largely by a higher number of merchants using our platform and by an increase in subscription plan pricing for certain plans in the second quarter of 2023. 54 Table of C ontents Subscription solutions revenues increased for the year ended December 31, 2023 compared to the same period in 2022. The increase was primarily a result of growth in MRR, which was driven largely by the number of merchants on our platform, as well as prospective merchants on the free and paid trials converting to full price subscription plans during the period and by an increase in subscription plan pricing for certain plans in 2023. Merchant Solutions Merchant solutions revenues increased for the year ended December 31, 2024 compared to the same period in 2023. The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue, relating to payment processing and currency conversion fees, growing in year ended December 31, 2024 compared to the same period in 2023. This increase was a result of an increase in our Shopify Payments penetration rate and increased merchant usage of our platform. These factors drove $43.9 billion of additional GMV facilitated using Shopify Payments in 2024 compared to the same period in 2023, representing growth of 32% year over year. For the year ended December 31, 2024, the Shopify Payments penetration rate was 61.9%, resulting in GMV of $181.0 billion that was facilitated using Shopify Payments. This compares to a penetration rate of 58.1%, resulting in GMV of $137.0 billion that was facilitated using Shopify Payments in the same period in 2023. As of December 31, 2024 Shopify Payments adoption among our merchants where Shopify Payments is available was as follows: North America, 91%, APAC, 90% and EMEA, 86% (December 31, 2023 - North America, 91%, APAC, 90% and EMEA, 81%). Merchant solutions revenues increased for the year ended December 31, 2023 compared to the same period in 2022. The increase in merchant solutions revenues was primarily a result of Shopify Payments revenue, relating to payment processing and currency conversion fees, growing in the year ended December 31, 2023 compared to the same period in 2022. This increase was a result of an increase in our Shopify Payments penetration rate and number of merchants using our platform. These factors drove $31.0 billion of additional GMV facilitated using Shopify Payments in 2023 compared to the same period in 2022 , representing growth of 29% year over year. For the year ended December 31, 2023 , the Shopify Payments penetration rate was 58.1% , resulting in GMV of $137.0 billion that was facilitated using Shopify Payments. This compares to a penetration rate of 53.8%, resulting in GMV of $106.1 billion that was facilitated using Shopify Payments in the same period in 2022. As of December 31, 2023 Shopify Payments adoption among our merchants was as follows: North America, 91%, APAC, 90% and EMEA, 81% (December 31, 2022 - North America, 91%, APAC, 89% and EMEA, 74%). Cost of Revenues Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) Cost of revenues Cost of subscription solutions 434 23 % 354 7 % 331 Cost of merchant solutions 3,974 25 % 3,191 27 % 2,515 Total cost of revenues 4,408 24 % 3,545 25 % 2,846 Percentage of revenues Cost of subscription solutions 5 % 5 % 6 % Cost of merchant solutions 45 % 45 % 45 % 50 % 50 % 51 % Cost of Subscription Solutions Cost of subscription solutions increased for the year ended December 31, 2024 compared to the same period in 2023. The increase was due mainly to an increase in cloud and infrastructure costs and increase in payment processing fees on merchant billings. As a percentage of revenues, cost of subscription solutions remained flat for the year ended December 31, 2024 compared to the same period in 2023. 55 Table of C ontents Cost of subscription solutions increased for the year ended December 31, 2023 compared to the same period in 2022. The increase was primarily due to an increase in payment processing fees on merchant billings and cloud and infrastructure costs, partially offset by a decrease in support costs. As a percentage of revenues, cost of subscription solutions decreased for the year ended December 31, 2023 compared to the same period in 2022, due to lower growth on cloud and infrastructure costs, relative to the growth in revenue as well as a decrease in support costs. Cost of Merchant Solutions Cost of merchant solutions increased for the year ended December 31, 2024 compared to the same period in 2023. The increase was primarily due to higher payment processing fees resulting from an increase in GMV facilitated through Shopify Payments, offset by decreased costs associated with our logistics operation and amortization of acquired intangibles as a result of the sales of our logistics businesses in the second quarter of 2023. As a percentage of revenues, cost of merchant solutions remained flat for the year ended December 31, 2024 compared to the same period in 2023 due to Shopify Payments representing a larger percentage of total revenue offset by decreased costs associated with revenue from our logistics operations and amortization of acquired intangibles as a result of the sales of our logistics businesses in the second quarter of 2023. Cost of merchant solutions increased for the year ended December 31, 2023 compared to the same period in 2022. The increase was primarily due to higher payment processing fees resulting from an increase in GMV facilitated through Shopify Payments and Shop Cash issued following the program launch in June 2023, offset by a decrease in costs associated with our logistics operations and a decrease in acquired intangibles following the sales of our logistics business in the second quarter of 2023. As a percentage of revenues, cost of merchant solutions remained flat for the year ended December 31, 2023 compared to the same period in 2022 due to higher payment processing fees from Shopify Payments caused by increased network costs and changes in payment card type relative to the increase in Shopify Payments revenue and Shop Cash issued following the program launch in June 2023. The increases were offset by the decrease in costs associated with revenue from our logistics operations and a decrease in amortization of acquired intangibles following the sales of our logistics business in the second quarter of 2023. Gross Profit Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) Gross profit 4,472 27 % 3,515 28 % 2,754 Percentage of total revenues 50 % 50 % 49 % 56 Table of C ontents Operating Expenses Sales and Marketing Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) Sales and marketing 1,393 14 % 1,220 (1) % 1,230 Percentage of total revenues 16 % 17 % 22 % Sales and marketing expenses increased for the year ended December 31, 2024 compared to the same period in 2023, due to increases of $84 million in overall marketing program spend primarily related to an increase in performance marketing spend, $68 million in payouts related to our affiliate partner programs and $43 million in employee-related costs, offset by a decrease in severance related costs of $28 million associated with the reduction in workforce in the second quarter of 2023. Sales and marketing expenses decreased for the year ended December 31, 2023 compared to the same period in 2022, due to decreases of $58 million in employee related costs and $53 million in online marketing spend, partially offset by increases of $38 million in offline marketing spend, $30 million in payouts related to our affiliate partner program and $17 million in severance related costs. Research and Development Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) Research and development 1,367 (21) % 1,730 15 % 1,503 Percentage of total revenues 15 % 25 % 27 % Research and development expenses decreased for the year ended December 31, 2024 compared to the same period in 2023, due to decrease in employee-related costs of $114 million, the acceleration of stock-based compensation of $164 million primarily related to the sales of our logistics businesses in the second quarter of 2023 and severance related costs of $102 million associated with the reduction in workforce in the second quarter of 2023. Research and development expenses increased for the year ended December 31, 2023 compared to the same period in 2022, due to acceleration of stock-based compensation of $164 million primarily related to the sales of our logistics businesses and an increase in severance related costs of $93 million. The increases were partially offset by a decrease of $57 million in employee-related costs. General and Administrative Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) General and administrative 410 (16) % 491 (31) % 708 Percentage of total revenues 5 % 7 % 13 % General and administrative expenses decreased for the year ended December 31, 2024 compared to the same period in 2023, due to a reversal of an estimated legal liability of $55 million recorded in the second quarter of 2024, impairment expenses of $38 million incurred relating to certain office locations we ceased using in the third quarter of 2023 and severance related costs of $18 million associated with the reduction in workforce in the second quarter of 2023, offset by increases in indirect taxes of $20 million and employee-related costs of $6 million in 2024. 57 Table of C ontents General and administrative expenses decreased for the year ended December 31, 2023 compared to the same period in 2022, due to $97 million in legal expenses incurred in the third quarter of 2022, a decrease of $70 million in employee-related costs and a decrease of $46 million in impairment related costs associated with right-of-use assets and leasehold improvements. Transaction and Loan Losses Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) Transaction and loan losses 227 49 % 152 13 % 135 Percentage of total revenues 3 % 2 % 2 % Transaction and loan losses increased for the year ended December 31, 2024 compared to the same period in 2023, due to an increase of $41 million in losses related to lending services driven by an expansion of our offerings and programs relative to the same period in 2023 and increase of $31 million in losses related to Shopify Payments, related to higher realized losses in the period and an increase in expected losses primarily driven by higher GMV processed through Shopify Payments. Transaction and loan losses increased for the year ended December 31, 2023 compared to the same period in 2022, due to an increase of $11 million in losses related to Shopify Capital driven by an expansion of our Capital offerings and programs relative to the same period in 2022 and an increase of $4 million in losses related to Shopify Payments, primarily related to higher realized losses in the period with the increase in GMV. Impairment on Sales of Shopify's Logistics Businesses In the year ended December 31, 2023, we had a net impairment on the sales of our logistics businesses of $1.3 billion, inclusive of impairment of $1.4 billion in goodwill, $337 million in intangible assets and $93 million in net assets and transaction costs, reduced by non-cash consideration received of $528 million. Other Income (Expense) Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) Other income (expense), net 1,153 * 1,603 * (2,801) * Not a meaningful comparison In the year ended December 31, 2024, we had net unrealized income on equity and other investments of $1.0 billion, of which $823 million was in investments with readily determinable fair values and was the result of the change in share prices from December 31, 2023 to December 31, 2024, $82 million in unrealized gain related to our investment option in Klaviyo and $89 million of unrealized gains offset by $14 million in unrealized losses and impairments related to investments without readily determinable fair values. Additionally, we had interest income of $308 million and a net loss of $138 million on our equity method investment. In the year ended December 31, 2023, we had an unrealized loss on equity and other investments of $1.4 billion of which $1.5 billion was in investments with readily determinable fair values and was the result of an unrealized gain on our Klaviyo investment as a result of its initial public offering during the year and the change in share prices from December 31, 2022 to December 31, 2023 in our Affirm and Global-E investments, partially offset by $110 million of unrealized losses related to investments without readily determinable fair values due to impairments in the year. Additionally, we had interest income of $241 million and a net loss of $58 million on our equity method investment. 58 Table of C ontents In the year ended December 31, 2022, we had an unrealized loss on equity and other investments of $3.0 billion due to our investments with readily determinable fair values, investments without readily determinable fair values and interest income. The unrealized losses were offset slightly by net realized gains on equity and other investments of $124 million and interest income of $75 million. (Provision for) Recovery of Income Taxes Years ended December 31, 2024 % Change 2023 % Change 2022 (in US $ millions, except percentages) (Provision for) recovery of Income taxes (209) * (53) * 163 * Not a meaningful comparison In the year ended December 31, 2024, we had a provision for income taxes of $209 million on account of earnings and unrealized gains on the Company's equity and other investments, net of an offset to the reversal of valuation allowance. During the year ended December 31, 2024, there were significant unrealized gains on the Company's equity and other investments resulting in a deferred tax expense. As a result, a portion of the valuation allowance was reversed which partially offset the deferred tax expense in the current year. In addition, during the year ended December 31, 2024, the Company performed a U.S. state tax sourcing analysis that resulted in a change to our U.S. state tax apportionment. This also resulted in a reduction in deferred tax assets, including unused non-capital tax losses, that were fully offset by a valuation allowance. This compares to a provision of income taxes of $53 million in the same period of 2023 primarily as a result of earnings in jurisdictions outside of North America. In the year ended December 31, 2023, we had a provision for income taxes of $53 million primarily as a result of earnings in jurisdictions outside of North America. This compares to a recovery of income taxes of $163 million in the same period of 2022 primarily as a result of the unrealized loss on equity and other investments, share-based compensation and the change in valuation allowance related to deferred tax assets in Canada, as well as the United States. 59 Table of C ontents Summary of Quarterly Results The following table sets forth selected unaudited quarterly results of operations data for each of the eight quarters ended December 31, 2024. The information for each of these quarters has been derived from unaudited condensed consolidated financial statements that were prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflects all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with U.S. GAAP. This data should be read in conjunction with our unaudited condensed consolidated financial statements and audited consolidated financial statements and related notes for the relevant period. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future periods. Three months ended Dec 31, 2024 Sep 30, 2024 Jun 30, 2024 Mar 31, 2024 Dec 31, 2023 Sep 30, 2023 Jun 30, 2023 Mar 31, 2023 (in US $ millions, except per share data) Revenues Subscription solutions 666 610 563 511 525 486 444 382 Merchant solutions 2,146 1,552 1,482 1,350 1,619 1,228 1,250 1,126 2,812 2,162 2,045 1,861 2,144 1,714 1,694 1,508 Cost of revenues (1)(2) Subscription solutions 134 108 97 95 97 88 85 84 Merchant solutions 1,326 936 903 809 985 725 774 707 1,460 1,044 1,000 904 1,082 813 859 791 Gross profit 1,352 1,118 1,045 957 1,062 901 835 717 Operating expenses Sales and marketing (1)(2)(4) 348 331 353 361 317 295 321 287 Research and development (1)(2)(4) 351 332 349 335 311 313 648 458 General and administrative (1)(3)(4)(5) 112 114 60 124 100 137 131 123 Transaction and loan losses 76 58 42 51 45 34 31 42 Impairment on sales of Shopify's logistics businesses — — — — — — 1,340 — Total operating expenses 887 835 804 871 773 779 2,471 910 Income (loss) from operations 465 283 241 86 289 122 (1,636) (193) Other (expenses) income, net 956 577 (38) (342) 393 606 335 269 Income (loss) before income taxes 1,421 860 203 (256) 682 728 (1,301) 76 Provision for income taxes (128) (32) (32) (17) (25) (10) (10) (8) Net income (loss) 1,293 828 171 (273) 657 718 (1,311) 68 Net income (loss) per share attributable to shareholders: Basic $ 1.00 $ 0.64 $ 0.13 $ (0.21) $ 0.51 $ 0.56 $ (1.02) $ 0.05 Diluted $ 0.99 $ 0.64 $ 0.13 $ (0.21) $ 0.51 $ 0.55 $ (1.02) $ 0.05 60 Table of C ontents (1) Includes stock-based compensation expense and related payroll taxes as follows: Three months ended Dec 31, 2024 Sep 30, 2024 Jun 30, 2024 Mar 31, 2024 Dec 31, 2023 Sep 30, 2023 (a) Jun 30, 2023 (a) Mar 31, 2023 (in US $ millions) Cost of revenues — — 3 1 1 — 1 2 Sales and marketing 13 15 10 12 14 17 13 15 Research and development 81 77 73 72 69 70 252 106 General and administrative 24 23 23 26 19 20 19 18 118 115 109 111 103 107 285 141 (a) Includes accelerated stock-based compensation of $1 million and $4 million in sales and marketing during the second and third quarter of 2023, respectively, and $164 million in research and development during the second quarter of 2023. (2) Includes amortization of acquired intangibles as follows: Three months ended Dec 31, 2024 Sep 30, 2024 Jun 30, 2024 Mar 31, 2024 Dec 31, 2023 Sep 30, 2023 Jun 30, 2023 Mar 31, 2023 (in US $ millions) Cost of revenues 1 3 4 4 4 4 8 19 Sales and marketing 1 — — — — — 1 2 Research and development — 1 — — — — — — 2 4 4 4 4 4 9 21 (3) In the third quarter of 2022, we incurred $97 million of expenses related to legal matters. In the second quarter of 2024, we released an accrual for an estimated liability of $55 million associated with a legal matter. (4) In the second quarter of 2023, we had $148 million of severance related costs associated with reductions in workforce with $28 million in sales and marketing, $102 million in research and development and $18 million in general and administrative. In the third quarter of 2022, we had $30 million of severance related costs associated with reductions in workforce with $11 million in sales and marketing, $8 million in research and development and $11 million in general and administrative. (5) In the third quarter of 2023, we had $38 million of impairment related costs associated with right-of-use assets and leasehold improvements. We believe that year-over-year comparisons are more meaningful than our sequential results due to seasonality in our business. While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has partially masked seasonal trends to date. Our merchant solutions revenues are directionally correlated with our merchants' GMV. Our merchants' GMV typically increases during the fourth-quarter holiday season. As a result, we have historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. As a result of the growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future, and that historical patterns in our business may not be a reliable indicator of our future performance. Quarterly Revenue and Gross Margin Trends Historically, revenues experienced a seasonal decrease in our first quarter as consumers typically reduce their spending following the holiday season resulting in a seasonal decrease in GMV per merchant, which was not completely offset by merchant and MRR growth. Subsequently, revenues have increased in each of the next three quarters as a result of merchant, MRR and overall GMV growth. Our merchants have processed additional GMV during the fourth-quarter holiday seasons, and as a result we have generated higher merchant solutions revenues in our fourth quarters compared to other quarters. Due to the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future. Our gross margin is generally driven by the mix between our higher margin subscription solutions revenue and lower margin merchant solutions revenue. While our total revenues have increased in recent periods, the mix has shifted towards merchant solutions revenue, most notably in the fourth quarter due to higher holiday volume of orders facilitated and the resulting Shopify Payments revenue during this period. We expect this overall trend to continue over time. 61 Table of C ontents In connection with expanding our operations internationally, we anticipate a growing proportion of our revenues and cost of sales transactions to be incurred in foreign currencies as compared to USD due to increased Shopify Payments, Shopify Capital, subscriptions and other billings to select countries in local currency. Fluctuations in foreign currencies relative to the USD may impact identified quarterly and yearly trends. Quarterly Operating Expenses Trends Excluding the events described below and outlined in the tables above, prior to the second quarter of 2023 operating expense growth was relatively steady. Following the workforce reduction and sales of our logistics businesses in the second quarter of 2023, operating expenses decreased and continued to decrease in the third quarter of 2023. In the fourth quarter of 2023 and the first quarter of 2024, we saw increased spend to support our operations growth. Due to the reversal of a previously recorded estimated legal liability in the second quarter of 2024, operating expenses decreased versus the first quarter of 2024. In the third quarter of 2024 and continuing into the fourth quarter of 2024, operating expenses increased in connection with operations growth. We recognized an impairment on the sales of our logistics businesses in the second quarter of 2023. We also recognized restructuring expenses in the second quarter of 2023 which caused an increase in research and development, sales and marketing and general and administrative spend relative to revenue in the quarter. We impaired certain office spaces in the third quarter of 2023, which caused an increase in general and administrative expense relative to revenue. In the second quarter of 2024, we released the remaining portion of the litigation contingency recorded in the second quarter of 2022 which decreased general and administrative spend. In addition, the sales of our logistics businesses in the second quarter of 2023, impacted the comparability of operating expenses. We note a significant portion of our operating expenses are incurred in foreign currencies which may impact the comparability of our quarterly and yearly trends. Quarterly Other (Expense) Income Trends Historically, there have been no consistent trends associated with other (expense) income as changes are impacted by fluctuations in the fair value of our equity investments in public companies with readily determinable fair values, observable changes or impairments associated with our equity investments in private companies without readily determinable fair values, changes in our equity method investment based on our share of income and loss, including amortization of the basis difference, changes in the fair value of our investments in convertible notes of private companies, foreign exchange rates and interest rates. The results from these changes may fluctuate from period to period and may cause volatility to our earnings as well as impact comparability of our results from period to period. Key Balance Sheet Information December 31, 2024 2023 (in US $ millions) Cash, cash equivalents and marketable securities (1) 5,479 5,008 Total assets 13,924 11,299 Total liabilities 2,366 2,233 Total non-current liabilities 410 1,335 (1) Excludes $709 million and $115 million of marketable securities classified in "Long-term Investments" as of December 31, 2024 and 2023, respectively. Total net assets increased $2.5 billion as of December 31, 2024 compared to December 31, 2023, due to the increase of $2.6 billion in total assets and the decrease of $133 million in total liabilities. The increase in net assets is primarily due to the cash provided by operating activities of $1.6 billion and an increase in Equity and other investments from net unrealized gains on our investments of $1.0 billion. 62 Table of C ontents The following table presents the total value of the Company's cash and cash equivalents, marketable securities, long-term investments, equity and other investments and equity method investments by the assets' underlying geographic location: December 31, 2024 2023 (in US $ millions, except percentages) United States 8,999 78 % 7,310 78 % Israel 1,310 11 % 962 10 % Canada 992 9 % 913 10 % Rest of World 176 2 % 200 2 % 11,477 100 % 9,385 100 % Liquidity and Capital Resources To date, we have financed our operations primarily through the sale of equity securities as well as the sale of the Notes, raising approximately $7.8 billion, net of issuance costs, from investors. In connection with the expiration of our previous short-form base shelf prospectus, we filed a new short-form base shelf prospectus with the securities commissions in each of the provinces and territories of Canada, except Quebec, and a corresponding shelf registration statement on Form F-10 with the U.S. SEC, on November 12, 2024. This shelf prospectus and registration statement enables Shopify to offer Class A subordinate voting shares, preferred shares, debt securities, warrants, subscription receipts, units, or any combination thereof, from time to time during the 25-month period that the shelf prospectus is effective. The type of securities and the specific terms thereof will be determined at the time of any offering and will be described in the applicable prospectus supplement to be filed separately with Canadian securities regulators and the SEC. Our principal cash requirements are for working capital and ongoing operations. Excluding current deferred revenue and convertible senior notes, working capital as of December 31, 2024 was $6.5 billion. The $920 million in aggregate principal amount of Notes due in less than one year may be settled in Class A subordinate voting shares instead of cash, at our option. As a result of our employee compensation program there is a potential for an increase in cash usage as employees have the ability to elect how much of their total compensation will be in the form of cash versus stock-based compensation awards. Given the ongoing cash generated from operations and our existing cash and cash equivalents, we believe there is sufficient liquidity to meet our current and planned financial obligations over the next 12 months and into the foreseeable future. Our future financing requirements will depend on many factors, including but not limited to our growth rate, subscription renewal activity, the timing and extent of spending to support development of our platform, the expansion of sales and marketing activities, the macroeconomic conditions and overall levels of consumer spending on goods and potential strategic investments and acquisitions activity. Although we currently are not a party to any material undisclosed agreement and do not have any understanding with any third parties with respect to potential material investments in, or material acquisitions of, businesses or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. 63 Table of C ontents Cash, Cash Equivalents and Marketable Securities Cash, cash equivalents and marketable securities increased by $471 million to $5.5 billion as of December 31, 2024 from $5.0 billion as of December 31, 2023, primarily as a result of cash provided by our operations partially offset by the purchase and origination of loans, net of repayments and the purchase of equity and other investments. Cash equivalents and marketable securities include money market funds, term deposits, U.S. federal bonds and agency securities and corporate bonds and commercial paper, all maturing within the 12 months from December 31, 2024. The following table summarizes our total cash, cash equivalents and marketable securities as well as our operating, investing and financing activities for the years ended December 31, 2024, 2023 and 2022: Years ended December 31, 2024 2023 2022 (in US $ millions) Cash, cash equivalents and marketable securities (end of period) 5,479 5,008 5,053 Net cash provided by (used in): Operating activities 1,616 944 (136) Investing activities (1,586) (1,244) (719) Financing activities 61 60 18 Effect of foreign exchange on cash and cash equivalents (6) 4 (17) Net increase (decrease) in cash and cash equivalents 85 (236) (854) Decrease in marketable securities (1) 386 191 (1,861) Net increase (decrease) in cash, cash equivalents and marketable securities 471 (45) (2,715) (1) Excludes $709 million and $115 million of marketable securities classified in "Long-term Investments" as of December 31, 2024 and 2023, respectively. Cash Flows From Operating Activities Our largest source of operating cash is from merchant solutions. Within merchant solutions, the largest source of cash flows are Shopify Payments processing fee arrangements, which are received on a daily basis as transactions are processed. We also generate significant cash flows from our subscription solutions with subscription revenues. These payments are typically paid to us at the beginning of the applicable subscription period, except for our Shopify Plus merchants who typically pay us at the end of their monthly billing cycle. Our primary uses of cash from operating activities are for third-party payment processing fees, employee-related expenditures, marketing programs and outsourced hosting costs. For the year ended December 31, 2024, net cash provided by operating activities was primarily the result of operating income, once adjusted for non-cash items, slightly offset by a use of cash due to an increase in non-cash working capital. Cash Flows From Investing Activities Net cash used in investing activities in the year ended December 31, 2024 was driven by $939 million used for purchases of marketable securities, net of maturities, $464 million used for purchases and originations of loans, net of repayments and sales, $137 million used for purchases of equity and other investments, $30 million used in acquisitions of businesses, net of cash acquired and $19 million used to purchase property and equipment, which consisted mainly of leasehold improvements and computer equipment. 64 Table of C ontents Cash Flows From Financing Activities Net cash provided by financing activities in the year ended December 31, 2024 was driven by proceeds from the issuance of Class A subordinate voting shares and Class B restricted multiple voting shares as a result of stock options exercises. Contractual Obligations Our principal commitments consist of our Notes and obligations under our operating leases for office, warehouse and commercial space. The following table summarizes our contractual obligations as of December 31, 2024: Payments Due by Period Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years Total (in US $ millions) Convertible senior notes (1) 921 — — — 921 Operating lease and unconditional purchase obligations (2) 255 352 88 193 888 Total contractual obligations 1,176 352 88 193 1,809 (1) $920 million in aggregate principal amount of Notes due in less than one year may be settled in Class A subordinate voting shares instead of cash, at our option. (2) Consists of payment obligations under our office and commercial space leases as well as other unconditional purchase obligations. Litigation and Loss Contingencies In the third quarter of 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. and the Company recorded an estimated liability in that period for damages and potential interest of $55 million. The Company filed a post-trial motion for judgment as a matter of law. In the second quarter of 2024, the court granted that motion, vacating the jury verdict in its entirety and mooting the plaintiff's motion for pre- and post-judgement interest. As a result of this decision, in the second quarter of 2024, the Company reversed the previously recorded liability within "General and administrative" in the condensed consolidated statement of operations and comprehensive income (loss), as a loss contingency was no longer considered probable. We are not aware of any other 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. Off-Balance Sheet Arrangements In connection with the sales of our logistics businesses in the second quarter of 2023, we retained our guarantee of certain leases. We also entered into an indemnification agreement that governs the liability obligations of the purchaser in connection with these guarantees. These arrangements, and our obligations arising from such arrangements, are not expected to have a material impact on the current or future financial performance or financial condition of the Company. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP. In the preparation of these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we re-evaluate these 65 Table of C ontents estimates on an ongoing basis. We refer to accounting estimates of this type as significant accounting policies and estimates, which we discuss below and in further detail in Note 3 - Significant Accounting Policies of our audited consolidated financial statements for the year ended December 31, 2024 included in this Annual Report on Form 10-K. Revenue Recognition For revenue streams that involve another party that contributes to providing a specified service to a customer, the Company determines whether it is the principal or an agent. In these instances, the Company determines whether it has promised to provide the specified service itself (as principal) or to arrange for the specified service to be provided by another party (as an agent). This determination depends on the facts and circumstances of each arrangement and, in some instances, involves significant judgment. The Company recognizes revenue from certain services, such as the sale of shipping labels, the sale of apps, the sale of themes, card services and installments services, on a net basis as the Company is the agent in the arrangement with customers. All other revenue is reported on a gross basis, as the Company has determined it is the principal in the respective arrangements. Equity and Other Investments The Company evaluates each investment to determine if the investment is a variable interest entity and, if so, whether the Company is the primary beneficiary of the variable interest entity. As of December 31, 2024 and 2023, there were no variable interest entities required to be consolidated in the Company’s consolidated financial statements. The Company also assesses each investment to determine its classification based on fair value measurements and other factors, which then are classified as equity and other investments with readily determinable fair values, equity and other investments without readily determinable fair values and equity and other investments under the equity method of accounting. Equity and other investments in private companies without readily determinable fair values are carried at cost less impairments, with subsequent adjustments for observable changes (referred to as the measurement alternative). Estimates and judgments are involved in applying the measurement alternative associated with equity and other investments without readily determinable fair values by developing certain key assumptions, including revenue growth rates and revenue multiples based on market comparables. The Company also holds investments in convertible notes of private companies which are classified as available-for-sale debt securities, for which the Company has elected to account for under the fair value option. The investments are carried at fair value at each balance sheet date and any movements in the fair values are classified as "Other income (expense), net" in the consolidated statement of operations and comprehensive income (loss). The Company evaluates each investment to determine if the investment should be accounted for as an equity method investment based upon equity ownership, significant influence and ongoing involvement in the investee, including factors such as representation on the investee's Board of Directors. Investments that qualify for the equity method of accounting treatment are carried at the Company’s investment amounts and adjusted each period for the Company’s share of the investee’s income or loss and amortization of the basis difference, which is the difference between the fair value of our investment in the company and the underlying equity in the net assets of the investee. The Company assesses its equity and other investments in private companies and equity method investment for impairment through analyzing market conditions, business results and other qualitative measures that suggest that the carrying amount of the investment may be impaired, and the decline in value below the carrying amount is determined to be other than temporary. Loss Contingencies The Company records accruals for loss contingencies when losses are probable and reasonably estimable. The Company evaluates developments in legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is 66 Table of C ontents required to determine both probability and the estimated amount of a loss or potential loss. The Company may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others, because: (i) the damages sought are indeterminate; (ii) the proceedings are in the relatively early stages; (iii) there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) there remain significant factual issues to be determined or resolved; (vi) the relevant law is unsettled; or (vii) the proceedings involve novel or untested legal theories. In such instances, there may be considerable uncertainty regarding the ultimate resolution of such matters, including the likelihood or magnitude of a possible eventual loss, if any. Income Taxes Income tax expense includes domestic and foreign income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized. The Company considers many factors when assessing the likelihood of future realization of our deferred tax assets, including its recent cumulative loss experience and expectations of future earnings, capital gains and investment in the applicable jurisdiction, the carry-forward periods available to it for tax reporting purposes and other relevant factors. The Company evaluates tax positions taken or expected to be taken in the course of preparing tax returns to determine whether the tax positions have met a “more-likely-than-not” threshold of being sustained by the applicable tax authority. Tax benefits related to tax positions not deemed to meet the “more-likely-than-not” threshold are not permitted to be recognized in the consolidated financial statements.