Unity Software Inc. 10-K

Item 8. Financial Statements and Supplementary Data UNITY SOFTWARE INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 85 Consolidated Balance Sheets 88 Consolidated Statements of Operations 89 Consolidated Statements of Comprehensive Loss 90 Consolidated Statements of Stockholders’ Equity 91 Consolidated Statements of Cash Flows 94 Notes to Consolidated Financial Statements 96 Table of Contents Unity Software Inc. Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Unity Software Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Unity Software Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Table of Contents Unity Software Inc. Revenue Recognition Description of the Matter As discussed in Note 1 to the consolidated financial statements, revenue is recognized when the Company's contractual performance obligations are satisfied, in an amount that reflects the consideration expected in exchange for products and services. Determining whether certain of the Company’s products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation requires significant judgment. Judgment is required to determine the level of integration and interdependency between individual promises of software license and multi-platform support. This determination influences whether the software license is considered distinct and accounted for separately as a license performance obligation recognized at a point in time, or not distinct and accounted for together with other promises as a single performance obligation recognized over time. Management has concluded that the Company’s software subscription is a single combined performance obligation because the software license and multi-platform support are highly interdependent and interrelated. As such, the combined performance obligation is recognized over the contract term as the subscription is delivered. Auditing the Company’s determination whether the products and services included in the Company’s software subscriptions should be accounted for as distinct performance obligations or as one combined performance obligation required a significant level of auditor judgment. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's determination of performance obligations. We also obtained an understanding of the Company’s product and service offerings and tested the application of the revenue recognition accounting model to determine distinct performance obligations. Our audit procedures also included, among others, assessing the nature, level of integration and interdependency between the software license, and multi-platform support. We also assessed key assumptions related to the software license and multi-platform support with the Company’s product specialists and further reviewed information externally available on the Company’s product offerings. We have also evaluated the Company’s revenue disclosures in relation to these matters. Table of Contents Unity Software Inc. Valuation of Acquired Intangible Assets Description of the Matter As described in Note 6 to the consolidated financial statements, in December 2021, the Company acquired certain assets of Weta Digital Limited for total purchase consideration of $1,526.1 million, of which $668.4 million was allocated to the fair value of acquired intangible assets. In September 2021, the Company acquired Parsec Cloud, Inc. for total purchase consideration of $332.7 million, of which $43.2 million was allocated to the fair value of acquired intangible assets. Auditing the fair value of acquired intangible assets was complex due to the significant estimation uncertainty in determining the fair value of acquired intangible assets. The significant assumptions used to estimate the fair value of acquired intangible assets included forecasted revenue and discount rates. These assumptions were highly subjective and involved significant judgment as they were based on estimates of future financial performance and could be impacted by competition and technological innovation, among other factors. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s acquisition accounting process, including controls over management’s review of significant assumptions including forecasted revenue and discount rates used in the valuation of acquired intangible assets. To test the fair value of acquired intangible assets from these acquisitions, our audit procedures included, among others, identifying and testing the significant assumptions including forecasted revenue and discount rates used in the valuation models by assessing the historical accuracy of management’s estimates of its performance and comparing assumptions to historical performance and available external data from comparable companies. Additionally, we involved our valuation specialists to assist with our evaluation of the valuation methodologies and the significant assumptions used in the valuation models, and to perform comparative calculations of the valuation. /s/ Ernst & Young LLP We have served as the Company's auditor since 2019. San Jose, California February 22, 2022 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value) As of December 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 1,055,776 $ 1,272,578 Marketable securities 681,323 479,406 Accounts receivable, net of allowances of $ 5,447 and $ 2,714 as of December 31, 2021 and 2020, respectively 340,491 274,255 Prepaid expenses 39,097 32,025 Other current assets 34,423 22,396 Total current assets 2,151,110 2,080,660 Property and equipment, net 106,106 95,544 Operating lease right‑of‑use assets 98,393 103,609 Goodwill 1,620,127 286,251 Intangible assets, net 814,386 57,459 Restricted cash 10,823 21,369 Other assets 40,401 26,333 Total assets $ 4,841,346 $ 2,671,225 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 14,009 $ 11,303 Accrued expenses and other current liabilities 144,873 106,306 Publisher payables 237,637 182,269 Income and other taxes payable 64,759 64,116 Deferred revenue 140,528 113,853 Operating lease liabilities 23,729 25,375 Total current liabilities 625,535 503,222 Convertible notes 1,703,035 — Long-term deferred revenue 15,945 20,523 Long-term operating lease liabilities 92,539 98,532 Other long-term liabilities 9,901 11,805 Total liabilities 2,446,955 634,082 Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, $ 0.000005 par value; 100,000 shares authorized, and no shares issued and outstanding as of December 31, 2021; 100,000 shares authorized, issued, and outstanding as of December 31, 2020 — — Common stock, $ 0.000005 par value; 1,000,000 and 1,000,000 shares authorized as of December 31, 2021 and 2020, respectively; 292,592 and 273,537 shares issued and outstanding as of December 31, 2021 and 2020, respectively 2 2 Additional paid-in capital 3,729,874 2,838,057 Accumulated other comprehensive loss ( 3,858 ) ( 3,418 ) Accumulated deficit ( 1,331,627 ) ( 797,498 ) Total stockholders’ equity 2,394,391 2,037,143 Total liabilities and stockholders’ equity $ 4,841,346 $ 2,671,225 See accompanying Notes to Consolidated Financial Statements. 88 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2021 2020 2019 Revenue $ 1,110,526 $ 772,445 $ 541,779 Cost of revenue 253,630 172,347 118,597 Gross profit 856,896 600,098 423,182 Operating expenses Research and development 695,710 403,515 255,928 Sales and marketing 344,939 216,416 174,135 General and administrative 347,912 254,979 143,788 Total operating expenses 1,388,561 874,910 573,851 Loss from operations ( 531,665 ) ( 274,812 ) ( 150,669 ) Interest expense ( 1,131 ) ( 1,520 ) — Interest income and other expense, net 1,566 ( 3,885 ) ( 2,573 ) Loss before provision for income taxes ( 531,230 ) ( 280,217 ) ( 153,242 ) Provision for income taxes 1,377 2,091 9,948 Net loss $ ( 532,607 ) $ ( 282,308 ) $ ( 163,190 ) Basic and diluted net loss per share: Net loss per share attributable to our common stockholders, basic and diluted $ ( 1.89 ) $ ( 1.66 ) $ ( 2.39 ) Weighted-average shares used in per share calculation attributable to our common stockholders, basic and diluted 282,195 169,973 114,442 See accompanying Notes to Consolidated Financial Statements. 89 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Year Ended December 31, 2021 2020 2019 Net loss $ ( 532,607 ) $ ( 282,308 ) $ ( 163,190 ) Other comprehensive loss, net of taxes: Change in foreign currency translation adjustment 583 161 ( 155 ) Change in unrealized gains (losses) on marketable securities ( 1,023 ) 53 — Other comprehensive gain (loss) ( 440 ) 214 ( 155 ) Comprehensive loss $ ( 533,047 ) $ ( 282,094 ) $ ( 163,345 ) See accompanying Notes to Consolidated Financial Statements. 90 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share data) Year Ended December 31, 2019 Accumulated Additional Other Total Convertible Preferred Stock Common Stock Paid‑In Comprehensive Accumulated Treasury Stockholders’ Shares Amount Shares Amount Capital Loss Deficit Stock Equity Balance at December 31, 2018 96,992,575 $ 600,114 107,068,886 $ 1 $ 173,214 $ ( 3,477 ) $ ( 352,000 ) $ ( 101,725 ) $ 316,127 Issuance of common stock — — 22,297,024 — 460,200 — — — 460,200 Issuance of common stock from exercise of stock options — — 6,427,160 — 11,813 — — — 11,813 Common stock issued in connection with acquisitions — — 1,734,737 — 34,807 — — — 34,807 Purchase and retirement of treasury stock — — ( 14,266,783 ) — ( 388,100 ) — — 101,725 ( 286,375 ) Issuance of convertible Series E preferred stock, net of issuance costs 5,681,818 124,918 — — — — — — 124,918 Repurchase and extinguishment of convertible preferred stock ( 6,775,179 ) ( 38,473 ) — — ( 110,241 ) — — ( 148,714 ) Stock‑based compensation expense — — — — 30,959 — — — 30,959 Stock-based compensation expense in connection with modified awards for certain employees — — — — 13,521 — — — 13,521 Net loss — — — — — — ( 163,190 ) — ( 163,190 ) Foreign currency translation adjustment — — — — — ( 155 ) — — ( 155 ) Balance at December 31, 2019 95,899,214 $ 686,559 123,261,024 $ 1 $ 226,173 $ ( 3,632 ) $ ( 515,190 ) $ — $ 393,911 91 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share data) Year Ended December 31, 2020 Accumulated Additional Other Total Convertible Preferred Stock Common Stock Paid-In Comprehensive Accumulated Treasury Stockholders’ Shares Amount Shares Amount Capital Loss Deficit Stock Equity Balance at December 31, 2019 95,899,214 $ 686,559 123,261,024 $ 1 $ 226,173 $ ( 3,632 ) $ ( 515,190 ) $ — $ 393,911 Issuance of common stock — — 4,545,455 — 100,000 — — — 100,000 Issuance of common stock in connection with initial public offering, net of underwriting discounts and commissions and offering costs — — 28,750,000 — 1,417,582 — — — 1,417,582 Issuance of common stock in connection with charitable donation — — 750,000 — 63,615 — — — 63,615 Issuance of common stock from exercise of stock options — — 6,758,226 — 25,404 — — — 25,404 Issuance of common stock from exercise of stock options in connection with nonrecourse promissory note — — 5,656,927 — 8,856 — — — 8,856 Common stock issued in connection with acquisitions — — 1,103,190 — 25,380 — — — 25,380 Purchase and retirement of treasury stock — — ( 5,000 ) — ( 110 ) — — — ( 110 ) Issuance of convertible Series E preferred stock, net of issuance costs 6,818,182 149,970 — — — — — — 149,970 Conversion of convertible preferred stock to common stock upon initial public offering ( 102,717,396 ) ( 836,529 ) 102,717,396 1 836,528 — — — — Stock‑based compensation expense — — — — 134,554 — — — 134,554 Stock-based compensation expense in connection with modified awards for certain employees — — — — 75 — — — 75 Net loss — — — — — — ( 282,308 ) — ( 282,308 ) Foreign currency translation adjustment — — — — — 161 — — 161 Unrealized gain on marketable securities — — — — — 53 — — 53 Balance at December 31, 2020 — $ — 273,537,218 $ 2 $ 2,838,057 $ ( 3,418 ) $ ( 797,498 ) $ — $ 2,037,143 92 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share data) Year Ended December 31, 2021 Accumulated Additional Other Total Convertible Preferred Stock Common Stock Paid‑In Comprehensive Accumulated Treasury Stockholders’ Shares Amount Shares Amount Capital Loss Deficit Stock Equity Balance at December 31, 2020 — $ — 273,537,218 $ 2 $ 2,838,057 $ ( 3,418 ) $ ( 797,498 ) $ — $ 2,037,143 Cumulative effect of accounting change — — — — — — ( 1,522 ) — ( 1,522 ) Issuance of common stock from exercise of stock options — — 11,650,963 — 66,704 — — — 66,704 Issuance of common stock for settlement of RSUs — — 3,935,813 — — — — — — Common stock issued in connection with acquisitions — — 3,468,362 — 526,081 — — — 526,081 Purchase of capped calls — — — — ( 48,127 ) — — — ( 48,127 ) Stock‑based compensation expense — — — — 334,529 — — — 334,529 Stock-based compensation expense in connection with modified awards for certain employees — — — — 12,630 — — — 12,630 Net loss — — — — — — ( 532,607 ) — ( 532,607 ) Foreign currency translation adjustment — — — — — 583 — — 583 Unrealized loss on marketable securities — — — — — ( 1,023 ) — — ( 1,023 ) Balance at December 31, 2021 — $ — 292,592,356 $ 2 $ 3,729,874 $ ( 3,858 ) $ ( 1,331,627 ) $ — $ 2,394,391 See accompanying Notes to Consolidated Financial Statements. 93 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2021 2020 2019 Operating activities Net loss $ ( 532,607 ) $ ( 282,308 ) $ ( 163,190 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 64,567 42,974 31,113 Common stock charitable donation expense — 63,615 — Stock-based compensation expense 334,529 134,554 30,959 Stock-based compensation expense in connection with modified awards for certain employees 12,630 75 13,521 Other 13,843 3,246 133 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable, net ( 65,151 ) ( 63,294 ) ( 49,420 ) Prepaid expenses ( 6,831 ) ( 9,131 ) ( 9,269 ) Other current assets ( 13,170 ) ( 12,985 ) 4,457 Operating lease right-of-use ("ROU") assets 23,739 23,923 — Deferred tax, net ( 13,033 ) ( 213 ) ( 4,466 ) Other assets ( 6,628 ) ( 1,867 ) ( 7,657 ) Accounts payable 2,022 ( 2,526 ) 473 Accrued expenses and other current liabilities 34,571 41,618 12,432 Publisher payables 55,368 44,605 20,174 Income and other taxes payable ( 1,296 ) 19,525 13,166 Operating lease liabilities ( 26,473 ) ( 20,204 ) — Other long-term liabilities ( 3,282 ) 898 8,587 Deferred revenue 15,753 37,408 31,051 Net cash provided by (used in) operating activities ( 111,449 ) 19,913 ( 67,936 ) Investing activities Purchase of marketable securities ( 519,698 ) ( 482,453 ) — Proceeds from principal repayments on marketable securities 18,572 1,644 — Maturities of marketable securities 290,385 — — Purchase of non-marketable investments ( 4,600 ) ( 1,000 ) — Purchase of property and equipment ( 41,938 ) ( 40,156 ) ( 27,035 ) Acquisition of intangible assets — ( 750 ) — Business acquisitions, net of cash acquired ( 1,580,081 ) ( 52,475 ) ( 192,506 ) Net cash used in investing activities ( 1,837,360 ) ( 575,190 ) ( 219,541 ) 94 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2021 2020 2019 Financing activities Proceeds from issuance of convertible notes 1,725,000 — — Purchase of capped calls ( 48,127 ) — — Proceeds from revolving loan facility — 125,000 — Payment of principal related to revolving loan facility — ( 125,000 ) — Payment of debt issuance costs ( 22,575 ) ( 247 ) ( 370 ) Proceeds from initial public offering, net of underwriting discounts, commissions, and offering costs — 1,417,582 — Proceeds from issuance of convertible preferred stock, net of issuance costs — 149,970 124,918 Proceeds from issuance of common stock — 100,000 460,200 Repurchase and extinguishment of convertible preferred stock — — ( 148,714 ) Purchase and retirement of treasury stock — ( 110 ) ( 286,375 ) Proceeds from exercise of stock options 66,704 25,404 11,813 Proceeds from exercise of stock options in connection with nonrecourse promissory note — 8,856 — Net cash provided by financing activities 1,721,002 1,701,455 161,472 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash 459 673 ( 172 ) Increase (decrease) in cash, cash equivalents, and restricted cash ( 227,348 ) 1,146,851 ( 126,177 ) Cash and restricted cash, beginning of period 1,293,947 147,096 273,273 Cash, cash equivalents, and restricted cash, end of period $ 1,066,599 $ 1,293,947 $ 147,096 Supplemental disclosure of cash flow information: Cash paid for interest $ 110 $ 1,393 $ — Cash paid for income taxes, net of refunds $ 5,651 $ 19,956 $ 1,187 Supplemental disclosures of non‑cash investing and financing activities: Fair value of common stock issued as consideration for business acquisitions $ 526,081 $ 25,144 $ 34,807 Fair value of common stock issued as consideration for acquisition of intangible assets $ — $ 236 $ — Accrued property and equipment $ 8,329 $ 4,665 $ 3,572 The below table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the total of the same amounts shown on the consolidated statements of cash flows (in thousands): As of December 31, 2021 2020 2019 Cash and cash equivalents $ 1,055,776 $ 1,272,578 $ 129,959 Restricted cash 10,823 21,369 17,137 Total cash, cash equivalents, and restricted cash $ 1,066,599 $ 1,293,947 $ 147,096 See accompanying Notes to Consolidated Financial Statements. 95 Table of Contents Unity Software Inc. UNITY SOFTWARE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business and Summary of Significant Accounting Policies Description of Business We were founded as Over the Edge Entertainment in Denmark in 2004. We reorganized as a Delaware corporation on May 28, 2009 as Unity Software Inc. (collectively referred to with its wholly owned subsidiaries as “we,” “our” or “us”). We provide a comprehensive set of software solutions to create, run and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices, among others. We are headquartered in San Francisco, California and have operations in the United States, Denmark, Belgium, Canada, China, Colombia, Finland, France, Germany, Ireland, Israel, Japan, Lithuania, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland, and the U.K. We market our solutions directly through our online store and field sales operations in North America, Denmark, China, Finland, the U.K., Germany, Israel, Japan, Singapore, South Korea, and Spain, and indirectly through independent distributors and resellers worldwide. Basis of Presentation and Consolidation We prepared the accompanying consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). The consolidated financial statements include the accounts of Unity Software Inc. and its wholly owned subsidiaries. We have eliminated all intercompany balances and transactions. In our opinion, the information contained herein reflects all adjustments necessary for a fair presentation of our results of operations, financial position, cash flows, and stockholders’ equity. All such adjustments are of a normal, recurring nature. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. For us, these estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, fair values of financial instruments, useful lives of fixed assets, the incremental borrowing rate ("IBR") we use to determine our operating lease liabilities, income taxes, valuation of deferred tax assets and liabilities, valuation of intangible assets, useful lives of intangible assets, assets acquired and liabilities assumed through business combinations, valuation of stock-based compensation, capitalization of software costs and software implementation costs, customer life for capitalized commissions, and other contingencies, among others. Actual results could differ from those estimates, and such differences could be material to our financial position and results of operations. Revenue Recognition Revenue is recognized upon the transfer of control of promised products and services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We evaluate and recognize revenue by: • identifying the contract(s) with the customer; • identifying the performance obligation(s) in the contract(s); • determining the transaction price; • allocating the transaction price to performance obligation(s) in the contract(s); and 96 Table of Contents Unity Software Inc. • recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (“transfer of control”). The five-step model requires us to make significant estimates in situations where we are unable to establish stand-alone selling price based on various observable prices using all information that is reasonably available. Observable inputs and information we use to make these estimates include historical internal pricing data and cost plus margin analysis. We generate revenue through three sources: (1) Create Solutions, which consists primarily of our subscription offerings and professional services; (2) Operate Solutions, which includes our monetization services, hosting, and multiplayer services, and voice services; and (3) Strategic Partnerships and Other, which are primarily arrangements with strategic hardware, operating system, device, game console, and other technology providers for the customization and development of our software to enable interoperability with these platforms. We recognize revenue as our contractual performance obligations are satisfied. When contracts with our customers contain multiple performance obligations, we allocate the overall transaction price, which is the amount of consideration to which we expect to receive in exchange for promised goods or services, to each of the distinct performance obligations based on their estimated relative standalone selling prices. Create Solutions Create Solutions Subscriptions Our subscriptions, mainly consisting of Unity Pro and Unity Plus (collectively, the “Create Solutions subscriptions”) are fully integrated content development solutions that enable customers to build interactive real-time 2D and 3D applications. These Create Solutions subscriptions provide customers with the rights to a software license with embedded cloud functionality and multi-platform support. Significant judgment is required to determine the level of integration and interdependency between individual promises of the Create Solutions subscriptions. This determination influences whether the software is considered distinct and accounted for separately as a license performance obligation recognized at a point in time, or not distinct and accounted for together with other promises in the Create Solutions subscriptions as a single performance obligation recognized over time. Under FASB ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”) , we have concluded that the software license is not distinct from the multi-platform support as they are highly interdependent and interrelated considering the significant two-way dependency between the promises. Although the promise to the embedded cloud functionality represents separate performance obligations under Topic 606, we have accounted for these obligations as if they are a single performance obligation that includes the software license and the multi-platform support because the cloud functionality has the same pattern of transfer to the customer over the duration of the subscription term. The transaction price is determined based on the consideration that we will be entitled to receive in exchange for transferring our Create Solutions subscriptions to the customer, and we do not have material variable consideration. We recognize the single performance obligation ratably over the contract term beginning when the license key is delivered. Enterprise customers may purchase an enhanced support offering (“Enterprise Support”) that is sold separately from the Create Solutions subscriptions, and is capable of being distinct, and is distinct within the context of the contract due to its separate utility. Enterprise Support is generally billed in advance and is recognized ratably over the support term as we have a stand-ready performance obligation over the support term. When an arrangement includes Enterprise Support and Create Solutions subscriptions, which have the same pattern of transfer to the customer (the services transfer to the customer over the same period), we account for those performance obligations as if they are a single performance obligation. If an arrangement includes Enterprise Support and Create Solutions subscriptions that do not have the same pattern of transfer, we allocate the transaction price to the distinct performance obligations and recognize them ratably over their respective terms. Create Solutions subscriptions typically have a term of one to three years and are generally billed in advance and recognized ratably over the term. 97 Table of Contents Unity Software Inc. Professional Services Our professional services revenue is primarily composed of consulting, integration, training, and custom application and workflow development. Professional services may be billed in advance or on a time and materials basis and we recognize the related revenue as services are rendered. We typically invoice our customers up front or when promised services are delivered, and the payment terms vary by customer type and location. The term between billing and payment due dates is not significant. As a result, we have determined that our contracts do not include significant financing component. Customer billings related to taxes imposed by and remitted to governmental authorities on revenue-producing transactions are reported on a net basis. Operate Solutions Monetization We generate advertising revenue through our monetization solutions, including the Unified Auction, which allows publishers to sell the available advertising inventory from their mobile applications to advertisers. We enter into contracts with both advertisers and publishers to participate in the Unified Auction. For advertisements placed through the Unified Auction, we evaluate whether we are the principal (in which case revenue is reported on a gross basis) or the agent (in which case revenue is reported on a net basis). The evaluation to present revenue on a gross basis versus net basis requires significant judgment. We have concluded that the publisher is our customer and we are the agent in facilitating the fulfillment of the advertising inventory in the Unified Auction primarily because we do not control the advertising inventory prior to the placement of an advertisement. As the operator of the Unified Auction, our role is to enable the publisher to monetize its advertising inventory with the advertiser based on the bid/ask price from the auction. We do not control the outcome of the bids and do not have pricing latitude in the transaction. Based on these and other factors, we report advertising revenue based on the net amount retained from the transaction which is our revenue share. Advertising revenue is recognized at a point in time when control is transferred to the customer. This occurs when a user installs an application after seeing an advertisement contracted on a cost-per-install basis or when an advertisement starts on a cost-per-impression basis. Typically, we do not retain a share of the revenue generated through Unity IAP (“In-App Purchases”). Publisher payables represent amounts earned by publishers in the Unified Auction and are presented as a reduction of revenue in our consolidated statements of operations. Payment terms are contractually defined and vary by publisher and location. Cloud and Hosting Services We provide cloud-based services as well as enterprise hosting (“Hosting Services”) to developers that develop and operate multiuser/multiplayer games and applications through a combination of hardware server and cloud-based infrastructure and services. The Hosting Services facilitate the connection of end users, and allow content game and application operators to monitor network traffic. Our cloud-based services provide our customers with tools and services to develop and operate live games and applications, including voice chat services. We primarily sell these services on a fixed fee or consumption-based model with fixed fees billed monthly in advance and consumption fees billed monthly in arrears. We recognize revenue ratably over the contractual service term for fixed fee arrangements as we have a stand-ready performance obligation that is generally fulfilled evenly throughout the hosting period. We recognize revenue for consumption-based arrangements as services are provided. 98 Table of Contents Unity Software Inc. Strategic Partnerships and Other We enter into strategic contracts with owners of hardware, operating system, device, game console and other technology providers to customize our software licenses to enable interoperability with these platforms (“Strategic Partnerships”). This allows customers using our Create Solutions subscriptions to build and publish content to more than one platform without having to write platform-specific code. We consider these strategic partners as our customers and generally provide them with the following promises in our contracts: (i) development and customization of our software to integrate with the customer’s platform and (ii) post-integration ongoing support and updates. We generally view these promises as one single performance obligation as they are not distinct within the context of the contract. This is because the customized software license that is integrated with the customer’s platform requires continuous updates that are critical to the utility of the customized software. The transaction price is determined based on the consideration that we will be entitled to receive in exchange for transferring our goods and services to the customer. We do not have material variable consideration. When Strategic Partnerships contain non-monetary consideration, we measure and record the transaction price at the estimated fair value of the non-cash consideration received from the customer. Typically, we recognize revenue for these contracts over time as service is performed using the input method to measure progress of the satisfaction of the performance obligation. Certain Strategic Partnerships also require the customer to pay sales-based royalties based on the sales of games on the Strategic Partner platform that incorporate our customized software. Since customized software intellectual property is the predominant item to which royalty relates, we recognize revenue for sales-based royalties when the later of the subsequent sale or usage occurs, or the performance to which some or all of the sales-based royalty has been allocated has been satisfied. We record revenue under these arrangements for the amounts due to us based on estimates of the sales of these customers and pursuant to the terms of the contracts. The Strategic Partnerships are typically multi-year arrangements where customers make payments commensurate with milestones accomplished with respect to the development and integration service or pay in advance on a quarterly basis. Cost of Revenue Cost of revenue for the delivery of software tools, support, updates and advertising consists primarily of hosting expenses, personnel costs (including salaries, stock-based compensation, and benefits) for employees associated with our product support and professional services organizations, credit card fees, third-party license fees, and allocated shared costs, including facilities, IT, and security costs, as well as amortization of related capitalized software costs and depreciation of related property and equipment. 99 Table of Contents Unity Software Inc. Stock-Based Compensation Stock-based compensation expense related to our employees and non-employee directors is calculated based on the fair value on the grant date. For restricted stock units ("RSUs"), fair value is based on the closing price of our common stock on the grant date. The fair value of stock options and purchases made under the 2020 Employee Stock Purchase Plan ("2020 ESPP") is estimated using the Black-Scholes pricing model. This model requires certain assumptions be used as inputs, such as the fair value of the underlying common stock, expected term of the option before exercise, expected volatility of our common stock, expected dividend yield, and a risk-free interest rate. Options granted during the year have a maximum contractual term of ten years . We have limited historical stock option activity and therefore estimates the expected term of stock options granted using the simplified method, which represents the average of the contractual term of the stock option and its weighted-average vesting period. The expected volatility of stock options is based upon the historical volatility of a number of publicly traded companies in similar industry. We have historically not declared or paid any dividends and does not currently expect to do so in the foreseeable future. The risk-free interest rates used are based on the U.S. Department of Treasury ("U.S. Treasury") yield in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock options. We recognize stock-based compensation expense for stock options and RSUs, on a straight-line basis, over the requisite service period, generally, a vesting period of one year to four years . We recognize stock-based compensation expense related to the 2020 ESPP on a straight-line basis over the offering period. We have elected to account for forfeitures as they occur. Cash, Cash Equivalents, and Restricted Cash We consider all highly liquid investments with original maturities of three months or less at date of purchase to be cash equivalents. Our cash equivalents include money market funds and commercial paper. As of December 31, 2021 and 2020, restricted cash was $ 10.8 million and $ 21.4 million, respectively. Restricted cash consists of secured letters of credit issued in connection with our operating leases. Restrictions typically lapse at the end of the lease term, and restricted cash is classified as current or non-current based on the remaining term of the restriction. Marketable Securities Our marketable securities consist of investments in U.S. treasury securities, asset-backed securities, corporate bonds, commercial paper, and supranational bonds. We classify our investments in debt securities as available-for-sale at the time of purchase. We consider all debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities as current assets in the consolidated balance sheets. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive loss, which is reflected as a separate component of stockholders’ equity in our consolidated balance sheets. These investments are considered impaired when a decline in fair value is judged to be other-than-temporary. We consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis. If the cost of an individual investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. 100 Table of Contents Unity Software Inc. Accounts Receivable We record accounts receivable at the invoiced amount. We maintain an allowance for doubtful accounts for any receivables we may be unable to collect, based on historical loss patterns, the number of days that billings are past due, and an evaluation of the potential risk of loss associated with delinquent accounts. In addition, we review the accounts receivable amounts due from customers that are past due to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness of customers based on ongoing credit evaluations. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2021 and 2020, the allowance for doubtful accounts was $ 5.4 million and $ 2.7 million, respectively. We include the allowances for doubtful accounts in accounts receivable, net, on the consolidated balance sheets. Credit Risk and Concentrations Financial instruments that potentially subject us to a concentration of credit risk consist primarily of cash and cash equivalents, marketable securities, and accounts receivable. We place our domestic and foreign cash and cash equivalents, as well as our marketable securities, with large, creditworthy financial institutions. Balances in these accounts may exceed federally insured limits at times. In general, we do not require our customers to provide collateral or other security to support accounts receivable. To reduce credit risk, management performs credit evaluations of our customers’ financial condition, as warranted, and continually analyzes the allowance for doubtful accounts, which we maintain based upon the expected collectability of accounts receivable. As of December 31, 2021 and 2020, no individual customer represented 10% or more of the aggregate receivables. For the years ended December 31, 2021, 2020, and 2019, no individual customer represented 10% or more of total revenue. Fair Value of Financial Instruments We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which to transact and the market-based risk. We apply fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Goodwill, intangible assets, and other long-lived assets are measured at fair value on a nonrecurring basis, only if impairment is indicated. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, due to their short-term nature. Comprehensive Loss Comprehensive loss is comprised of net loss and other comprehensive loss. Our other comprehensive loss includes unrealized gains and losses on available-for-sale investments and foreign currency translation adjustment. Property and Equipment, Net Property and equipment are stated at cost less accumulated depreciation and amortization, computed using the straight-line method based on the estimated useful lives of the assets. Depreciation commences upon placing the asset in service. An estimated useful life of three years is used for computer and other hardware and five years is used for furniture. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining term of the lease. Software is amortized over the estimated useful life or license term, generally either three to five years . The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. 101 Table of Contents Unity Software Inc. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to the consolidated statement of operations. Leases We determine if a contract contains a lease based on whether we have the right to obtain substantially all of the economic benefits from the use of an identified asset and whether we have the right to direct the use of an identified asset in exchange for consideration, which relates to an asset which we do not own. Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets are recognized as the lease liability, adjusted for lease incentives received and prepayments made. Lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our IBR because the interest rate implicit in most of our leases is not readily determinable. The IBR is a hypothetical rate based on our understanding of what our credit rating would be. Lease payments may be fixed or variable; however, only fixed payments or in-substance fixed payments are included in our lease liability calculation. Variable lease payments are recognized in operating expenses in the period in which the obligation for those payments are incurred. Convertible Senior Notes and Capped Call Transactions We account for the issuance of convertible senior notes as a single liability measured at its amortized cost. Interest expense related to the amortization of debt issuance costs are recorded in other income and expense. We record the cost of capped call transactions as a reduction of our additional paid-in capital on our consolidated balance sheets. Capped call transactions will not be remeasured as long as they continue to meet the conditions for equity classification. Business Combinations We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: • future expected revenues and cash flows from acquired intangible assets; • the economic life used on acquired company’s trade name, trademark, existing customer relationship, and contractual relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our product portfolio; • the expected use of the acquired intangible assets; and • discount rates. These estimates are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Goodwill and Intangible Assets 102 Table of Contents Unity Software Inc. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Intangible assets, with the exception of certain contractual relationships, that are not considered to have an indefinite useful life are amortized on a straight-line basis over their estimated useful lives, which typically range from three to six years . Certain contractual relationships are amortized using an accelerated method of amortization, which reflects the pattern in which the economic benefits from the intangible assets are expected to be recognized. On an annual basis, we evaluate the estimated remaining useful life of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining amortization period. No changes to the useful lives of our intangible assets were deemed necessary during the years ended December 31, 2021, 2020, and 2019 based on management's evaluation. Segments We operate as a single operating segment. The chief operating decision maker is our Chief Executive Officer, who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis, accompanied by disaggregated information of our revenue. Accordingly, we have determined that we have a single reportable segment and operating segment structure. Capitalized Software Costs and Software Implementation Costs We capitalize implementation costs incurred in our cloud computing service arrangements related to enterprise software solutions (“capitalized implementation costs”) and costs associated with customized internal‑use software systems that have reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll‑related expenses for employees, who are directly associated with the development of the applications. We capitalize such costs during the application development stage, which begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized software costs are amortized on a straight-line basis over their estimated useful life, which is generally two to three years . Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Capitalized implementation costs are expensed over the term of the hosting arrangement, which is the fixed, non-cancellable term of the arrangement, plus any reasonably certain renewal periods. The amount of capitalized software costs and capitalized implementation costs was $ 1.2 million and $ 4.7 million, respectively, during the year ended December 31, 2021 and $ 0.8 million and $ 7.0 million, respectively, during the year ended December 31, 2020. Capitalized software costs are included in property and equipment, net, on the consolidated balance sheets. The current portion of capitalized implementation costs are included in prepaid expenses on the consolidated balance sheets, and the non-current portion of capitalized implementation costs are included in other assets on the consolidated balance sheets. Impairment Analysis We evaluate intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset’s carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value. We evaluate and test the recoverability of our goodwill for impairment at least annually during our fourth quarter of each calendar year or more often if and when circumstances indicate that goodwill may not be recoverable. 103 Table of Contents Unity Software Inc. There were no material impairments of capitalized software costs, capitalized implementation costs, intangible assets, long-lived assets, or goodwill during the years ended December 31, 2021, 2020, and 2019. Income Taxes We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. We record an income tax expense (or benefit) for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for NOL and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize the deferred income tax effects of a change in tax rates in the period of the enactment. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance. We recognize tax benefits from uncertain tax positions only if we believe that the position is more likely than not to be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect our income tax expense (or benefit) in the period in which such determination is made, and could have a material impact on our financial condition and operating results. We recognize interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statement of operations. Accrued interest and penalties are included in income and other taxes payable on the consolidated balance sheets. Translation of Foreign Currencies The functional currency of the majority of our foreign subsidiaries is the U.S. dollar. Foreign currency transaction gains and losses are included in interest and other income (expense), net, on the consolidated statements of operations for the period. For U.S. dollar functional currency subsidiaries, all assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates. For a foreign subsidiary where the local currency is the functional currency, adjustments to translate those statements into U.S. dollars are recorded in accumulated other comprehensive loss in stockholders’ equity. Warranties and Indemnifications From time to time, we enter into certain types of contracts that contingently require us to indemnify parties against third‑party claims. These contracts primarily relate to agreements under which we indemnify customers and partners for claims arising from intellectual property infringement. The terms of such obligations vary, and the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not been obligated to make any payments for these obligations, and no liabilities have been recorded for these obligations as of December 31, 2021 and 2020. 104 Table of Contents Unity Software Inc. We generally do not offer warranties for our software products. With certain customers, we will warrant that our software products will operate without material error and/or substantially in conformity with product documentation. We have not experienced any warranty claims to date, and no liabilities have been recorded as of December 31, 2021 and 2020. Research and Development Research and development costs, which consist primarily of software development costs, are expensed as incurred. FASB ASC Topic 985‑20, Costs of Software to Be Sold, Leased or Marketed , requires development costs incurred subsequent to establishment of technological feasibility related to software incorporated in our products to be capitalized and amortized over the estimated useful lives of the related products. Based upon our product development process, technological feasibility is established upon completion of a working model. Costs incurred between completion of the working model and the point at which the product is ready for general release have not been significant. Therefore, all product development costs have been charged to research and development expense in the accompanying consolidated statements of operations. Advertising Costs Advertising costs are expensed as incurred as a component of sales and marketing expense in the consolidated statements of operations. Advertising expense was approximately $ 24.2 million, $ 12.3 million, and $ 4.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. 2. Summary of Accounting Pronouncements Accounting Pronouncements Recently Adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , and subsequent amendments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. This update replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The new impairment methodology eliminates the probable initial recognition threshold and, instead, estimates the expected credit losses in consideration of past events, current conditions and forecasted information. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We adopted this new standard effective January 1, 2021, using the modified-retrospective approach, which resulted in a cumulative-effect adjustment of $ 1.5 million to accumulated deficit. We updated the following accounting policies as a result of the adoption of this guidance. Accounts Receivable We record accounts receivable at the original invoiced amount, net of allowances for credit losses for any potential uncollectible amounts. We make estimates of expected credit losses for the allowance for doubtful accounts based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified. The estimated credit loss allowance is recorded as a general and administrative expense on our consolidated statement of operations. As of December 31, 2021, the allowance for credit losses was $ 5.4 million. 105 Table of Contents Unity Software Inc. Marketable Securities Our marketable securities consist of investments in U.S. treasury securities, asset-backed securities, corporate bonds, commercial paper, and supranational bonds. We classify our investments in debt securities as available-for-sale at the time of purchase. We consider all debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities as current assets in the consolidated balance sheets. When the fair value of a security is below its amortized cost, the amortized cost will be reduced to its fair value if it is more likely than not that we are required to sell the impaired security before recovery of its amortized cost basis, or we have the intention to sell the security. If neither of these conditions is met, we determine whether the impairment is due to credit losses by comparing the present value of the expected cash flows of the security with its amortized cost basis. The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security. An allowance for credit losses for the excess of amortized cost over the expected cash flows is recorded in interest income and other expense, net in our consolidated statements of operations. Impairment losses that are not credit-related are included in accumulated other comprehensive loss in stockholders’ equity. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . The new guidance simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments in the diluted earnings per share calculated and include the effect of potential share settlement for instruments that may be settled in cash or shares. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021 with early adoption permitted, but only at the beginning of the fiscal year. We early adopted ASU 2020-06 as of January 1, 2021 with no cumulative effect upon adoption. There was no impact to the number of potentially dilutive shares in each of the periods presented. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers . The new guidance creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies Topic 606 to recognize and measure contract assets and contract liabilities on the acquisition date. Topic 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and liabilities it assumes at fair value on the acquisition date. This generally will result in companies recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date. The ASU is effective for fiscal years beginning December 15, 2022. Early adoption is permitted for all entities, including adoption in an interim period. We early adopted this new standard effective January 1, 2021. The adoption resulted in immaterial changes in contract liabilities and total revenue recognized for the year ended December 31, 2021. Recent Accounting Pronouncements Not Yet Adopted There were no other significant updates to the recently issued accounting standards other than as disclosed herein. Although there are several other new accounting pronouncements issued or proposed by the FASB, we do not believe any of those accounting pronouncements have had or will have a material impact on its financial position or operating results. 106 Table of Contents Unity Software Inc. 3. Revenue Disaggregation of Revenue Revenue by Source The following table presents our revenue disaggregated by source (in thousands): Year Ended December 31, 2021 2020 2019 Create Solutions $ 326,636 $ 231,314 $ 168,626 Operate Solutions 709,140 471,161 293,317 Strategic Partnerships and Other 74,750 69,970 79,836 Total revenue $ 1,110,526 $ 772,445 $ 541,779 Additional information regarding our revenue by source is discussed under the heading “Revenue Recognition” in Note 1, “Description of Business and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements. Revenue by Geographic Area The following table presents our revenue disaggregated by geography, based on the invoice address of our customers (in thousands): Year Ended December 31, 2021 2020 2019 United States $ 266,825 $ 197,343 $ 151,383 Greater China (1)(2) 169,330 111,037 64,784 EMEA (1)(3) 414,902 279,344 184,064 APAC (1)(4) 222,348 149,527 113,938 Other Americas (1)(5) 37,121 35,194 27,610 Total revenue $ 1,110,526 $ 772,445 $ 541,779 (1) No individual country, other than those disclosed above, exceeded 10% of our total revenue for any period presented. (2) Greater China includes China, Hong Kong, and Taiwan. (3) Europe, the Middle East, and Africa (“EMEA”) (4) Asia- Pacific , excluding Greater China (“APAC”) (5) Canada and Latin America (“Other Americas”) Contract Balances Timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets relate to performance completed in advance of scheduled billings. The primary changes in our contract assets and contract liabilities are due to our performance under the contracts and billings. Contract assets (unbilled receivables) included in accounts receivable are recorded when revenue is recognized in advance of customer invoicing. Unbilled receivables totaled $ 28.3 million and $ 26.3 million as of December 31, 2021 and 2020, respectively. Contract liabilities (deferred revenue) relate to payments received in advance of performance under the contract. Revenue recognized during the year ended December 31, 2021 that was included in the deferred revenue balances at January 1, 2021 was $ 108.6 million. The satisfaction of performance obligations typically lags behind payments received under contract from customers, which may lead to an increase in our deferred revenue balance over time. 107 Table of Contents Unity Software Inc. Remaining Performance Obligations As of December 31, 2021, we had total remaining performance obligations of $ 581.5 million, which represents the total contract transaction price allocated to undelivered performance obligations primarily for Create Solutions subscriptions, Enterprise Support, and Strategic Partnership contracts, which are generally recognized over the next one year to three years. Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. This amount excludes contracts with an original expected term of one year or less and contracts for which we recognize revenue in the amount and in the same period in which we invoice for services performed. We expect to recognize $ 204.6 million or 35 % of this revenue during the next 12 months. We expect to recognize the remaining $ 376.8 million or 65 % of this revenue thereafter. 4. Cash Equivalents and Marketable Securities Restricted cash, cash equivalents, and marketable securities consisted of the following as of December 31, 2021 (in thousands) : Amortized Cost Unrealized Gains Unrealized Losses Fair Value Restricted cash: Restricted cash $ 10,823 $ — $ — $ 10,823 Total restricted cash $ 10,823 $ — $ — $ 10,823 Cash equivalents: Money market funds $ 73,138 $ — $ — $ 73,138 Total cash equivalents $ 73,138 $ — $ — $ 73,138 Marketable securities: Commercial paper $ 59,792 $ — $ — $ 59,792 Asset-backed securities 40,965 — ( 23 ) 40,942 Corporate bonds 237,735 20 ( 353 ) 237,402 U.S. treasury securities 272,678 1 ( 379 ) 272,300 Supranational bonds 71,121 1 ( 235 ) 70,887 Total marketable securities $ 682,291 $ 22 $ ( 990 ) $ 681,323 108 Table of Contents Unity Software Inc. Cash equivalents and marketable securities consisted of the following as of December 31, 2020 (in thousands) : Amortized Cost Unrealized Gains Unrealized Losses Fair Value Restricted cash: Restricted cash $ 21,369 $ — $ — $ 21,369 Total restricted cash $ 21,369 $ — $ — $ 21,369 Cash equivalents: Money market funds $ 660,086 $ — $ — $ 660,086 Commercial paper 75,726 — — 75,726 Total cash equivalents $ 735,812 $ — $ — $ 735,812 Marketable securities: Asset-backed securities 49,950 54 ( 39 ) 49,965 Corporate bonds 92,312 31 ( 21 ) 92,322 U.S. treasury securities 327,025 81 ( 56 ) 327,050 Supranational bonds 10,066 4 ( 1 ) 10,069 Total marketable securities $ 479,353 $ 170 $ ( 117 ) $ 479,406 We do not intend to sell any of the securities in an unrealized loss position and we expect to realize the full value of all these investments which may be upon maturity. We did not recognize any credit losses related to our available-for-sale debt securities during the years ended December 31, 2021,and 2020. The following table summarizes the amortized cost and fair value of our marketable securities as of December 31, 2021, by contractual years to maturity (in thousands): Amortized Cost Fair Value Due within one year $ 381,269 $ 381,133 Due between one and three years 301,022 300,190 Total $ 682,291 $ 681,323 There were no material realized or unrealized gains or losses, either individually or in the aggregate during the year ended December 31, 2021, 2020, and 2019 for the years ended December 31, 2021 and 2020. 5. Fair Value Measurements We categorize assets and liabilities recorded or disclosed at fair value on our consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows: • Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments. • Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation. 109 Table of Contents Unity Software Inc. The following table presents the fair value of our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of December 31, 2021 (in thousands): Level 1 Level 2 Level 3 Total Restricted cash: Restricted cash $ 10,823 $ — $ — $ 10,823 Total restricted cash $ 10,823 $ — $ — $ 10,823 Cash equivalents: Money market funds $ 73,138 $ — $ — $ 73,138 Total cash equivalents $ 73,138 $ — $ — $ 73,138 Marketable securities: Commercial paper $ — $ 59,792 $ — $ 59,792 Asset-backed securities — 40,942 — 40,942 Corporate bonds — 237,402 — 237,402 U.S. treasury securities — 272,300 — 272,300 Supranational bonds — 70,887 — 70,887 Total marketable securities $ — $ 681,323 $ — $ 681,323 The following table presents the fair value of our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of December 31, 2020 (in thousands): Level 1 Level 2 Level 3 Total Restricted cash: Restricted cash $ 21,369 $ — $ — 21,369 Total restricted cash $ 21,369 $ — $ — $ 21,369 Cash equivalents: Money market funds $ 660,086 $ — $ — $ 660,086 Commercial paper — 75,726 — 75,726 Total cash equivalents $ 660,086 $ 75,726 $ — $ 735,812 Marketable securities: Asset-backed securities $ — $ 49,965 $ — $ 49,965 Corporate bonds — 92,322 — 92,322 U.S. treasury securities — 327,050 — 327,050 Supranational bonds — 10,069 — 10,069 Total marketable securities $ — $ 479,406 $ — $ 479,406 6. Acquisitions Acquisitions are accounted for in accordance with FASB ASC Topic 805, Business Combinations , and the revenue and earnings of the acquired businesses have been included in our results from the respective dates of the acquisitions and were not material to our consolidated financial statements. 110 Table of Contents Unity Software Inc. The total purchase price allocated to the net assets acquired is assigned based on the fair values as of the date of acquisition. The fair value assigned to identifiable intangible assets acquired was determined using the income approach and the cost approach. We believe that these identified intangible assets will have no residual value after their estimated economic useful lives. The identifiable intangible assets are subject to amortization on a straight-line basis, as this best approximates the benefit period related to these assets. The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, is recorded as goodwill. Goodwill is not subject to amortization and it typically is not deductible for U.S. income tax purposes. For 2021 and certain 2020 acquisitions, the fair values of assets acquired and liabilities assumed, including current income taxes payable and deferred taxes, may change over the measurement period as additional information is received and certain tax returns are finalized. Accordingly, the provisional measurements of fair value of the current income taxes payable and deferred taxes are subject to change. We expect to finalize the valuation as soon as practicable, but not later than one year from the respective acquisition dates. 2021 Acquisitions Weta Digital In December 2021, we completed the purchase of certain assets and assembled workforce from Weta Digital,for a total consideration of approximately $ 1.5 billion. This amount was payable in a combination of approximately $ 1.0 billion in cash and the issuance of 3,468,362 shares of common stock valued at approximately $ 526.1 million. Weta Digital researches and develops sophisticated visual effects tools. The following table summarizes the consideration paid for Weta Digital and the estimated fair values of the assets acquired at the acquisition date (in thousands): Consideration: Cash $ 1,000,001 Common stock issued 526,081 Fair value of total consideration transferred $ 1,526,082 Recognized amounts of identifiable assets acquired and liabilities assumed: Intangible assets $ 668,400 Total identifiable net assets assumed 668,400 Goodwill (1) 857,682 Total $ 1,526,082 (1) Goodwill reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. The goodwill balance is not subject to amortization, and because it was acquired in a taxable asset purchase it is deductible for U.S. income tax purposes over a period of 15 years. We recorded $ 5.9 million in transaction costs associated with the asset purchase for the year ended December 31, 2021. These costs were recorded within general and administrative expenses. The revenue and earnings of the acquired business have been included in our results since the acquisition date and are not material to our consolidated financial results. Ziva Dynamics In December 2021, we completed the acquisition of Ziva Dynamics for total consideration of approximately $ 127.7 million in cash. Ziva Dynamics provides services and simulation software specializing in the development of characters to film, gaming, virtual, and augmented reality industries. 111 Table of Contents Unity Software Inc. The following table summarizes the consideration paid for Ziva Dynamics and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): Consideration: Cash $ 127,653 Fair value of total consideration transferred $ 127,653 Recognized amounts of identifiable assets acquired and liabilities assumed: Cash $ 2,288 Accounts receivable, net 297 Other current assets 642 Property and equipment, net 457 Intangible assets 23,200 Other assets and liabilities, net 74 Accrued expenses and other current liabilities ( 547 ) Deferred revenue ( 493 ) Deferred tax liability ( 2,534 ) Total identifiable net assets assumed 23,384 Goodwill (1) 104,269 Total $ 127,653 (1) Goodwill reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. The goodwill balance is not subject to amortization, and it is not typically deductible for Canadian income tax purposes. However, we will make an election, for Canadian tax purposes, to step-up the tax basis of Ziva Dynamics' intangibles and a portion of goodwill, offsetting the current tax implications of the step-up by using Ziva Dynamics' tax attributes (e.g. NOL). The estimated amount of goodwill that will be amortizable after the step-up election is approximately $ 3 million. We recorded $ 1.3 million in transaction costs associated with the Ziva Dynamics acquisition for the year ended December 31, 2021. These costs were recorded within general and administrative expenses. Pro forma results of operations for the Ziva Dynamics acquisition have not been presented because the acquisition is not material to the consolidated statements of operations and comprehensive loss. Parsec In September 2021, we completed the acquisition of Parsec for a total consideration of approximately $ 332.7 million in cash. Parsec designs and develops remote access streaming technology. Parsec offers a proprietary desktop capturing application primarily used for playing games through video streaming. 112 Table of Contents Unity Software Inc. The following table summarizes the consideration paid for Parsec and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): Consideration: Cash $ 332,729 Fair value of total consideration transferred $ 332,729 Recognized amounts of identifiable assets acquired and liabilities assumed: Cash $ 23,402 Accounts receivable, net 1,349 Intangible assets 43,200 Other assets and liabilities, net ( 124 ) Deferred revenue ( 3,121 ) Deferred tax liability ( 4,570 ) Total identifiable net assets assumed 60,136 Goodwill (1) 272,593 Total $ 332,729 (1) Goodwill reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. The goodwill balance is not subject to amortization, and it is not deductible for U.S. income tax purposes. We recorded $ 1.3 million in transaction costs associated with the Parsec acquisition for the year ended December 31, 2021. These costs were recorded within general and administrative expenses. Pro forma results of operations for the Parsec acquisition have not been presented because the acquisition is not material to the consolidated statements of operations and comprehensive loss. Metaverse Technologies Limited In June 2021, we completed the acquisition of Metaverse Technologies Limited ("Metaverse") for consideration of $ 45.7 million in cash. Metaverse develops first class software and solutions to prepare and optimize computer-aided design ("CAD") data, reducing time and efforts and maximizing visualization performance. Metaverse bridges the gap between complex models that are made for design or engineering and the RT3D world. 113 Table of Contents Unity Software Inc. The following table summarizes the consideration paid for Metaverse and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): Consideration: Cash $ 45,721 Fair value of total consideration transferred $ 45,721 Recognized amounts of identifiable assets acquired and liabilities assumed: Cash $ 1,093 Intangible assets 12,340 Other assets and liabilities, net 194 Income and other taxes payable ( 1,470 ) Other payable ( 345 ) Deferred revenue ( 507 ) Deferred tax liability ( 2,210 ) Total identifiable net assets assumed 9,095 Goodwill (1) 36,626 Total $ 45,721 (1) Goodwill reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. The goodwill balance is not subject to amortization, and it is not deductible for French income tax purposes. We recorded $ 0.8 million in transaction costs associated with the Metaverse acquisition for the year ended December 31, 2021. These costs were recorded within general and administrative expenses. Pro forma results of operations for the Metaverse acquisition have not been presented because the acquisition is not material to the consolidated statements of operations and comprehensive loss. Other 2021 Acquisitions In March 2021, we completed the acquisition of Visual Live 3D LLC ("Visual Live") for total consideration of approximately $ 24.8 million in cash. In aggregate, $ 5.1 million was attributed to intangible assets and represents acquired developed technology, customer relationships, and trademarks, $ 0.6 million was attributed to other assets, $ 19.8 million was attributed to goodwill and $ 0.6 million was attributed to other liabilities assumed. In November 2021, we completed the acquisition of SyncSketch for total consideration of approximately $ 30.4 million in cash. In aggregate, $ 7.8 million was attributed to intangible assets and represents acquired developed technology, customer relationships, and trademarks, $ 0.8 million was attributed to other assets, $ 23.2 million was attributed to goodwill and $ 1.4 million was attributed to other liabilities assumed. During the year ended December 31, 2021, we completed other acquisitions for total consideration of approximately $ 47.1 million payable in cash. In aggregate, $ 1.0 million represented cash acquired, $ 30.2 million was attributed to intangible assets and represented acquired developed technology, customer relationships and trademarks, $ 20.1 million was attributed to goodwill and $ 4.2 million was attributed to net liabilities assumed. These acquisitions were strategic in nature as they enhanced our product offerings. We recorded $ 3.8 million in transaction costs associated with these acquisitions for the year ended December 31, 2021. These costs were recorded within general and administrative expenses. 114 Table of Contents Unity Software Inc. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information presents the consolidated results of Weta Digital for the years ended December 31, 2021 and 2020, giving effect to the acquisition as if it had occurred on January 1, 2020, and combines the historical financial results of Weta Digital. The unaudited pro forma financial information includes adjustments to give effect to pro forma events that are directly attributable to the acquisition. The pro forma financial information includes adjustments to amortization for intangible assets acquired and acquisition costs. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods. The unaudited pro forma financial information does not give effect to the potential impact of current financial conditions, future revenues, regulatory matters, or any anticipated synergies, operating efficiencies, or cost savings that may be associated with the acquisition. Consequently, actual results will differ from the unaudited pro forma financial information presented below (in thousands): Year Ended December 31, 2021 2020 Unaudited pro forma financial information Pro forma revenue $ 1,110,526 $ 772,445 Pro forma net loss $ ( 640,134 ) $ ( 408,291 ) Pro forma results of operations for the other acquisitions have not been presented because they are not material to the consolidated statements of operations and comprehensive loss, either individually or in the aggregate. 2020 Acquisitions Finger Food In April 2020, we completed the acquisition of 100 % of the issued share capital of Finger Food for consideration of $ 46.8 million payable in a combination of $ 23.6 million in cash and the issuance of 1,030,711 shares of common stock valued at $ 23.1 million. Finger Food creates developer applications on top of our solutions for a variety of industries, such as automotive, construction, gaming and retail. The acquisition of Finger Food was strategic in nature as we look to create repeatable solutions from Finger Food’s projects and apply the know-how of customer engagement to our offerings. 115 Table of Contents Unity Software Inc. The following table summarizes the consideration paid for Finger Food and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): Consideration: Cash $ 23,626 Common stock issued 23,126 Fair value of total consideration transferred $ 46,752 Recognized amounts of identifiable assets acquired and liabilities assumed: Cash $ 288 Accounts receivable, net 5,758 Property and equipment, net 1,307 Operating lease ROU assets 4,972 Deferred tax assets 1,327 Customer relationships 2,900 Trademark 200 Income and other taxes payable ( 8,109 ) Operating lease liabilities ( 4,972 ) Other assets and liabilities, net ( 293 ) Deferred tax liability ( 1,436 ) Total identifiable net assets assumed 1,942 Goodwill 44,810 Total $ 46,752 The acquired customer relationships and trademark intangible assets have useful lives of two years and six months , respectively. Goodwill of $ 44.8 million reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. Other 2020 Acquisitions During the year ended December 31, 2020, we completed other acquisitions for total consideration of approximately $ 31.6 million payable in a combination of $ 29.6 million in cash and the issuance of 72,479 shares of common stock valued at $ 2.0 million. In aggregate, $ 0.4 million represented cash acquired, $ 9.1 million was attributed to intangible assets and represents acquired developed technology, customer relationships and trademarks, $ 2.6 million was attributed to other assets, $ 23.3 million was attributed to goodwill, and $ 3.8 million was attributed to other liabilities assumed. These acquisitions were strategic in nature as they enhanced our product offerings. We recorded approximately $ 4.1 million in transaction costs associated with acquisitions for the year ended December 31, 2020. These costs were recorded within general and administrative expenses. Pro forma results of operations for these acquisitions have not been presented because they are not material to the consolidated statements of operations. 2019 Acquisitions Vivox In January 2019, we completed the acquisition of 100 % of the issued share capital of Mercer Road Corporation ("Vivox") for consideration of $ 123.4 million payable in a combination of $ 119.0 million in cash and the issuance of 348,739 shares of common stock valued at $ 4.4 million. 116 Table of Contents Unity Software Inc. Vivox provides cross-platform voice and text communication tools for social experiences where players can communicate regardless of location in game play, on any platform, whether it is mobile, personal computer or console. The acquisition of Vivox was strategic in nature as we look to deliver more services for connected games and other use cases. The acquired developed technology has an estimated useful life of six years . The acquired customer relationships and trademark intangible assets have useful lives of two years and four years , respectively. Goodwill of $ 94.2 million reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. deltaDNA In September 2019, we completed the acquisition of 100 % of the issued share capital of deltaDNA Limited ("deltaDNA") for consideration of $ 53.1 million payable in a combination of $ 32.8 million in cash and $ 20.3 million of our common stock. The total purchase price includes 928,123 common shares issued by us. deltaDNA provides analytics, messaging and ad campaign management tools to enable real-time player life-cycle management. The acquisition of deltaDNA was strategic in nature as we look to integrate deltaDNA’s engagement tools and services to support our monetization products. The acquired developed technology has an estimated useful life of six years . The acquired customer relationships and trademark intangible assets have useful lives of two years and three years , respectively. Goodwill of $ 35.2 million reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. Artomatix In December 2019, we completed the acquisition of 100 % of the issued share capital of Artomatix Limited (“Artomatix”) for consideration of $ 48.8 million payable in a combination of $ 38.7 million in cash and $ 10.1 million of our common stock. The total purchase price includes 457,875 common shares issued by us. Artomatix offers artificial intelligence (“AI”) and machine learning powered tools to simplify and automate parts of the 3D art creation process. The acquisition of Artomatix was strategic in nature as we look to expand our offering for 3D artists in addition to developers. The acquired developed technology has an estimated useful life of six years . Goodwill of $ 39.0 million reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. Other 2019 Acquisitions During the year ended December 31, 2019, we completed other acquisitions and purchases of intangible assets for total consideration of approximately $ 8.2 million. In aggregate, $ 0.4 million represented cash acquired, $ 3.5 million was attributed to intangible assets and represents acquired developed technology, $ 0.4 million was attributed to other assets, $ 4.5 million was attributed to goodwill and $ 0.7 million was attributed to other liabilities assumed. These acquisitions generally enhance the breadth and depth of our offerings and expand our expertise in different functional areas. We recorded $ 3.6 million in transaction costs associated with these acquisitions for the year ended December 31, 2019. These costs were recorded within general and administrative expenses. 7. Goodwill and Intangible Assets Goodwill Goodwill represents the excess of purchase price and related costs over the value assigned to net tangible and identifiable intangible assets acquired in business combinations. 117 Table of Contents Unity Software Inc. The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2020 (in thousands): Balance as of December 31, 2019 $ 218,305 Goodwill acquired 68,011 Measurement period adjustment ( 65 ) Balance as of December 31, 2020 286,251 Goodwill acquired 1,334,074 Measurement period adjustment ( 198 ) Balance as of December 31, 2021 $ 1,620,127 Intangible Assets, Net The following tables present details of our intangible assets, excluding goodwill (in thousands, except for weighted-average useful life): As of December 31, 2021 Weighted-Average Useful Life (1) (In Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Developed technology 8.8 $ 580,204 $ ( 52,811 ) $ 527,393 Customer relationships 2.9 50,171 ( 16,980 ) 33,191 Trademark 5.7 60,557 ( 3,937 ) 56,620 Contractual relationship 8.0 200,000 ( 2,818 ) 197,182 Total intangible assets $ 890,932 $ ( 76,546 ) $ 814,386 As of December 31, 2020 Weighted-Average Useful Life (1) (In Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Developed technology 5.8 $ 83,688 $ ( 32,342 ) $ 51,346 Customer relationships 2.2 13,327 ( 8,682 ) 4,645 Trademark 3.3 3,507 ( 2,039 ) 1,468 Total intangible assets $ 100,522 $ ( 43,063 ) $ 57,459 (1) Based on weighted-average useful life established as of the acquisition date. The following table presents the amortization of finite-lived intangible assets included on our consolidated statements of operations (in thousands): Year Ended December 31, 2021 2020 2019 Amortization expense $ 33,483 $ 17,755 $ 11,570 118 Table of Contents Unity Software Inc. As of December 31, 2021, the estimated future amortization of finite-lived intangible assets for each of the next five years and thereafter was as follows (in thousands): 2022 $ 130,074 2023 124,813 2024 120,314 2025 108,355 2026 76,918 Thereafter 253,912 Total $ 814,386 8. Balance Sheet Components The following tables provide details of selected balance sheet items (in thousands): As of December 31, 2021 December 31, 2020 Property and equipment, net: Gross property and equipment Leasehold improvements $ 84,006 $ 65,669 Computer and other hardware 74,953 58,568 Furniture 27,916 23,685 Internally developed software 3,508 3,301 Purchased software 1,449 1,436 Construction in progress 12,075 13,343 Total gross property and equipment 203,907 166,002 Accumulated depreciation and amortization (1) ( 97,801 ) ( 70,458 ) Property and equipment, net $ 106,106 $ 95,544 (1) The following table presents the depreciation and amortization of property and equipment included on our consolidated statements of operations (in thousands): Year Ended December 31, 2021 2020 2019 Depreciation and amortization expense $ 31,084 $ 25,219 $ 19,543 119 Table of Contents Long-lived Assets, Net, by Geographic Area The following table presents our long-lived assets, net, disaggregated by geography, which consists of our property and equipment, net, but excludes internally developed software and purchased software (in thousands): As of December 31, 2021 December 31, 2020 United States $ 36,718 $ 35,494 Canada 31,498 20,063 United Kingdom 15,011 17,846 Greater China 4,300 5,653 EMEA, excluding United Kingdom (1) 12,587 11,181 APAC (1) 3,052 3,546 Other Americas, excluding Canada (1) 945 809 Total long-lived assets, net $ 104,111 $ 94,592 (1) No individual country, other than those disclosed above, exceeded 10% of our total long-lived assets, net, for any period presented. As of December 31, 2021 December 31, 2020 Accrued expenses and other current liabilities: Accrued expenses $ 60,937 $ 53,535 Accrued compensation 83,936 52,771 Accrued expenses and other current liabilities $ 144,873 $ 106,306 Sales Commissions We consider internal sales commissions as incremental costs of obtaining the contract with a customer. We apply a practical expedient to expense incremental costs incurred if the period of the benefit is one year or less. Incremental costs that have a period of benefit greater than one year are capitalized and amortized over the estimated period of benefit. Capitalized commissions, net of amortization, are included in other current assets and other assets on our consolidated balance sheets. We capitalized $ 14.8 million and $ 8.8 million of sales commissions for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, capitalized commissions, net of amortization, included in other current assets and other assets were $ 7.9 million and $ 8.7 million, respectively. As of December 31, 2020, capitalized commissions, net of amortization, included in other current assets and other assets were $ 2.9 million and $ 4.4 million, respectively. Capitalized commissions are amortized over the expected period of benefit, which we have determined, based on analysis, to be three years . Amortization of capitalized commissions are included in sales and marketing expenses on our consolidated statements of operations. For the years ended December 31, 2021 and 2020, we amortized $ 5.6 million and $ 1.5 million of capitalized commissions, respectively. We did no t incur any impairment losses for the years ended December 31, 2021 and 2020. 120 Table of Contents 9. Leases We have operating leases for offices which have remaining lease terms of less than one year to 10 years, some of which include options to extend the lease with renewal terms from one to five years . Some leases include an option to terminate the lease from less than one year up to five years from the lease commencement date. Components of lease expense were as follows (in thousands): Year Ended December 31, 2021 December 31, 2020 Operating lease expense, excluding ROU asset impairment $ 29,153 $ 29,265 Short-term lease expense 728 953 Variable lease expense 5,048 5,013 Sublease income ( 325 ) ( 130 ) Total lease expense $ 34,604 $ 35,101 Other information related to operating leases was as follows (in thousands): Year Ended December 31, 2021 December 31, 2020 Cash paid for amounts included in the measurement of operating lease liabilities $ 29,811 $ 29,336 Operating lease ROU assets obtained in exchange for new operating lease liabilities $ 18,507 $ 24,647 As of December 31, 2021, our operating leases had a weighted-average remaining lease term of 5.9 years and a weighted-average discount rate of 4.3 %. As of December 31, 2020, our operating leases had a weighted-average remaining lease term of 6.0 years and a weighted-average discount rate of 4.5 %. As of December 31, 2021, future minimum lease payments under our non-cancellable operating leases were as follows (in thousands): Operating Leases (1) 2022 $ 28,193 2023 24,968 2024 21,409 2025 16,242 2026 10,174 Thereafter 31,547 Total future minimum lease payments 132,533 Less: imputed interest ( 16,265 ) Present value of lease liabilities $ 116,268 (1) Excludes future minimum payments for leases which have not yet commenced as of December 31, 2021. As of December 31, 2021, we had entered into leases that have not yet commenced with future minimum lease payments of $ 8.8 million that are not yet reflected on our consolidated balance sheets. These operating leases will commence in 2022 with lease terms of 2.1 years to 5.4 years. In August 2018, we entered into a lease agreement for approximately 150,000 square feet of office space in San Francisco, California. In June 2021, we entered into an agreement to terminate the lease, which involved a one-time payment of $ 43.5 million, all of which was recorded in general and administrative expense on our consolidated statement of operations. 121 Table of Contents 10. Borrowings Credit Agreement On December 20, 2019, we entered into a revolving credit agreement (the “ Credit Agreement”), which provided for a committed revolving loan facility of up to $ 125.0 million (the “Revolving Facility”) and included a $ 20.0 million letter of credit subfacility (the “LC Capacity” and together with the Revolving Facility, the “Credit Facility”). Borrowings under the Credit Facility were available for working capital and general corporate purposes. The Credit Facility had a maturity date of December 20, 2024. At our option, we were to specify whether the loans made under the Revolving Facility were an Alternate Base Rate (“ABR”) borrowing or a Eurodollar borrowing, which then determined the annual interest rate. ABR borrowings bore interest at the ABR plus 0.50 %. Eurodollar borrowings bore interest at the adjusted LIBO Rate plus 1.50 %. The ABR equaled the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50 %, and (iii) the sum of the adjusted one-month LIBO Rate for a Eurodollar borrowing plus 1.00 %. The ABR was subject to a floor of 1.00 %. For ABR borrowings, interest was payable on the last day of March, June, September, and December of each year. For Eurodollar borrowings, interest was payable on the last day of each interest period for the applicable borrowing, and if such interest period extended over three months, each day prior to the last day of each three-month interval during such interest period. Commitments under the Revolving Facility are subject to a commitment fee of 0.25 % on the difference between the total committed amount of the Revolving Facility on the one hand, and the amount drawn thereunder plus the aggregate amount of LC Capacity used on the other. An annual letter of credit fee of 1.50 % of the average daily undrawn amount of the letters of credit issued thereunder was also payable quarterly. Letters of credit issued under the letter of credit subfacility were subject to a fronting fee of 0.125 % on the average daily undrawn amount on such letters of credit. In March 2020, we borrowed the full $ 125.0 million amount as a Eurodollar borrowing under the Revolving Facility. In September 2020, we repaid the $ 125.0 million of indebtedness under the Credit Facility using a portion of the net proceeds we received from our IPO. In connection with this borrowing, we recognized $ 1.1 million and $ 1.5 million in expense primarily related to the interest cost associated with this borrowing, commitment fees on the undrawn portion, and amortization of debt issuance costs during the years ended December 31, 2021 and 2020, respectively. This amount is reported within "Interest expense" on our consolidated statements of operations and comprehensive loss. Under the Credit Agreement, we were to maintain a minimum liquidity balance of $ 75.0 million as of the last day of the most recently completed four consecutive fiscal quarters, which commenced on June 30, 2020. The Credit Agreement contained customary conditions to borrowing, representations and warranties, events of default and covenants, including covenants that restrict our ability to incur indebtedness, grant liens, make investments, undergo corporate changes, make dispositions, prepay other indebtedness, pay dividends or other distributions and engage in transactions with our affiliates. The obligations under the Credit Agreement are secured by a perfected security interest in (i) all of our tangible and intangible assets, except for certain customary excluded assets, and (ii) all of our ownership in capital stock of restricted subsidiaries (limited, in the case of the stock of non-U.S. subsidiaries and U.S. subsidiaries that have no material assets other than equity interests and/or indebtedness in foreign subsidiaries that are controlled foreign corporations, to 65 % of the capital stock of such subsidiaries). The obligations under the Credit Agreement are also guaranteed by our existing and subsequently acquired or formed material domestic subsidiaries. In April 2021, we terminated without penalty our Credit Agreement. There was no outstanding indebtedness under the Credit Facility, and we determined that the Credit Facility was no longer necessary. We were in compliance in all material respects with the covenants in the Credit Agreement through April 2021, when the Credit Agreement was terminated. 122 Table of Contents Convertible Notes In November 2021, we issued an aggregate of $ 1.7 billion principal amount of 0 % Convertible Senior Notes due 2026, including the exercise in full by the initial purchasers of their option to purchase up to an additional $ 225.0 million aggregate principal amount of the 2026 Notes, pursuant to an Indenture dated as of November 19, 2021 (the “Indenture”), between us and U.S. Bank National Association, as trustee. The net proceeds from the issuance of the 2026 Notes were $ 1.7 billion, net of debt issuance costs and cash used to purchase the capped call transactions ("Capped Call Transactions") discussed below. The debt issuance costs are amortized to interest expense using the straight-line method, which approximates the effective interest method. The 2026 Notes are general unsecured obligations which do not bear regular interest and for which the principal balance will not accrete. We may elect for special interest to accrue on the 2026 Notes as the sole remedy for any failure by us to comply with certain reporting requirements for the first 365 days after the occurrence of such failure under the Indenture. Special interest will accrue for any failure by us to comply with certain reporting requirements during the six-month period beginning on, and including, the date that is six months after the last date of original issuance of the 2026 Notes. Special interest will also accrue if, and for so long as, the restrictive legend on the 2026 Notes has not been removed, the 2026 Notes are assigned a restricted CUSIP number or the 2026 Notes are not otherwise freely tradeable by holders other than our affiliates as of the de-legending deadline date set forth in the Indenture until the restrictive legend has been removed from the 2026 Notes, the 2026 Notes are assigned an unrestricted CUSIP number and the 2026 Notes are freely tradable. Holders of the 2026 Notes may receive special interest under specified circumstances as outlined in the Indenture. Special interest, if any, will be payable semiannually in arrears on November 15 and May 15 of each year, beginning on May 15, 2022 (if and to the extent that special interest is then payable on the 2026 Notes). The 2026 Notes will mature on November 15, 2026 unless earlier converted, redeemed, or repurchased. The 2026 Notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election, at an initial conversion rate of 3.2392 shares of common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $ 308.72 per share of our common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture governing the 2026 Notes. We may not redeem the Notes prior to November 20, 2024. We may redeem for cash all or any portion of the 2026 Notes, at our option, on or after November 20, 2024 if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 -consecutive-trading-day period (including the last day of such period), ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date. If we redeem less than all the outstanding 2026 Notes, at least $ 150.0 million aggregate principal amount of 2026 Notes must be outstanding and not subject to redemption as of, and after giving effect to, delivery of the relevant notice of redemption. No sinking fund is provided for the convertible notes, which means that we are not required to redeem or retire them periodically. Holders of the 2026 Notes may convert all or a portion of their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding August 15, 2026, in multiples of $1,000 principal amounts, only under the following circumstances: • during any calendar quarter commencing after the calendar quarter ending on March 31, 2022 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the 2026 Notes on each such trading day; 123 Table of Contents • during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of the 2026 Notes for each trading day of that ten consecutive trading day period was less than 98 % of the product of the last reported sale price of our common stock and the applicable conversion rate of the 2026 Notes on each such trading day; • if we call such 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the 2026 Notes called (or deemed called) for redemption; or • on the occurrence of specified corporate events set forth in the Indenture. On or after August 15, 2026, the 2026 Notes are convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances. In connection with a make-whole fundamental change, as defined in the Indenture, or in connection with certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, in each case as described in the Indentures, we will increase the conversion rate for a holder of the 2026 Notes who elects to convert its 2026 Notes in connection with such a corporate event or during the related redemption period in certain circumstances. Additionally, in the event of a fundamental change, subject to certain limitations described in the Indenture, holders of the 2026 Notes may require us to repurchase all or a portion of the 2026 Notes at a price equal to 100 % of the principal amount of 2026 Notes to be repurchased, plus any accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. We accounted for the issuance of the 2026 Notes as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives. As of December 31, 2021 Convertible note: Principal $ 1,725,000 Unamortized debt issuance cost ( 21,965 ) Net carrying amount $ 1,703,035 Interest expense related to the amortization of debt issuance costs was $ 0.5 million for the year ended December 31, 2021. As of December 31, 2021, the if-converted value of the 2026 Notes did not exceed the principal amount. The sale price for conversion was not satisfied as of December 31, 2021 for the 2026 Notes. The 2026 Notes were not eligible for conversion as of December 31, 2021. Capped Call Transactions In connection with the pricing of the 2026 Notes, we entered into the Capped Call Transactions with certain counterparties at a net cost of $ 48.1 million with call options totaling approximately 5.6 million of our common shares, and expiration dates beginning on September 18, 2026 and ending on November 12, 2026. The strike price of the Capped Call Transactions is $ 308.72 , and the cap price is initially $ 343.02 per share of our common stock and is subject to certain adjustments under the terms of the Capped Call Transactions. The Capped Call Transactions are freestanding and are considered separately exercisable from the 2026 Notes. 124 Table of Contents The Capped Call Transactions are intended to reduce potential dilution to our common stock upon any conversion of the 2026 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2026 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price described above. The cost of the Capped Call Transactions was recorded as a reduction of our additional paid-in capital on our consolidated balance sheets. The Capped Call Transactions will not be remeasured as long as they continue to meet the conditions for equity classification. As of December 31, 2021, the Capped Call Transactions were not in the money. 11. Commitments and Contingencies The following table summarizes our non-cancelable contractual commitments as of December 31, 2021 (in thousands): Total 2022 2023-2024 2025-2026 Thereafter Purchase commitments (1) $ 692,215 $ 116,865 $ 279,744 $ 295,606 $ — (1) The substantial majority of our purchase commitments are related to agreements with our data center hosting providers. Data Center Hosting Commitments In September 2021, we entered into an amended cloud service agreement with an additional term of five years beginning on the amendment date. In December 2021, we entered into an amended commitment agreement to increase the annual commitments over the contract term. Under the agreement and amendment, we were granted access to use certain cloud services. Minimum annual commitments increase annually over the term of the agreement. The aggregate value of all annual minimum commitments over the contract term is $ 700.0 million over five years . Total spend under the original and amended cloud service agreements for the years ended December 31, 2021, 2020, and 2019 was approximately $ 117.7 million, $ 63.2 million, and $ 32.7 million, respectively. The total spend under the amended cloud service agreement for the year ended December 31, 2021 was $ 32.9 million. We expect to meet our remaining commitment. Legal Matters In the normal course of business, we are subject to various legal matters. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Legal costs related to such potential losses are expensed as incurred. In addition, recoveries are shown as a reduction in legal costs in the period in which they are realized. With respect to our outstanding matters, based on our current knowledge, we believe that the resolution of such matters will not, either individually or in aggregate, have a material adverse effect on our business or our consolidated financial statements. However, litigation is inherently uncertain, and the outcome of these matters cannot be predicted with certainty. Accordingly, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these matters. Indemnifications In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third-party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. As of December 31, 2021, there were no known events or circumstances that have resulted in a material indemnification liability to us and we did not incur material costs to defend lawsuits or settle claims related to these indemnifications. 125 Table of Contents Unity Software Inc. Letters of Credit We had $ 10.8 million and $ 21.4 million of secured letters of credit outstanding as of December 31, 2021 and 2020, respectively. These primarily relate to our office space leases and are fully collateralized by certificates of deposit which we record in restricted cash on our consolidated balance sheets based on the term of the remaining restriction. 12. Stockholders’ Equity and Employee Compensation Plans Stockholders' Equity Employee Compensation Plans 2009 Stock Plan, 2019 Stock Incentive Plan, and 2020 Equity Incentive Plan The Company adopted the 2009 Stock Plan, 2019 Stock Incentive Plan ("2019 Stock Plan") and the 2020 Equity Incentive Plan ("2020 Plan"), primarily for the purpose of granting stock-based awards to employees and non-employee directors. Upon the effectiveness of the 2020 Plan in August 2020, no further grants may be made under the Company's 2009 Stock Plan and 2019 Stock Plan. Any options or awards outstanding under the 2009 Stock Plan and 2019 Stock Plan remained outstanding and effective. Any shares under 2009 Stock Plan and 2019 Stock Plan that expire, or are forfeited, cancelled, withheld, or reacquired will become available for new grant under the 2020 Plan. The 2020 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other forms of awards to employees, directors, and consultants, including employees and consultants of our affiliates. The exercise price of stock options granted under the 2020 Plan must be at least equal to the fair market value of a share of our common stock on grant date and the exercise price of incentive stock options granted to any participant, who owns more than 10% of the total voting power of all classes of our outstanding stock, must be at least 110 % of the fair market value on the grant date. The term of a stock option and stock appreciation right may not exceed 10 years, except with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock, the term of an incentive stock option may not exceed five years . As of December 31, 2021, we had reserved a total of 77.1 million shares of common stock under the 2020 Plan, of which 34.2 million were available for grant. 2020 Employee Stock Purchase Plan Our board of directors adopted the 2020 ESPP in August 2020 and our stockholders approved the 2020 ESPP in September 2020. The 2020 ESPP permits participants to purchase shares of our common stock through payroll deductions of up to 15 % of their earnings. Unless otherwise determined by the administrator, the purchase price of the shares will be 85 % of the lower of the fair market value of our common stock on (i) the first day of an offering or (ii) on the date of purchase. No participant may purchase more than 1,000 shares of common stock in any one offering period. Participants may end their participation at any time during an offering and will be paid their accrued contributions that have not yet been used to purchase shares. Participation ends automatically upon termination of employment with us. The maximum number of shares of our common stock that may be issued under our 2020 ESPP is 8.0 million shares, all of which were available for issuance as of December 31, 2021. The number of shares reserved and available for issuance under the 2020 ESPP will automatically increase on January 1 of each year, beginning on January 1, 2021 through January 31, 2030, by 1.0 % of the total number of shares of common stock outstandi ng on December 31 of the preceding calendar year. 126 Table of Contents Employee 401(k) Plan We have a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code. U.S. full-time employees qualify for participation in the plan. Contribution to the plan is under our discretion. For the years ended December 31, 2021, 2020, and 2019, we contributed and expensed $ 9.1 million, $ 6.8 million, and $ 5.9 million, respectively, to the plan. Defined Contribution Pension Plan For other operations outside the United States, we have a defined contribution pension plan. We contribute up to 10 % of total salary into the plan annually when employees contribute to the plan. For the years ended December 31, 2021, 2020, and 2019, we contributed and expensed $ 18.3 million, $ 10.6 million, and $ 7.1 million, respectively, to the plan. 13. Stock‑Based Compensation We recorded stock-based compensation expense related to grants to employees, including those in connection with modified awards, on our consolidated statements of operations as follows (in thousands): Year Ended December 31, 2021 2020 2019 Cost of revenue $ 24,811 $ 10,626 $ 3,198 Research and development 165,604 66,038 13,521 Sales and marketing 70,663 23,769 6,124 General and administrative 86,081 34,196 21,637 Total stock-based compensation expense $ 347,159 $ 134,629 $ 44,480 As of December 31, 2021, there was unrecognized compensation expense related to outstanding stock options of $ 103.6 million to be recognized over the weighted-average remaining vesting period of 2.15 years. As of December 31, 2021, there was unrecognized compensation expense related to unvested restricted stock units of $ 1.0 billion to be recognized over the weighted-average remaining vesting period of 2.95 years. As of December 31, 2021, there was unrecognized compensation expense related to our 2020 ESPP of $ 1.7 million to be recognized over the weighted-average vesting period of 0.17 years. In future periods, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain employees. In March 2021, we entered into a separation agreement with our former Chief Financial Officer. The agreement provided for payment of a one-time lump-sum severance benefit of $ 0.3 million, payment for coverage under COBRA and modification of her equity awards. Incremental stock-based compensation expense of $ 12.6 million in connection with the modified equity awards was recorded in general and administrative expense in the year ended December 31, 2021. The one-time lump-sum severance benefit of $ 0.3 million was paid in full as of December 31, 2021 and was recorded in general and administrative expense. In November 2019, we entered into a separation agreement with our former Chief People Officer. Our Board of Directors (excluding the CEO) approved the agreement providing for payment of her earned bonus, payment for coverage under COBRA and modification of her equity awards. Incremental stock-based compensation expense of $ 13.5 million in connection with the modified equity awards was recorded in general and administrative expense in the year ended December 31, 2019. 127 Table of Contents Unity Software Inc. Stock Options A summary of our stock option activity under the 2009 Stock Plan, 2019 Stock Plan, and 2020 Plan is as follows: Options Outstanding Stock Options Outstanding Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (In Years) Balance as of December 31, 2019 42,728,180 $ 5.77 7.35 Granted 5,348,737 $ 21.03 Exercised ( 6,758,226 ) $ 3.76 Forfeited, cancelled, or expired ( 860,816 ) $ 10.35 Balance as of December 31, 2020 40,457,875 $ 8.03 6.87 Granted 1,325,352 $ 107.10 Exercised ( 11,650,963 ) $ 5.72 Forfeited, cancelled, or expired ( 906,223 ) $ 13.23 Balance as of December 31, 2021 29,226,041 $ 13.28 6.26 Exercisable as of December 31, 2021 20,056,867 $ 6.15 5.46 In 2014, we issued nonplan options to purchase 4,250,000 shares of common stock, 8,500,000 when taking into account the 2 :1 forward stock split we effected in 2017, to our CEO with an exercise price of $ 2.85 per share. These options vested over four years and were immediately exercisable. We accepted a promissory note receivable from our CEO in consideration for the early exercise of these nonplan options. The note receivable, totaling $ 12.1 million, bore interest at a rate of 1.72 % and had a term of seven years . The promissory note receivable was considered nonrecourse. Due to the nonrecourse nature of the note, the resulting exercise of the nonplan options was determined to not be substantive. Therefore, we did not reflect the exercise of the stock options or the note receivable for accounting purposes on our consolidated balance sheets at the time the promissory note was executed. The shares issued were considered restricted until the note was repaid. During 2016, $ 4.2 million of the note was partially repaid and an amended promissory note was put in place for an amount of $ 8.0 million bearing interest at a rate of 1.72 % and with a remaining term of five years . For accounting and reporting purposes, the repayment of the note was considered to be a $ 4.2 million exercise of stock options during the year ended December 31, 2016. In June 2020, our CEO fully repaid the $ 8.0 million principal balance and $ 0.9 million in related interest of the nonrecourse promissory note that we issued in 2016. For accounting and reporting purposes, the repayment of the note was considered to be an $ 8.9 million exercise of stock options during the year ended December 31, 2020. The aggregate pretax intrinsic value of stock options exercised during the years ended December 31, 2021, 2020, and 2019, was $ 1,394.7 million, $ 441.0 million, and $ 92.0 million respectively. The intrinsic value is the difference between the estimated fair value of our common stock on the date of exercise and the exercise price for in-the-money options. The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2021, 2020, and 2019, was $ 39.05 , $ 10.66 , and $ 8.39 per share, respectively. The fair value of stock options vested during the years ended December 31, 2021, 2020, and 2019, was $ 48.9 million, $ 44.1 million, and $ 27.8 million, respectively. 128 Table of Contents Unity Software Inc. The calculated grant-date fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2021 December 31, 2020 December 31, 2019 Expected dividend yield — — — Risk-free interest rate 0.9 % - 1.3 % 0.4 % - 0.6 % 1.6 % - 2.5 % Expected volatility 32.9 % - 36.2 % 33.8 % - 36.3 % 34.0 % - 34.7 % Expected term (in years) 6.25 6.00 6.25 Fair value of underlying common stock $ 100.60 - $ 152.34 $ 22.00 - $ 152.00 $ 12.66 - $ 22.09 Restricted Stock Units A summary of our RSU activity under the 2019 Stock Plan and 2020 Plan is as follows: Unvested Restricted Stock Units Number of Shares Weighted-Average Grant-Date Fair Value Unvested as of December 31, 2019 2,849,378 $ 22.06 Granted 7,706,961 $ 62.26 Vested ( 804,312 ) $ 28.55 Forfeited ( 190,236 ) $ 28.47 Unvested as of December 31, 2020 9,561,791 $ 53.79 Granted 8,060,505 $ 112.11 Vested ( 3,131,986 ) $ 58.23 Forfeited ( 793,474 ) $ 73.36 Unvested as of December 31, 2021 13,696,836 $ 85.96 The total fair value of RSUs vested as of the vesting dates during the years ended December 31, 2021 and 2020 was $ 442.1 million and $ 85.9 million, respectively. No RSUs vested during the year ended December 31, 2019. The RSUs granted prior to our IPO are subject to both a service-based vesting condition, which is satisfied over one to four years , and a liquidity event vesting condition, which was satisfied upon the completion of our IPO in September 2020. In the third quarter of 2020, we recorded cumulative stock-based compensation expense of $ 47.8 million related to all then-outstanding RSUs as the liquidity event vesting condition was satisfied upon the completion of our IPO. 129 Table of Contents Unity Software Inc. Employee Stock Purchase Plan The first offering period under the 2020 ESPP began on September 1, 2021 and ends on February 28, 2022. The fair value of stock purchase rights granted under the 2020 ESPP was estimated using the following assumptions: Year Ended December 31, 2021 Expected dividend yield — Risk-free interest rate 0.1 % Expected volatility 27.2 % Expected term (in years) 0.50 Estimated fair value $ 28.64 14. Income Taxes Loss before provision for income taxes consisted of the following for the years ended December 31, 2021, 2020, and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 United States $ ( 318,907 ) $ ( 185,580 ) $ ( 120,135 ) Foreign ( 212,323 ) ( 94,637 ) ( 33,107 ) Total $ ( 531,230 ) $ ( 280,217 ) $ ( 153,242 ) The components of the provision for income taxes consists of the following for the years ended December 31, 2021, 2020, and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Current: U.S. federal $ ( 111 ) $ 183 $ 331 State 219 155 108 Foreign 13,594 4,412 14,186 Total current tax expense (benefit) 13,702 4,750 14,625 Deferred: U.S. federal ( 4,874 ) — ( 6,746 ) State ( 851 ) ( 156 ) ( 1,147 ) Foreign ( 6,600 ) ( 2,503 ) 3,216 Total deferred tax expense (benefit) ( 12,325 ) ( 2,659 ) ( 4,677 ) Total tax provision $ 1,377 $ 2,091 $ 9,948 130 Table of Contents Unity Software Inc. Reconciliations of the income tax provision at the U.S. federal statutory tax rate to the provision for income taxes are as follows (in thousands): Year Ended December 31, 2021 2020 (1) 2019 U.S. federal statutory tax rate $ ( 111,558 ) $ ( 58,846 ) $ ( 32,181 ) Changes in income taxes resulting from: State tax expense, net of federal benefit ( 36,984 ) ( 12,698 ) ( 4,865 ) Foreign income taxed at different rates ( 30,114 ) ( 29,958 ) 7,695 Federal Research and development credits ( 31,088 ) ( 12,338 ) ( 5,756 ) Stock-based compensation ( 91,623 ) ( 22,624 ) ( 5,305 ) Change in valuation allowance 301,330 139,219 49,477 Other 1,414 ( 664 ) 883 Total tax provision $ 1,377 $ 2,091 $ 9,948 (1) Certain prior year amounts have been reclassified to conform to current year presentation. Our income tax provision for the year ended December 31, 2021 was primarily driven by the earnings of our foreign subsidiaries, which are taxed at rates that differ from the U.S. statutory rate, losses that cannot be benefited due to the valuation allowance against the net deferred tax assets of our United States, Denmark, and United Kingdom entities, gain recognized from an intercompany transaction with our subsidiary in Israel, and an income tax benefit recognized as a result of a partial release of our valuation allowance against our deferred tax assets in connection with business combinations. Our income tax provision for the year ended December 31, 2020 was primarily driven by earnings of our foreign subsidiaries which are taxed at rates that differ from the U.S. statutory tax rate and losses that cannot be benefited due to the valuation allowance on United States and Denmark entities. Our income tax provision for the year ended December 31, 2019 was primarily driven by $ 8.5 million tax expense related to an intercompany transaction with a subsidiary. 131 Table of Contents Unity Software Inc. The types of temporary differences that give rise to significant portions of our deferred tax assets and liabilities as of December 31, 2021 and 2020 are set forth below (in thousands): As of December 31, 2021 2020 (1) Deferred tax assets: Net operating losses $ 332,622 $ 118,244 Tax credits 81,847 35,630 Accruals and reserves 9,261 8,537 Deferred revenue 5,683 4,960 Stock-based compensation 29,647 20,394 Charitable contribution 13,707 13,834 Capitalized R&D expenditures 94,686 56,596 Depreciation and amortization — 4,300 Operating lease liabilities 24,137 22,477 Other 1,134 150 Gross deferred tax assets 592,724 285,122 Valuation allowance ( 568,124 ) ( 265,781 ) Total deferred tax assets 24,600 19,341 Deferred tax liabilities: Depreciation and amortization ( 4,469 ) — Operating lease right-of-use assets ( 20,467 ) ( 19,341 ) Other — ( 260 ) Total deferred tax liabilities ( 24,936 ) ( 19,601 ) Net deferred tax assets $ ( 336 ) $ ( 260 ) (1) Certain prior year amounts have been reclassified to conform to current year presentation. The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We regularly assess the ability to realize our deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including our history of losses, we believe that it is more likely than not that our U.S. federal, state, and certain foreign deferred tax assets will not be realized as of December 31, 2021 and 2020, and as such, we have maintained a full valuation allowance against such deferred tax assets. For the period ended December 31, 2021, we determined that due to the weight of objectively verifiable negative evidence, our U.K. deferred tax assets are no longer more likely than not to be realized in the future and a full valuation allowance was recorded. 132 Table of Contents Unity Software Inc. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. In the event we determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation allowance against deferred tax assets will be reversed in the period in which we make such determination. The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which the valuation allowance is released. The valuation allowance against our U.S. federal, state and foreign deferred tax assets increased by $ 302.3 million and $ 142.4 million in the years ended December 31, 2021 and 2020, respectively. The increase in the valuation allowance in the years ended December 31, 2021 and 2020 was primarily related to deferred tax assets for which insufficient positive evidence exists to support their realizability. In the tax year ended December 31, 2021, we capitalized certain research and development costs incurred by our foreign subsidiary, which resulted in a deferred tax asset of $ 38.1 million. This deferred tax asset for the capitalized research and development costs is offset by a valuation allowance. Our NOL carryforwards for U.S. federal, state, and foreign purposes were $ 1.0 billion, $ 392.2 million, and $ 449.8 million, respectively, with most of our foreign NOL carryforward balances arising from Denmark and the U.K. jurisdictions. The NOL carryforwards, if not utilized, will begin to expire in 2032, 2024, and 2039, respectively. Our U.S. federal, state, and foreign research and development credit carryforwards were $ 69.2 million, $ 28.4 million and $ 6.2 million, respectively. The U.S. federal credit carryforwards, if not utilized, will begin to expire in 2032, while the California credit carryforwards have no expiration. The foreign credit carryforwards, if not utilized, will begin to expire in 2041. Federal and state tax laws impose restrictions on the utilization of NOL and research and development credit carryforwards in the event of a change in ownership of our business as defined by the Internal Revenue Code, Sections 382 and 383. Under Section 382 and 383 of the Code, substantial changes in our ownership may limit the amount of NOL and research and development credit carryforwards that are available to offset taxable income. The annual limitation would not automatically result in the loss of NOL or research and development credit carryforwards but may limit the amount available in any given future period. We are maintaining our reinvestment assertion with respect to foreign earnings for the period ended December 31, 2021, which is that all earnings are permanently reinvested for all jurisdictions. Based on our reinvestment assertion and losses from our foreign entities, we have not recorded a liability for the period ended December 31, 2021. A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits, excluding accrued net interest and penalties, is as follows (in thousands): As of December 31, 2021 2020 (1) 2019 (1) Unrecognized tax benefits, beginning balance $ 74,670 $ 37,392 $ 23,980 Gross increases for tax positions taken in prior years 1,729 1,689 1,565 Gross decreases for tax positions taken in prior years ( 2,507 ) ( 694 ) ( 6,239 ) Gross increases for tax positions taken in current year 38,406 38,829 19,398 Gross decreases for tax positions taken in current year — — — Reductions resulting from lapses of statues of limitations ( 1,700 ) ( 2,952 ) ( 1,258 ) Foreign exchange gains and losses ( 283 ) 406 ( 54 ) Unrecognized tax benefits, ending balance $ 110,315 $ 74,670 $ 37,392 (1) Certain prior year amounts have been reclassified to conform to current year presentation. 133 Table of Contents Unity Software Inc. As of December 31, 2021 and 2020, we had unrecognized tax benefits of $ 110.3 million and $ 74.7 million, respectively, of which $ 11.9 million and $ 9.0 million would affect the effective tax rate if recognized. We recognize interest and penalties related to our unrecognized tax benefits within our provision for income taxes. The amount of interest and penalties accrued as of December 31, 2021 and 2020 were $ 2.5 million and $ 2.2 million, respectively, of which $ 0.3 million and $( 0.2 ) million was accrued in the period ended December 31, 2021 and 2020, respectively. We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Denmark. Our 2012 and subsequent tax years remain open to examination by the Internal Revenue Service. Our 2018 and subsequent tax years remain open to examination in Denmark. We believe that adequate amounts have been reserved in accordance with ASC 740 for any adjustments to the provision for income taxes or other tax items that may ultimately result from examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the taxing authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, or cash flows. 15. Net Loss per Share of Common Stock Basic net loss per share attributable to our common stockholders is computed using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common stock outstanding for the period, including stock options and RSUs, using the treasury stock method, and the 2026 Notes, using the if-converted method. Diluted net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were antidilutive given our net loss in each period presented. The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data): Year Ended December 31, 2021 2020 2019 Basic and diluted net loss per share Numerator: Net loss $ ( 532,607 ) $ ( 282,308 ) $ ( 163,190 ) Add: Deemed dividends representing excess paid over initial issuance price to repurchase convertible preferred stock — — ( 110,241 ) Net loss attributable to our common stockholders $ ( 532,607 ) $ ( 282,308 ) $ ( 273,431 ) Denominator: Weighted-average common shares used in per share computation, basic and diluted 282,195 169,973 114,442 Net loss per share, basic and diluted $ ( 1.89 ) $ ( 1.66 ) $ ( 2.39 ) 134 Table of Contents Unity Software Inc. The following table presents the forms of antidilutive potential common shares excluded from the computation of diluted net loss per share for the following periods (in thousands): Year Ended December 31, 2021 2020 2019 Convertible preferred stock — — 95,899 Convertible notes 9,091 — — Stock options 29,226 40,458 42,728 Unvested RSUs 13,697 10,366 2,849 16. Subsequent Events In January 2022, we completed the acquisition of a company that provides 2D art creation tools and game templates with the goal of providing consumers the ability to create, play, and share their own 2D games. The purchase consideration for this acquisition was approximately $ 50.0 million, payable with a combination of cash and common stock. Prior to the completion of the acquisition, we held a minority investment in the acquired company that we accounted for using the equity method of accounting. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None .