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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-22 · 153 added, 283 removed, 208 unchanged (68% of the section changed)

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The following discussion and analysis contains forward-looking statements that involve risks and uncertainties.

Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations.

When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business.

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These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends.

Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations.

Forward-looking statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

See the section titled “Note Regarding Forward-Looking Statements” in this report.

These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussion of 2019 and year-over-year comparisons between fiscal 2020 and 2019 that are not included in this Form 10-K can be found under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, that was filed with the SEC on March 5, 2021.

Discussion of 2020 and year-over-year comparisons between fiscal 2021 and 2020 that are not included in this Form 10-K can be found under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that was filed with the SEC on February 22, 2022, and are incorporated by reference herein.

Unity is the world’s leading platform for creating and operating interactive, RT3D content.

Unity Software Inc.

Our platform provides 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.

Our platform consists of two distinct, but connected and synergistic, sets of solutions:

Create Solutions and Operate Solutions.

Our Create Solutions are used by content creators—developers, artists, designers, engineers, and architects—to create interactive, real-time 2D and 3D content.

Content can be created once and deployed to more than 20 platforms, including Windows, Mac, iOS, Android, PlayStation, Xbox, Nintendo Switch, and the leading augmented and virtual reality platforms, among others.

Our Operate Solutions offer customers the ability to grow and engage their end-user base, as well as run and monetize their content with the goal of optimizing end-user acquisition and operational costs, while increasing the lifetime value of their end users.

We launched our first game development engine in 2004, bringing together a set of tools, such as rendering, lighting, physics, sound, animation, and user interface, that were designed to address the challenges faced by most game developers.

Prior to Unity, developers primarily created these tools individually and repetitively across different target platforms, which was an expensive and time-consuming process.

Unity made game development easier and faster.

In the year ended December 31, 2021, we built upon our history of innovation by achieving a number of milestones that secured our position as the leading platform for creating and operating interactive, RT3D content including those identified below.

• Unity's Operate Solutions continued to command attention:

In 2021, Operate Solutions contributed to the stability and success of more than 200 thousand games.

Use of Unity monetization services drove more than 2 billion net-new installs, and as cross-platform, multiplayer games became more mainstream, our Multiplay and Vivox offerings continue to grow.

They supported some of the most successful game launches last year including Amazon's New World and Splitgate by 1,047 Games.

Unity Software Inc.

• Unity's Create Solutions accelerated throughout the year:

Create Solutions experienced a strong year across games and non-gaming.

In late 2021 particularly, AAA publishers and platform providers launched made with Unity games, including Riot Games' Ruined King:

A League of Legends Story.

Unity continued to expand market share within the top 1,000 mobile games in 2021.

Outside of gaming, Unity's RT3D capabilities led to more customers across industries and use-cases to implement Unity software as part of their digital strategies.

For example, Hyundai Motors and Unity partner to connect a physical factory with its digital twin to enhance plant management, drive productivity and innovate in the manufacturing process.

eBay partnered with unity to enable sellers to showcase the actual item they are selling in Unity's proprietary, interactive 360-view.

• Unity expanded its addressable market through strategic acquisitions and product innovations:

In 2021, Unity added key capabilities and expanded its addressable market with key acquisitions, heavily focused on supporting artists.

In the remote collaboration space, Unity brought on remote access platform Parsec and SyncSketch, which enables cloud-based, secure collaboration between separated creators and artists.

With certain tools and technologies from Weta Digital, Interactive Data Visualization (makers of SpeedTree), and most recently, Ziva Dynamics, Unity aims to democratize access to some of artistry's most exclusive tools and services via the cloud.

On the product front, Unity introduced Unity Game Services, which unifies existing solutions and introduces new tools and services to simplify launching cross-platform, multiplayer games.

These initiatives expanded the company's total addressable market, increased its serviceable market and strengthened the value of the Unity platform to customers.

We continue to invest in research and development and to pursue selective acquisitions and partnerships in order to enhance and expand our platform.

Impact of COVID-19

While our total revenue, cash flows, and overall financial condition have not been adversely impacted to date, the COVID-19 pandemic has caused general business disruption worldwide beginning in January 2020.

The full extent to which the COVID-19 pandemic, including any new strains or mutations such as the delta or omicron variants, will directly or indirectly impact our business, results of operations, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted.

Although we experienced a modest adverse impact on our sales of Create Solutions as well as our Strategic Partnerships in 2020, our pipeline of customer opportunities for our Create Solutions and Strategic Partnerships were largely back to normal levels by the end of 2020 and we have not experienced COVID-19 related impacts on our Create Solutions during 2021.

We did see an increase in demand for our portfolio of products and services within Operate Solutions following the implementation of shelter-in-place orders to mitigate the outbreak of COVID-19, which resulted in higher levels of end-user engagement in Operate Solutions and an increase in revenue, along with a decrease in operating expense due to materially reduced travel and spending on events and facilities, which moderated over time.

This increased demand for our Operate Solutions will likely continue to moderate over time, particularly as vaccines are becoming widely available, and as shelter-in-place orders and other related measures and community practices evolve.

As restrictions related to COVID-19 ease, we expect travel and spending on events and facilities to increase.

In response to the COVID-19 pandemic, we are also requiring or have required substantially all of our employees to work remotely to minimize the risk of the virus to our employees and the communities in which we operate.

We are currently planning for most of our employees to return to in-person offices later in 2022, however our plans may change if the number of COVID-19 cases rises where our offices are located or if there is an increase in new strains such as the delta or omicron variants, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners.

Unity Software Inc.

The global impact of the COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations closely.

We do not yet know the full extent of potential impacts on our business or operations or on the global economy as a whole, particularly as the COVID-19 pandemic persists.

The return of more in-person activities will result in an increase in our expenses and could result in a range of impacts to our customers, which could impact our business.

Given the uncertainty, we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition.

Create Solutions and Grow Solutions.

ironSource Merger

In November 2022, we completed the ironSource Merger.

Following the transaction, ironSource forms part of our Grow Solutions (which we referred to prior to the acquisition as Operate solutions).

(See below for a discussion of the changes to how we present revenue results following the ironSource Merger and Item 8 of Part II, "Financial Statements and Supplementary Data" – Note 5 – Acquisitions, for further discussion of the acquisition.)

Impact of Macroeconomic Trends

Recent negative macroeconomic factors, such as inflation and corresponding higher interest rates, the strengthening of the U.S.

dollar, and the softening of the advertising market has negatively impacted our business, particularly our Grow Solutions, and may continue to do so.

We are managing costs in light of these factors and continuing to monitor their actual and potential direct and indirect impacts on us and our customers.

The impact of these macroeconomic trends remains uncertain, and we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition.

For additional details, refer to the section titled "Risk Factors."

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A single organization with multiple divisions, segments, or subsidiaries is generally counted as a single customer, even though we may enter into commercial agreements with multiple parties within that organization.

We had 1,052, 793, and 600 of such customers in the trailing 12 months as of December 31, 2021, 2020, and 2019, respectively, demonstrating our ability to grow our revenues with existing customers, and our strong and growing penetration of larger enterprises, including AAA gaming studios and large organizations in industries beyond gaming.

While these customers represented the substantial majority of revenue for the years ended December 31, 2021, 2020, and 2019, respectively, no one customer accounted for more than 10% of our revenue for either year.

We had 1,340, 1052, and 793 such customers in the trailing 12 months as of December 31, 2022, 2021, and 2020, respectively, demonstrating our ability to grow our revenues with existing customers, and our strong and growing penetration of larger enterprises, including AAA gaming studios and large organizations in industries beyond gaming.

We also experienced an increase of these customers as a result of the acquisition of ironSource.

While these customers represented the substantial majority of revenue for the years ended December 31, 2022, 2021, and 2020, respectively, no one customer accounted for more than 10% of our revenue for any of those years.

Dollar-Based Net Expansion Rate

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our Create and Operate Solutions customers and to increase their use of our platform.

We track our performance by measuring our dollar-based net expansion rate, which compares our Create and Operate Solutions revenue from the same set of customers across comparable periods, calculated on a trailing 12-month basis.

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our Create and Grow Solutions customers and to increase their use of our platform.

We track our performance by measuring our dollar-based net expansion rate, which compares our Create and Grow Solutions revenue from the same set of customers across comparable periods, calculated on a trailing 12-month basis.

Unity Software Inc.

Our dollar-based net expansion rate as of a period end is calculated as current period revenue divided by prior period revenue.

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Dollar-based net expansion rate 116 % 140 % 138 %

Our dollar-based net expansion rate as of December 31, 2021, 2020, and 2019 was driven primarily by the sales of additional subscriptions and services to our existing Create Solutions customers, expanded consumption among our existing Operate Solutions customers, and improvements in cross-selling our solutions to all of our customers.

Our dollar-based net expansion rate as of December 31, 2022, 2021, and 2020 was driven primarily by the sales of additional subscriptions and services to our existing Create Solutions customers and cross-selling our solutions to all of our customers.

The decrease in dollar-based net expansion rate, compared to the comparable prior year periods, is attributable to Grow Solutions and follows a similar trend to the revenue decrease seen from those solutions prior to the ironSource Merger due to softness in the advertising market.

The chart below illustrates that our dollar-based net expansion rate has been declining over the last year with a slight rebound in the fourth quarter due to the ironSource Merger.

Despite this decline, we are still maintaining strong relationships with our existing customers.

Unity Software Inc.

The chart below illustrates our strong relationship with existing customers by presenting our dollar-based net expansion rate as of the end of each of the past eight quarters.

Results of Operations

The following table summarizes our historical consolidated statements of operations data for the periods indicated (in thousands):

The following table summarizes our consolidated statements of operations data for the periods indicated (in thousands):

Year Ended December 31,

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Interest income and other expense, net 7,192 1,566 (3,885)

Loss before provision for income taxes (531,230) (280,217) (153,242)

Loss before income taxes (882,425) (531,230) (280,217)

Provision for income taxes 37,063 1,377 2,091

Net loss $ (919,488) $ (532,607) $ (282,308)

Unity Software Inc.

The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue for the periods indicated:

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Interest income and other expense, net 1 — (1)

Loss before provision for income taxes (48) (37) (28)

Loss before income taxes (63) (48) (37)

Provision for income taxes 3 — —

Net loss (66) % (48) % (37) %

We derive revenue from Create Solutions, Operate Solutions, and Strategic Partnerships and Other.

Create Solutions

We generate Create Solutions revenue primarily through the sale of subscription fee arrangements for the use of our products and related support services.

We offer subscription plans at various price points and recognize revenue over a service period that generally ranges from one to three years.

We typically bill our customers on a monthly, quarterly or annual basis, depending on the size of the contract.

As a result of billing our customers in advance, we record deferred revenue, and a portion of the revenue we report in each period is attributable to the recognition of deferred revenue related to subscription and support agreements that we entered into during previous periods.

We generate additional Create Solutions revenue from the sale of professional services to our subscription customers.

These services primarily consist of consulting, integration, training and custom application and workflow development, and may be billed in advance or on a time and materials basis.

Operate Solutions

We generate Operate Solutions revenue through a combination of revenue-share and consumption-based business models that we manage as a portfolio of products and services.

Unity Software Inc.

Our monetization products are primarily based on a revenue-share model.

These products were introduced in 2014 as our first set of Operate Solutions products and currently account for a substantial majority of our Operate Solutions revenue.

We recognize monetization revenue when an end user installs an application after seeing an advertisement (contracted on a cost-per-install basis), and when an advertisement starts (contracted on a cost-per-impression basis).

Our revenue represents the amount we retain from the transaction we are facilitating through our Unified Auction.

Actions by operating system platform providers or application stores such as Apple or Google may affect the manner in which we or our customers collect, use and share data from end-user devices.

For example, Apple recently implemented a requirement for applications using its mobile operating system, iOS, to affirmatively (on an opt-in basis) obtain an end user’s permission to “track them across apps or websites owned by other companies” or access their device’s advertising identifier for advertising and advertising measurement purposes, as well as other restrictions.

If end-users do not opt-in to participate in such tracking as defined by Apple, our ability to monetize through advertising could suffer.

The long-term impact of these and other privacy and regulatory changes remains uncertain.

We also provide cloud-based services to support the ongoing operation of games and applications.

These include application hosting services, as well as end-user engagement tools and voice chat services.

These services are generally sold based on consumption and billed monthly in arrears.

Some of our consumption-based contracts include a minimum fixed-fee consumption amount.

We expect that our Operate Solutions beyond monetization, including cloud operations and hosting services, such as Multiplay, which we introduced in 2018, will grow as a percentage of our revenue in the long term as we further scale newer products and services and as we launch additional solutions for gaming customers as well as customers in other industries.

Strategic Partnerships and Other

We generate Strategic Partnerships revenue primarily from partnership contracts with hardware, operating system, device, game console, and other technology providers.

Typically, we recognize revenue from these contracts as services are performed.

These partnerships are typically multi-year software development arrangements with payments that are either made in advance on a quarterly basis or milestone-based.

In addition, certain partners pay us royalties based on the sales of applications sold on their platform that incorporate or use our customized software.

We generate Other revenue primarily from our share of sales from our Asset Store, a marketplace and scaled aggregator for software, content, and tools used in the creation of real-time interactive games and applications, and from our Verified Solutions Partners, which sell software and tools certified for quality and compatibility with our platform.

Unity Software Inc.

Our total revenue is summarized as follows (in thousands, except percentages):

Year Ended Year Ended

December 31, Change December 31, Change

2021 2020 Amount % 2020 2019 Amount %

During the fourth quarter of 2022, we completed our acquisition of ironSource.

Following the merger, we made adjustments to our internal reporting structure to focus on our two complementary and interconnected solutions:

Create and Grow Solutions.

Our revenue presentation for the years ended December 31, 2022, 2021, and 2020 has been aligned with this new approach by including annual revenue of approximately $82.7 million, $74.8 million, and $70.0 million, respectively, related to Strategic Partnerships and Other in Create Solutions and moving annual revenue of approximately $125.6 million, $105.5 million, and $71.4 million, respectively, related to Unity Gaming Services, which provide hosting and cloud operations services, from Operate Solutions to Create Solutions.

Create Solutions are primarily focused on content development and operations, while Grow Solutions include Unity monetization and all ironSource businesses, which in combination provide customers with a platform that encompasses testing, user acquisition, growth, and retention capabilities.

Create Solutions

Operate Solutions 709,140 471,161 237,979 51 % $ 471,161 $ 293,317 $ 177,844 61 %

Strategic Partnerships and Other 74,750 69,970 4,780 7 % $ 69,970 $ 79,836 $ (9,866) (12) %

We generate Create Solutions revenue primarily through our suite of Create Solutions subscriptions, enterprise support, professional services and cloud and hosting services.

Our subscriptions provide customers access to technologies that allow them to edit, run, and iterate interactive, RT3D and 2D experiences that can be created once and deployed to a variety of platforms.

Enhanced support services are provided to our enterprise customers and are sold separately from the Create Solutions subscriptions.

Professional services are provided to our customers and include consulting, platform integration, training, and custom application and workflow development.

Cloud and hosting services are provided to our customers to simplify and enhance the way our users access and harness our solutions.

Grow Solutions

We generate Grow Solutions revenue primarily through our monetization solutions, user acquisition offerings, and Supersonic, a game publishing service.

Our monetization solutions allow publishers, original equipment manufacturers and mobile carriers to sell available advertising inventory on their mobile applications or hardware devices to advertisers for in-application or on-device placements.

Our revenue represents the amount we retain from the transaction we are facilitating through our Unified Auction and mediation platform.

Supersonic provides game developers with the infrastructure and expertise to launch their mobile games and manage their growth;

this is achieved through marketability testing tools, live games management tools and game design support, and optimizing the implementation of the customer's commercial model.

Through Supersonic, we generate revenue from in-app advertising in published games and in some cases, in app purchase revenue.

Our total revenue is summarized as follows (in thousands):

2022 2021 2020

Create Solutions $ 716,078 $ 506,920 $ 372,717

Grow Solutions 674,946 603,606 399,728

Total revenue $ 1,391,024 $ 1,110,526 $ 772,445

The increase in revenue in the year ended December 31, 2021 compared to the year ended December 31, 2020 was substantially due to revenue growth among existing customers.

In the year ended December 31, 2021, the increase in revenue was primarily due to an increase in revenue from our Create Solutions and Operate Solutions.

Create Solutions revenue growth was largely attributable to an increase in new customers, as well as expansion of existing customers.

Within Operate Solutions, the substantial majority of our revenue growth was driven by an increase in revenue per customer as customers increased their consumption across our Operate portfolio of products and services due in part to the higher levels of end-user engagement as a result of strong product and sales execution.

We also saw an increase in new customers within Operate Solutions.

The increase in total revenue for the year ended December 31, 2022, compared to the comparable prior year period, w as primarily due to an increase in new customers, as well as growth among existing customers, within Create Solutions.

Revenue from Grow Solutions increased for the year ended December 31, 2022 due to the ironSource Merger and inclusion of ironSource revenue from the date of acquisition in November.

The increase in revenue attributable to ironSource was partially offset by declines in our monetization business year over year prior to the acquisition due to gaps in our offerings which we believe ironSource will help fill, operational challenges experienced in earlier quarters of 2022, which included data quality and accuracy delays, and external factors, including the competitive landscape, negative macroeconomic conditions including impacts on customer spending, and reduced advertiser spend.

Unity Software Inc.

Cost of Revenue, Gross Profit, and Gross Margin

Cost of revenue consists primarily of hosting expenses, personnel costs (including salaries, benefits, and stock-based compensation) for employees associated with our product support and professional services organizations, allocated overhead (including facilities, IT, and security costs), third-party license fees, and credit card fees, as well as amortization of related capitalized software and depreciation of related property and equipment.

Cost of revenue consists primarily of hosting expenses, personnel costs (including salaries, benefits, and stock-based compensation) for employees associated with our product support and professional services organizations, allocated overhead (including facilities, information technology ("IT"), and security costs), third-party license fees, and credit card fees, as well as amortization of developed technology intangible assets, related capitalized software and depreciation of related property and equipment.

Gross profit, or revenue less cost of revenue, has been and will continue to be affected by various factors, including our product mix, the costs associated with third-party hosting services, and the extent to which we expand and drive efficiencies in our hosting costs, professional services, and customer support organizations.

We expect our gross profit to increase in absolute dollars, but we expect our gross profit as a percentage of revenue, or gross margin, to fluctuate from period to period.

Our cost of revenue, gross profit, and gross margin are summarized as follows (in thousands, except percentages):

Year Ended Year Ended

December 31, Change December 31, Change

2021 2020 Amount % 2020 2019 Amount %

Cost of revenue $ 253,630 $ 172,347 $ 81,283 47 % $ 172,347 $ 118,597 $ 53,750 45 %

Gross profit $ 856,896 $ 600,098 $ 256,798 43 % $ 600,098 $ 423,182 $ 176,916 42 %

Gross margin 77 % 78 % (1) % 78 % 78 % — %

Cost of revenue for the year ended December 31, 2021 increased primarily due to an increase of $43.0 million in personnel-related expense driven by higher stock-based compensation expense of $14.2 million as headcount increased to support our Create Solutions and Strategic Partnerships.

IT hosting expense also increased by $21.5 million to support growth in our Create and Operate solutions.

We expect our gross profit to increase in absolute dollars in the long term, but we expect our gross profit as a percentage of revenue, or gross margin, to fluctuate from period to period.

Cost of revenue for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses associated with increased headcount, as well as an increase of $44.6 million in amortization expenses related to developed technology intangible assets acquired through our business acquisitions and an increase of $18.8 million in hosting expenses in Grow Solutions.

Gross profit for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to an increase in revenue in our Create Solutions.

Gross margin decreased for the year ended December 31, 2022, compared to the comparable prior year period, due to the aforementioned increases in expenses and amortization, the challenges our monetization business experienced earlier in the year, and a shift in revenue mix to lower margin services.

Operating Expenses

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The most significant component of our operating expenses is personnel-related costs, including salaries and wages, sales commissions, bonuses, benefits, stock-based compensation, and payroll taxes.

Unity Software Inc.

Although personnel-related costs contributed to the majority of the increase in expense period over period, we are slowing down our hiring efforts and focusing on containing the growth rate of other expenses in an effort to manage costs in light of a worsening macroeconomic environment

Research and Development

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We expect our research and development expenses to increase in absolute dollars and may fluctuate as a percentage of revenue from period to period as we expand our teams to develop new products, expand features and functionality with existing products, and enter new markets.

Research and development expense is summarized as follows (in thousands, except percentages):

Year Ended Year Ended

December 31, Change December 31, Change

2021 2020 Amount % 2020 2019 Amount %

Research and development $ 695,710 $ 403,515 $ 292,195 72 % $ 403,515 $ 255,928 $ 147,587 58 %

Research and development expense for the year ended December 31, 2021 increased primarily due to an increase of $239.1 million in personnel-related expenses, including higher stock-based compensation expense of $99.6 million as headcount increased to support continued product innovation.

IT hosting expense increased by $26.7 million due to growing data and compute needs.

Research and development expense for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses as headcount increased to support continued product innovation and as a result of our acquisition of ironSource.

Amortization expense related to intangible assets acquired through our business acquisitions increased by approximately $64.0 million.

The increase was further driven, to a lesser extent, by higher hosting expenses and travel and conference expenditures due to the softening of COVID-19 restrictions.

Unity Software Inc.

Sales and Marketing

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Our expenses may fluctuate as a percentage of revenue from period to period.

Sales and marketing expense is summarized as follows (in thousands, except percentages):

Year Ended Year Ended

December 31, Change December 31, Change

2021 2020 Amount % 2020 2019 Amount %

Sales and marketing $ 344,939 $ 216,416 $ 128,523 59 % $ 216,416 $ 174,135 $ 42,281 24 %

Sales and marketing expense for the year ended December 31, 2021 increased primarily due to an increase of $97.9 million in personnel-related expenses, including higher stock-based compensation expense of $46.9 million as headcount increased to support the growth of our sales and marketing teams.

In addition, advertisement expenditures on various social media platforms increased by $8.4 million.

Unity Software Inc.

Sales and marketing expense for the year ended December 31, 2022 i ncreased, compared to the comparable prior year period, primarily due to higher personnel-related expenses as headcount increased to support the growth of our sales and marketing teams and as a result of our acquisition of ironSource.

Amortization expense related to intangible assets acquired through our business acquisitions increased by approximately $45.0 million.

The increase for the year ended December 31, 2022 was further driven, to a lesser extent, by increased travel and conference expenditures due to the softening of COVID-19 restrictions.

General and Administrative

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We expect that our general and administrative expenses will increase in absolute dollars and may fluctuate as a percentage of revenue from period to period as we scale to support the growth of our business.

General and administrative expense is summarized as follows (in thousands, except percentages):

Year Ended Year Ended

December 31, Change December 31, Change

2021 2020 Amount % 2020 2019 Amount %

General and administrative $ 347,912 $ 254,979 $ 92,933 36 % $ 254,979 $ 143,788 $ 111,191 77 %

General and administrative expense for the year ended December 31, 2021 increased primarily due to a one-time charge of $49.8 million for the termination of a future lease contract, including associated construction in progress write-offs.

Personnel-related costs also increased $80.6 million, including higher stock-based compensation expense of $51.9 million primarily related to an increase in headcount to support the growth of our finance, accounting, human resources, IT, and legal functions, as well as the incremental equity award modification expense associated with the separation of our former Chief Financial Officer.

In addition, professional and insurance expense increased $30.9 million due to increased administrative costs as part of being a public company, in addition an increase in costs related to our business combinations.

The increase in expense was partially offset by a one-time charge of $63.6 million related to the donation of our common stock to a charitable foundation during the year ended December 31, 2020.

Unity Software Inc.

Interest Expense

Interest expense consists primarily of interest expense associated with our Credit Agreement.

Interest expense is summarized as follows (in thousands, except percentages):

Year Ended Year Ended

December 31, Change December 31, Change

2021 2020 Amount % 2020 2020 2019 Amount %

General and administrative expense for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses as headcount increased as a result of our acquisition of ironSource, as well as an increase in acquisition-related expenses of approximately $27.0 million.

This increase was partially offset by a one-time charge of approximately $50.0 million for the termination of a future lease contract in 2021.

Interest Expense

* Not meaningful

Interest expense was recognized in the year ended December 31, 2021 on the outstanding balance from our $125.0 million credit facility and on the amortization of debt issuance costs related to our convertible note issuance in November 2021.

The credit facility was terminated in April 2021.

Interest expense consists primarily of interest expense associated with interest accrued on our convertible debt and our amortization of convertible debt issuance costs.

Interest expense for the year ended December 31, 2022 increased, compared to the comparable prior year period, due to our debt issuance costs amortization and interest accrued on our interest-bearing convertible debt issued in 2022.

Interest Income and Other Expense, Net

Interest income and other expense, net, consists primarily of interest income earned on our cash, cash equivalents, and marketable securities, amortization of premium arising at acquisition of marketable securities, foreign currency remeasurement gains and losses, and foreign currency transaction gains and losses.

Interest income and other expense, net, consists primarily of interest income earned on our cash, cash equivalents, and short-term investments, amortization of premium arising at acquisition of short-term investments, foreign currency remeasurement gains and losses, and foreign currency transaction gains and losses.

As we have expanded our global operations, our exposure to fluctuations in foreign currencies has increased, and we expect this to continue.

Interest income and other expense, net, is summarized as follows (in thousands, except percentages):

Year Ended Year Ended

December 31, Change December 31, Change

2021 2020 Amount % 2020 2019 Amount %

Interest income and other expense, net $ 1,566 $ (3,885) $ 5,451 (140) % $ (3,885) $ (2,573) $ (1,312) 51 %

Interest income and other expense, net, for the year ended December 31, 2021 increased primarily due to foreign currency remeasurement gains.

Interest income and other expense, net, for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to interest income earned on investments and time deposit accounts and amortization of premium related to investments.

Unity Software Inc.

Provision for Income Taxes

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See Note 13, "Income Taxes," of the Notes to Consolidated Financial Statements.

Provision for income taxes is summarized as follows (in thousands, except percentages):

Year Ended Year Ended

December 31, Change December 31, Change

2021 2020 Amount % 2020 2019 Amount %

Provision for income taxes $ 1,377 $ 2,091 $ (714) (34) % $ 2,091 $ 9,948 $ (7,857) (79) %

Provision for income taxes for the year ended December 31, 2021 decreased primarily due to the tax benefit recognized as a result of a partial release of our valuation allowance against our deferred tax assets in connection with business combinations, partially offset by a one time tax expense recognized from an intercompany transaction with our subsidiary in Israel.

Unity Software Inc.

Provision for income taxes for the year ended December 31, 2022 increased primarily due to the tax expense recognized as a result of a base-erosion and anti-abuse tax ("BEAT") mainly arising as a result of mandatory research and development capitalization under the IRC Section 174.

Also, we maintained a valuation allowance against the deferred tax assets in the U.K.

Following our acquisition of ironSource, the Company undertook certain tax restructuring efforts as part of the integration of the acquired business.

As a result of the restructuring, we recognized $192.2 million of US federal and state deferred tax liabilities, which reduce our need for a valuation allowance in the U.S., except for timing differences that resulted in $11.6 million of income tax expense.

Non-GAAP Financial Measures

To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use certain non-GAAP performance financial measures, as described below, to evaluate our ongoing operations and for internal planning and forecasting purposes.

To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to evaluate our ongoing operations and for internal planning and forecasting purposes.

We believe the following non-GAAP measures are useful in evaluating our operating performance.

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As a result, our non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered in isolation or as a substitute for our consolidated financial statements presented in accordance with GAAP.

In addition, we have used the non-GAAP financial measures below through fiscal year 2022.

In fiscal year 2023, we are preparing to replace non-GAAP gross profit, non-GAAP loss from operations, non-GAAP net loss, and non-GAAP net loss per share with adjusted gross profit and adjusted EBITDA.

Adjusted gross profit will be defined as gross profit excluding expenses associated with equity compensation, restructurings, depreciation, and amortization.

Adjusted EBITDA will be defined as net income or loss excluding benefits or expenses associated with equity compensation, acquisitions, restructurings, interest, taxes, depreciation, and amortization.

We expect to present, reconcile, and further define these measures in our first quarterly report on Form 10-Q in fiscal 2023.

Non-GAAP Gross Profit and Non-GAAP Loss from Operations

We define non-GAAP gross profit as gross profit excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense.

We define non-GAAP loss from operations as loss from operations excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense.

We define non-GAAP loss from operations as loss from operations excluding stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, costs incurred in connection with the formation of Unity China, acquisition-related cost, restructuring charges, legal settlement costs, and a one-time expense for the termination of a future lease agreement.

Unity Software Inc.

We use non-GAAP gross profit and non-GAAP loss from operations in conjunction with traditional GAAP measures to evaluate our financial performance.

We believe that non-GAAP gross profit and non-GAAP loss from operations provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as these metrics exclude stock-based compensation expense, employer tax related to employee stock tra nsactions, amortization of acquired intangible assets expense, a one-time expense for the termination of a future lease agreement, and non-cash charitable contribution expense, which we do not consider to be indicative of our overall operating performance.

Non-GAAP gross profit and non-GAAP loss from operations have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

Some of these limitations are:

• they exclude expense associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy;

• non-GAAP loss from operations excludes the expense of amortization of acquired intangible assets, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and non-GAAP loss from operations does not reflect cash expenditure for such replacements;

• non-GAAP loss from operations excludes the expense associated with the charitable contribution of common stock to a donor-advised fund, and although this is a non-cash expense, we may make similar charitable contributions in the future;

• non-GAAP loss from operations excludes the one-time expense for the termination of a future lease agreement, although there is no guarantee that the company will not incur similar expenses in the future;

Unity Software Inc.

• they exclude expense associated with our equity compensation plans, although equity compensation has been, and will continue to be, an important part of our compensation strategy;

• non-GAAP gross profit and non-GAAP loss from operations excludes the expense of amortization of acquired intangible assets, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and non-GAAP gross profit and non-GAAP loss from operations does not reflect cash expenditure for such replacements;

• non-GAAP loss from operations excludes costs incurred in connection with the formation of Unity China;

• non-GAAP loss from operations excludes costs incurred from our acquisitions;

• non-GAAP gross profit and non-GAAP loss from operations excludes costs incurred from restructuring activities that we initiated during the year ended December 31, 2022;

• non-GAAP loss from operations excludes costs incurred from legal settlements that we anticipate recovering through insurance in a later period;

• non-GAAP loss from operations excludes expense for the termination of a future lease agreement, although there is no guarantee that the company will not incur similar expenses in the future;

• the expenses and other items that we exclude in our calculation of non-GAAP gross profit and non-GAAP loss from operations may differ from the expenses and other items, if any, that other companies may exclude from this measure or similarly titled measures, which reduces their usefulness as comparative measures.

Unity Software Inc.

The following table presents a reconciliation of our non-GAAP gross profit to our GAAP gross profit, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):

2021 2020 2019

GAAP gross profit $ 948,524 $ 856,896

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Amortization of intangible assets expense 46,942 2,274

Restructuring charges 576 —

Non-GAAP gross profit $ 1,055,900 $ 889,415

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Non-GAAP gross margin 76 % 80 %

The year-over-year increase in non-GAAP gross margin in 2021 compared to 2020 was primarily due to strong product optimizations and lower unit costs in Operate Solutions as well as lower platform costs to support Strategic Partnerships.

The year-over-year decrease in non-GAAP gross margin was primarily due to product mix of revenues, including a lower mix from Grow Solutions and an increase of personnel-related costs to support Professional Services and Weta Digital.

The following table presents a reconciliation of our non-GAAP loss from operations to our GAAP loss from operations, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):

2021 2020 2019

GAAP loss from operations $ (882,213) $ (531,665)

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Amortization of intangible assets expense 172,551 33,483

Costs incurred in connection with the formation of Unity China 6,138 —

Acquisition-related costs 41,465 14,803

Restructuring charges 11,008 —

Legal settlement costs 3,250 —

Lease termination expense — 49,795

Charitable contribution to donor-advised fund — 63,615 —

Non-GAAP loss from operations $ (90,124) $ (35,851)

The year-over-year change in our non-GAAP loss from operations in 2021 compared to 2020 was relatively flat due to strong product optimizations and lower unit costs in Operate Solutions as well as lower platform costs to support Strategic Partnerships.

This was partially offset by higher personnel-related costs, driven by an increase in headcount across the entire company to support the growth in the business, as well as an increase in IT hosting costs to support growth in our Operate Solutions and our growing data and compute needs.

The year-over-year change in our non-GAAP loss from operations was primarily due to slower revenue growth, outpaced by our operating expenses, which were driven by an increase in headcount across the entire company to support investments in the business.

Unity Software Inc.

Non-GAAP Net Loss and Non-GAAP Net Loss per Share

We define non-GAAP net loss and non-GAAP net loss per share as net loss and net loss per share excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense, a one-time expense for the termination of a future lease agreement, and non-cash charitable contribution expense, as well as the related tax effects of these items.

Non-GAAP net loss per share also adds back expense relating to deemed dividends representing excess paid over initial issuance price to repurchase convertible preferred stock.

We define non-GAAP net loss and non-GAAP net loss per share as net loss and net loss per share excluding stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, expenses associated with the termination of a future lease agreement, costs incurred in connection with the formation of Unity China, legal settlement costs, restructuring charges, and acquisition-related costs as well as the related tax effects of these items.

We use non-GAAP net loss and non-GAAP net loss per share in conjunction with traditional GAAP measures to evaluate our financial performance.

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Some of these limitations are:

• they exclude expense associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy;

• they exclude expense associated with our equity compensation plans, although equity compensation has been, and will continue to be, an important part of our compensation strategy;

• they exclude the expense of amortization of acquired intangible assets, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and non-GAAP loss from operations does not reflect cash expenditure for such replacements;

• they exclude the expense associated with the charitable contribution of common stock to a donor-advised fund, and although this is a non-cash expense, we may make similar charitable contributions in the future;

• they exclude the one-time expense for the termination of a future lease agreement, although there is no guarantee that the company will not incur similar expenses in the future;

• they exclude costs incurred from restructuring activities that we initiated during the year ended December 31, 2022;

• they exclude costs incurred from legal settlement that we anticipate recovering through insurance in a later period;

• they exclude the expenses associated with the termination of a future lease agreement, although there is no guarantee that the company will not incur similar expenses in the future;

• they exclude the costs incurred in connection with the formation of Unity China;

• they exclude the costs incurred from our acquisitions;

• as further described below, we must make certain assumptions in order to determine the income tax effect adjustment for non-GAAP net loss, which assumptions may not prove to be accurate;

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Income Tax Effects of Non-GAAP Adjustments

We utilize a fixed projected tax rate in our computation of non-GAAP income tax effects to provide better consistency across interim reporting periods.

We utilize a fixed annual projected tax rate in our computation of non-GAAP income tax effects to provide better consistency across interim reporting periods.

In projecting this non-GAAP tax rate, we utilize a financial projection that excludes the direct impact of the non-GAAP adjustments described above, and eliminates the effects of non-recurring and period specific items which can vary in size and frequency.

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The following table presents a reconciliation of our non-GAAP net loss and non-GAAP net loss per share to our GAAP net loss and GAAP net loss per share, respectively, which are the most directly comparable measures as determined in accordance with GAAP, for the periods presented (in thousands, except per share data ):

2021 2020 2019

GAAP net loss $ (919,488) $ (532,607)

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Amortization of intangible assets expense 172,551 33,483

Costs incurred in connection with the formation of Unity China 6,138 —

Acquisition-related costs 41,465 14,803

Restructuring charges 11,008 —

Legal settlement costs 3,250 —

Lease termination expense — 49,795

Charitable contribution to donor-advised fund — 63,615 —

Income tax effect of non-GAAP adjustments 21,254 (6,415)

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Free Cash Flow

We define free cash flow as net cash provided by (used in) operating activities less cash used for purchases of property and equipment.

We define free cash flow as net cash (used in) provided by operating activities less cash used for purchases of property and equipment.

We believe that free cash flow is a useful indicator of liquidity as it measures our ability to generate cash, or our need to access additional sources of cash, to fund operations and investments.

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Some of these limitations are:

• it is not a substitute for net cash used in operating activities;

• it is not a substitute for net cash (used in) provided by operating activities;

• other companies may calculate free cash flow or similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a tool for comparison;

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Unity Software Inc.

The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):

2021 2020 2019

Net cash provided by (used in) operating activities $ (111,449) $ 19,913 $ (67,936)

Purchase of property and equipment (41,938) (40,156) (27,035)

The following table presents a reconciliation of free cash flow to net cash used in operating activities, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):

Net cash used in operating activities $ (59,431) $ (111,449)

Purchases of property and equipment (57,138) (41,938)

Free cash flow $ (116,569) $ (153,387)

Net cash used in investing activities $ (1,837,360) $ (575,190) $ (219,541)

Net cash provided by financing activities $ 1,721,002 $ 1,701,455 $ 161,472

The year-over-year decrease in free cash flow was primarily due to the payment of the corporate bonus for the year ended December 31, 2020, our net loss, higher payroll taxes on stock-based compensation, a one-time payment related to our real estate, prepayments of software licenses, and an increase in working capital as our business grows.

The year-over-year improvement in free cash flow was primarily due to the receipt of four years of license fees of approximately $200.0 million from Weta FX, which was connected to the acquisition of certain assets from Weta Digital, partially offset by the payment in 2022 of the corporate bonus for the year ended December 31, 2021, our net loss, prepayments of software licenses, and an increase in working capital as our business grows.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through the net proceeds we have received from the sales of our convertible preferred stock and common stock and through payments received from customers using our platform.

As of December 31, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1.7 billion, which were primarily held for working capital purposes.

Our cash equivalents and marketable securities are invested primarily in fixed income securities, including government and investment-grade debt securities and money market funds.

In November 2021, we also received net proceeds of approximately $1.7 billion from the issuance of convertible notes, after deducting $22.6 million of debt issuance costs and $48.1 million of payments made to enter into the related capped call transactions.

Our material cash requirements from known contractual and other obligations as of December 31, 2021 is as follows (in thousands):

Payments Due by Period

Total Less than 1 Year 1–3 Years 3–5 Years More than 5 Years

Operating leases (1)

$ 132,533 $ 28,193 $ 62,619 $ 10,174 $ 31,547

Purchase commitments (2)

692,215 116,865 279,744 295,606 —

Convertible note (3)

1,725,000 — — 1,725,000 —

$ 2,549,748 $ 145,058 $ 342,363 $ 2,030,780 $ 31,547

(1) Operating lease obligations consist primarily of obligations for real estate.

(2) The substantial majority of our purchase commitments are related to agreements with our data center hosting providers.

(3) Convertible note due 2026.

Refer to footnote 10 for further discussion.

(4) This table excludes amounts related to income tax liabilities for uncertain tax positions, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.

As of December 31, 2022, our principal sources of liquidity were cash, cash equivalents, and short-term investments totaling $1.6 billion, which were primarily held for working capital purposes.

Our cash equivalents and short-term investments are invested primarily in fixed income securities, including government and investment-grade debt securities and money market funds.

Our material cash requirements from known contractual and other obligations consists of our convertible notes, obligations under operating leases for office space, and contractual obligations for hosting services to support our business operations.

See Item 8 of Part II, "Financial Statements and Supplementary Data — Note 10 — Commitments and Contingencies" for additional discussion of our principal contractual commitments.

In July 2022, our board of directors approved our Share Repurchase Program, which authorized the repurchase of up to $2.5 billion of shares of our common stock in open market transactions through November 2024.

As of December 31, 2022, $1.0 billion remains available for future share repurchases under this program.

In connection with the ironSource Merger in November 2022, we issued $1.0 billion in aggregate amount of 2.0% convertible notes due 2027 (the "2027 Notes"), the proceeds of which were used to fund repurchases under our share repurchase program.

We previously issued $1.7 billion in aggregate principal amount of 0% convertible senior notes due 2027 in November 2021 (together with the 2027 Notes, the "Notes").

See Note 9, "Borrowings," of the Notes to Consolidated Financial Statements.

Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of $2.2 billion as of December 31, 2022.

We expect to continue to incur operating losses for the foreseeable future due to the investments we will continue to make in research and development, sales and marketing, and general and administrative.

We expect to continue to incur operating losses on a GAAP basis for the foreseeable future due to the investments we will continue to make in research and development, sales and marketing, and general and administrative.

As a result, we may require additional capital to execute our strategic initiatives to grow our business.

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As a result of these and other factors, we may choose or be required to seek additional equity or debt financing sooner than we currently anticipate.

If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all.

In addition, depending on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors, we may also from time to time seek to retire or purchase our outstanding debt, including the Notes, through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise.

If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all, including as a result of macroeconomic conditions such as rising interest rates and volatility in the capital market.

If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.

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Net cash provided by (used in) operating activities $ (59,431) $ (111,449) $ 19,913

Net cash used in investing activities (1,837,360) (575,190) (219,541)

Net cash provided by financing activities 1,721,002 1,701,455 161,472

Net cash provided by (used in) investing activities 723,228 (1,837,360) (575,190)

Net cash provided by (used in) financing activities (226,634) 1,721,002 1,701,455

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash 1,926 459 673

Net change in cash, cash equivalents, and restricted cash $ 439,089 $ (227,348) $ 1,146,851

Cash Provided by (Used in) Operating Activities

During the year ended December 31, 2021 , net cash used in operating activities was $111.4 million and was primarily due to the payment of the corporate bonus for our fiscal year ended December 31, 2020, our net loss, higher payroll taxes on stock-based compensation, prepayments of software licenses, an increase in working capital as our business grows, and a one-time payment related to our real estate.

During the year ended December 31, 2020, cash provided by operating activities was $19.9 million, which consisted of a net loss of $282.3 million, adjusted by non-cash charges of $244.5 million and net cash inflows from the change in net operating assets and liabilities of $57.8 million.

The non-cash charges primarily consisted of depreciation and amortization of $43.0 million, stock-based compensation of $134.6 million, and a common stock charitable donation expense of $63.6 million.The net cash inflows from the change in our net operating assets and liabilities was primarily due to a $41.6 million increase in accrued expenses and other current liabilities, a $44.6 million increase in publisher payables, and a $37.4 million increase in deferred revenue.

This was partially offset by a $63.3 million increase in accounts receivable and a $13.0 million increase in other current assets.

For the years ended December 31, 2021 and 2020, a substantial portion of our accounts receivable balance comes from advertising partners and is offset by an accounts payable amount due to our publishers (Operate Solutions customers).

However, the payment terms that we offer our advertising partners are generally shorter than the payment terms with our publishers (Operate Solutions customers).

As such, our cash flows fluctuate from period to period due to revenue seasonality, timi ng of billings, collections, and publisher payments.

Cash Used in Operating Activities

During the year ended December 31, 2022 , net cash used in operating activities was primarily due to payment in 2022 of the corporate bonus for our fiscal year ended December 31, 2021, our net loss, prepayments of software licenses, and an increase in working capital as our business grows, partially offset by the receipt of the prepayment of four years of license fees connected to the acquisition of certain assets from Weta Digital.

Our cash flows fluctuate from period to period due to revenue seasonality, timi ng of billings, collections, and publisher payments.

Historical cash flows are not necessarily indicative of our results in any future period.

Cash Provided by Investing Activities

During the year ended December 31, 2022 , net cash provided by investing activities was primarily due to sales of short-term investments offset by cash used in acquisitions, non-marketable investments, and capital expenditures.

Cash Used in Financing Activities

During the year ended December 31, 2022, net cash used in financing activities consisted of cash used to repurchase and retire common stock, partially offset by net proceeds from the issuance of the 2027 Notes, capital contributions from non-controlling interest holders, and proceeds from the issuance of common stock under our employee equity plans.

Unity Software Inc.

Cash Used in Investing Activities

During the year ended December 31, 2021 , cash used in investing activities was $1.8 billion, consisting of the purchase of marketable securities of $519.7 million, cash used in acquisitions of $1.6 billion, and capital expenditures of $41.9 million, partially offset by proceeds of $309.0 million from marketable security principal repayments and maturities.

During the year ended December 31, 2020, cash used in investing activities was $575.2 million, consisting of the purchase of marketable securities of $482.5 million, cash used in acquisitions of $53.2 million and capital expenditures of $40.2 million.

Cash Provided by Financing Activities

During the year ended December 31, 2021, cash provided by financing activities was $1.7 billion and consisted of $1.7 billion in net proceeds received from the issuance of the convertible notes, after deducting debt issuance costs of $22.6 million and $48.1 million of payments made to enter into the related capped call transactions, and $66.7 million of proceeds from the exercise of stock options.

During the year ended December 31, 2020, cash provided by financing activities was $1.7 billion, primarily consisting of net proceeds of $1.4 billion from our initial public offering, net proceeds of $250.0 million from the issuance of convertible preferred stock and common stock, proceeds of $125.0 million from the revolving credit facility, and proceeds of $25.4 million from the exercise of stock options.

The net cash outflows from financing activities was primarily due to the $125.0 million repayment of principal on our revolving credit facility.

Critical Accounting Policies and Estimates

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Re venue Recognition

We generate revenue through three sources:

(1) Create Solutions, which is composed 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 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);

• recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer which we refer to as a transfer of control.

Unity Software Inc.

Our contracts are generally non-cancellable.

Once we have determined the transaction price, the total transaction price is allocated to each performance obligation in the contract on a relative stand-alone selling price basis, or SSP.

The determination of SSP for each distinct performance obligation requires judgment.

Subscriptions to our Create Solutions provide customers with software, embedded cloud functionality, and software updates.

Significant judgment is required to determine the level of integration and interdependencies among the individual promises included in our Create Solutions subscriptions.

This determination influences whether the software is a distinct and separate performance obligation that should be recognized at a point in time or whether the software should be combined with other promises and recognized over time.

Given that the software and software updates are highly interdependent and interrelated, we have concluded that the two promises would be combined as a single performance obligation and recognized over time.

We consider the embedded cloud functionality to be a separate performance obligation, however, its pattern of performance aligns with the software and software updates, which enables us to treat the subscription agreements as one performance obligation that is recognized ratably over the term of the agreement.

When contracts contain multiple element performance obligations, an allocation of the transaction price to each performance obligation is done based on a relative stand-alone selling price ("SSP").

Judgment is required to determine SSP.

Generally, we determine SSP using observable pricing, which takes into consideration market conditions and customer specific factors.

When observable pricing is not available, we use cost plus margin analysis to determine SSP.

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 use the output method for our Create Solutions and Operate Solutions contracts, and generally use the input method for our Strategic Partnership contracts.

We determined that these methods are the most appropriate measure of progress as they faithfully represent when the value of the services are simultaneously received and consumed by the customer, and control is transferred.

For advertisements placed through the Unified Auction, we evaluate whether we are the principal (i.e., report revenue on a gross basis) or the agent (i.e., report revenue on a net basis).

The evaluation to present revenue on a gross 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.

Typically we do not retain a share of the revenue generated through Unity IAP (In-App Purchases).

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 estimate 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.

For advertisements placed through our Grow Solutions networks, we evaluate whether we are the principal, where revenue would be reported on a gross basis, or the agent, where revenue would be reported on a net basis.

This evaluation of whether to present revenue on a gross or net basis requires significant judgment.

We present revenue on a gross basis for advertising sales where we are the publisher and have control of the in-app placement.

Alternatively, we present revenue on a net basis for sales where we are facilitating the transaction between advertisers and publishers and do not have control over in-app placement.

Accounting for 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.

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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:

Unity Software Inc.

future expected revenues and cash flows from acquired intangible assets;

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the expected use of the acquired intangible assets;

• discount rates.

These estimates are inherently uncertain and unpredictable.

and the discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Goodwill and Intangible Assets

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.

We use judgments when assessing qualitative factors of impairment that include macroeconomic conditions, other relevant events and factors affecting the market and industry, our financial performance, and other factors.

To the extent we determine that it is more likely than not that the fair value of our single reporting unit is less than its carrying value, a quantitative test is then performed.

We evaluate intangible assets other than goodwill 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 the intangible 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 also evaluate the estimated remaining useful lives of intangible assets for changes in circumstances that warrant a revision to the remaining periods of amortization.

Unity Software Inc.

We are subject to income taxes in the United States and numerous foreign jurisdictions.

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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.

Unity Software Inc.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

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We recognize interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statement of operations.

JOBS Act Accounting Election

Effective December 31, 2021, we are no longer an "emerging growth company," as defined in the JOBS Act.

Prior to losing our status as an emerging growth company, the JOBS ACT allowed us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made to private companies, and we had elected to use this extended transition period.

We can no longer take advantage of this extended transition period.

Recent Accounting Pronouncements

See Note 2, “Summary of Accounting Pronouncements,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis