What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-29 compared with 2023-02-27 · 231 added, 293 removed, 769 unchanged (41% of the section changed)

29 unchanged sentences

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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Unity Software Inc.

11 unchanged sentences

We have also evaluated the Company’s revenue disclosures in relation to these matters.

Unity Software Inc.

Valuation of Acquired Intangible Assets

Description of the Matter As described in Note 5 to the consolidated financial statements, on November 7, 2022, the Company acquired ironSource Ltd.

for total purchase consideration of $2,915.6 million, of which $1,270.0 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

San Francisco, California

February 29, 2024

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(In thousands, except share data)

December 31, 2023 December 31, 2022

23 unchanged sentences

Redeemable noncontrolling interests 225,797 219,563

Unity Software Inc.

Stockholders' equity:

8 unchanged sentences

Noncontrolling interest 5,939 6,298

Total stockholders' equity 3,188,581 3,534,566

Total liabilities and stockholders' equity $ 7,243,441 $ 7,833,985

18 unchanged sentences

Loss before income taxes ( 797,845 ) ( 882,425 ) ( 531,230 )

Provision for (benefit from) Income taxes 37,063 1,377 2,091

Provision for Income taxes 28,477 37,063 1,377

Net loss ( 826,322 ) ( 919,488 ) ( 532,607 )

Net income (loss) attributable to noncontrolling interest and redeemable noncontrolling interests ( 1,296 ) — —

Net loss attributable to noncontrolling interest and redeemable noncontrolling interests ( 4,311 ) ( 1,296 ) —

Adjustments attributable to redeemable noncontrolling interests — 2,870 —

12 unchanged sentences

Net loss $ ( 826,322 ) $ ( 919,488 ) $ ( 532,607 )

Other comprehensive loss, net of taxes:

Other comprehensive income (loss), net of taxes:

Change in foreign currency translation adjustment ( 4,556 ) 259 583

3 unchanged sentences

Comprehensive loss $ ( 830,589 ) $ ( 917,321 ) $ ( 533,047 )

Comprehensive income (loss) attributable to noncontrolling interest and redeemable noncontrolling interests:

Net income (loss) attributable to noncontrolling interest and redeemable noncontrolling interests ( 1,296 ) — —

Net loss attributable to noncontrolling interest and redeemable noncontrolling interests ( 4,311 ) ( 1,296 ) —

Foreign currency translation attributable to noncontrolling interest and redeemable noncontrolling interests ( 949 ) 560 —

Comprehensive income (loss) attributable to noncontrolling interest and redeemable noncontrolling interests ( 736 ) — —

Comprehensive loss attributable to noncontrolling interest and redeemable noncontrolling interests ( 5,260 ) ( 736 ) —

Comprehensive loss attributable to Unity Software Inc.

5 unchanged sentences

(In thousands, except share data)

Year Ended December 31, 2021

Additional Other Unity Software Inc.

Convertible Preferred Stock Common Stock Paid‑In Comprehensive Accumulated Stockholders’ Noncontrolling Total

Shares Amount Shares Amount Capital Loss Deficit Equity Interest (1)

Common Stock Paid‑In Comprehensive Accumulated Stockholders’ Noncontrolling Total

Shares Amount Capital Loss Deficit Equity Interest (1)

Balance at December 31, 2020 273,537,218 $ 2 $ 2,838,057 $ ( 3,418 ) $ ( 797,498 ) $ 2,037,143 $ — $ 2,037,143

Issuance of common stock — — 4,545,455 — 100,000 — — 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 — 1,417,582

Issuance of common stock in connection with charitable donation — — 750,000 — 63,615 — — 63,615 — 63,615

Cumulative effect of accounting change — — — — ( 1,522 ) ( 1,522 ) — ( 1,522 )

Issuance of common stock from employee equity plans 11,650,963 — 66,704 — — 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 — 526,081

Purchase and retirement of common stock — — ( 5,000 ) — ( 110 ) — — ( 110 ) — ( 110 )

Issuance of convertible Series E preferred stock, net of issuance costs 6,818,182 149,970 — — — — — 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 — — — — —

Purchase of capped calls — — ( 48,127 ) — — ( 48,127 ) — ( 48,127 )

Stock‑based compensation expense — — 347,159 — — 347,159 — 347,159

Net loss — — — — ( 532,607 ) ( 532,607 ) — ( 532,607 )

Other comprehensive income — — — — — 214 — 214 — 214

Other comprehensive loss — — — ( 440 ) — ( 440 ) — ( 440 )

Balance at December 31, 2021 292,592,356 $ 2 $ 3,729,874 $ ( 3,858 ) $ ( 1,331,627 ) $ 2,394,391 $ — $ 2,394,391

Unity Software Inc.

UNITY SOFTWARE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

Year Ended December 31, 2022

Additional Other Unity Software Inc.

Convertible Preferred Stock Common Stock Paid-In Comprehensive Accumulated Stockholders' Noncontrolling Total

Shares Amount Shares Amount Capital Loss Deficit Equity Interest (1)

Common Stock Paid-In Comprehensive Accumulated Stockholders' Noncontrolling Total

Shares Amount Capital Loss Deficit Equity Interest (1)

Balance at December 31, 2021 292,592,356 $ 2 $ 3,729,874 $ ( 3,858 ) $ ( 1,331,627 ) $ 2,394,391 $ — $ 2,394,391

Cumulative effect of accounting change — — — — — — ( 1,522 ) ( 1,522 ) — ( 1,522 )

Issuance of common stock from employee equity plans 5,119,859 — 63,493 — — 63,493 — 63,493

1 unchanged sentence

Common stock issued in connection with acquisitions 112,716,696 — 2,932,228 — — 2,932,228 — 2,932,228

Purchase of capped calls — — — — ( 48,127 ) — — ( 48,127 ) — ( 48,127 )

Purchase and retirement of common stock ( 42,731,179 ) — ( 1,500,000 ) — — ( 1,500,000 ) — ( 1,500,000 )

Stock‑based compensation expense — — 549,671 — — 549,671 — 549,671

Capital contribution from minority interest holder — — 7,380 — — 7,380 6,387 13,767

Net loss — — — — ( 918,192 ) ( 918,192 ) ( 89 ) ( 918,281 )

Other comprehensive loss — — — — — ( 440 ) — ( 440 ) — ( 440 )

Adjustments to redeemable noncontrolling interest — — ( 2,870 ) — — ( 2,870 ) — ( 2,870 )

Other comprehensive income — — — 2,167 — 2,167 — 2,167

Balance at December 31, 2022 374,243,196 $ 2 $ 5,779,776 $ ( 1,691 ) $ ( 2,249,819 ) $ 3,528,268 $ 6,298 $ 3,534,566

1 unchanged sentence

UNITY SOFTWARE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY—CONTINUED

(In thousands, except share data)

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Additional Other Unity

Convertible Preferred Stock Common Stock Paid‑In Comprehensive Accumulated Stockholders’ Noncontrolling Total

Shares Amount Shares Amount Capital Loss Deficit Equity Interest (1)

Common Stock Paid‑In Comprehensive Accumulated Stockholders’ Noncontrolling Total

Shares Amount Capital Loss Deficit Equity Interest (1)

Balance at December 31, 2022 374,243,196 $ 2 $ 5,779,776 $ ( 1,691 ) $ ( 2,249,819 ) $ 3,528,268 $ 6,298 $ 3,534,566

1 unchanged sentence

Issuance of common stock for settlement of RSUs 11,944,558 — — — — — — —

Common stock issued in connection with acquisitions — — 112,716,696 — 2,932,228 — — 2,932,228 — 2,932,228

Purchase and retirement of common stock ( 7,558,415 ) — ( 250,000 ) — — ( 250,000 ) — ( 250,000 )

Stock‑based compensation expense — — 664,853 — — 664,853 — 664,853

Capital contribution from minority interest holder — — — — 7,380 — — 7,380 6,387 13,767

Net loss, including adjustment to redeemable noncontrolling interests — — — — ( 2,870 ) — ( 918,192 ) ( 921,062 ) ( 89 ) ( 921,151 )

Other comprehensive income — — — — — 2,167 — 2,167 — 2,167

Net loss — — — — ( 822,011 ) ( 822,011 ) ( 294 ) ( 822,305 )

Adjustments to redeemable noncontrolling interest — — ( 11,135 ) — — ( 11,135 ) — ( 11,135 )

Other comprehensive loss — — — ( 3,318 ) — ( 3,318 ) ( 65 ) ( 3,383 )

Balance at December 31, 2023 384,871,561 $ 2 $ 6,259,479 $ ( 5,009 ) $ ( 3,071,830 ) $ 3,182,642 $ 5,939 $ 3,188,581

9 unchanged sentences

Net loss $ ( 826,322 ) $ ( 919,488 ) $ ( 532,607 )

Adjustments to reconcile net loss to net cash used in operating activities:

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization 563,916 211,576 64,567

Common stock charitable donation expense — — 63,615

Stock-based compensation expense 648,696 550,065 347,159

9 unchanged sentences

Deferred revenue ( 128,219 ) 166,816 15,753

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

Net cash provided by (used in) operating activities 234,700 ( 59,431 ) ( 111,449 )

Investing activities

5 unchanged sentences

Purchases of property and equipment ( 55,921 ) ( 57,138 ) ( 41,938 )

Acquisition of intangible assets — — ( 750 )

Business acquisitions, net of cash acquired — 121,531 ( 1,580,081 )

3 unchanged sentences

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 — ( 379 ) ( 22,575 )

Capital contribution from noncontrolling interest holders — 210,252 —

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

Proceeds from issuance of common stock — — 100,000

Repurchase and retirement of common stock ( 250,000 ) ( 1,500,000 ) —

Proceeds from issuance of common stock from employee equity plans 75,985 63,493 66,704

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

Net cash provided by (used in) financing activities ( 174,015 ) ( 226,634 ) 1,721,002

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash ( 6,146 ) 1,926 459

Increase (decrease) in cash, cash equivalents, and restricted cash 98,579 439,089 ( 227,348 )

Cash, cash equivalents, and restricted cash, beginning of period 1,505,688 1,066,599 1,293,947

Cash, cash equivalents, and restricted cash, end of period $ 1,604,267 $ 1,505,688 $ 1,066,599

Unity Software Inc.

UNITY SOFTWARE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED

(In thousands)

1 unchanged sentence

2023 2022 2021

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

Increase (decrease) in cash, cash equivalents, and restricted cash 439,089 ( 227,348 ) 1,146,851

Cash and restricted cash, beginning of period 1,066,599 1,293,947 147,096

Cash, cash equivalents, and restricted cash, end of period $ 1,505,688 $ 1,066,599 $ 1,293,947

Supplemental disclosure of cash flow information:

5 unchanged sentences

Assets acquired under operating lease $ 43,831 $ 20,699 $ 18,507

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,

2022 2021 2020

Cash and cash equivalents $ 1,485,084 $ 1,055,776 $ 1,272,578

Restricted cash, included in other assets 20,604 10,823 21,369

Total cash, cash equivalents, and restricted cash $ 1,505,688 $ 1,066,599 $ 1,293,947

See accompanying Notes to Consolidated Financial Statements.

12 unchanged sentences

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.

In our opinion, all adjustments, which include normal recurring adjustments necessary for a fair presentation, have been included.

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, the measurement of liabilities for uncertain tax positions and deferred tax assets and liabilities, the fair value of tangible and intangible assets acquired and liabilities assumed through business combinations, the fair value of redeemable noncontrolling interests, the fair value of equity awards assumed and replaced in connection with the acquisition of ironSource, and customer life for capitalized commissions.

For us, these estimates are used for, but not limited to, revenue recognition, the measurement of liabilities for uncertain tax positions and deferred tax assets and liabilities, the fair value of tangible and intangible assets acquired and liabilities assumed through business combinations, the fair value of redeemable noncontrolling interests, impairments of right of use assets, and customer life for capitalized commissions.

Actual results could differ from those estimates, and such differences could be material to our financial position and results of operations.

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

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

This resulted in adjustments to our internal reporting structure to focus on two complementary and interconnected solutions:

Our business focuses on two complementary sets of solutions:

(1) Create Solutions and (2) Grow Solutions.

Unity Software Inc.

Create Solutions

1 unchanged sentence

Revenue is primarily derived from Create Solution Subscriptions, Enterprise Support, Professional Services, and Cloud and Hosting services.

Unity Software Inc.

Create Solutions subscriptions provide customers with software, embedded cloud functionality, and software updates.

17 unchanged sentences

For restricted stock units ("RSUs"), fair value is based on the closing price of our common stock on the grant date.

Unity Software Inc.

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.

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Department of Treasury ("U.S.

Treasury") yield in effect at the time of grant for zero-coupon U.S.

Treasury") yield in effect

Unity Software Inc.

at the time of grant for zero-coupon U.S.

Treasury notes with maturities approximately equal to the expected term of the stock options and ESPP purchases.

1 unchanged sentence

We do not adjust compensation cost for subsequent changes in the expected outcome of the market-based vesting conditions.

In connection with the acquisition of ironSource, we estimated the fair value of the assumed equity awards using a binomial lattice model.

The assumed equity awards relating to future services is being recognized over the remaining service period.

We recognize stock-based compensation expense for RSUs, stock options, and PVUs, on a straight-line basis, over the requisite service period, generally, a vesting period of one year to four years .

8 unchanged sentences

Short-term Investments

Our short-term investments consist of investments in short-term deposits, U.S.

Our short-term investments consisted of investments in short-term deposits, 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.

We classified our investments in debt securities as available-for-sale at the time of purchase.

We considered all debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classified these securities as current assets in the consolidated balance sheets.

Unrealized gains and losses, net of taxes, were included in accumulated other comprehensive loss, which was reflected as a separate component of stockholders’ equity in our consolidated balance sheets.

During the year ended December 31, 2022, we sold the entirety of our available-for-sale debt securities portfolio.

Unity Software Inc.

During the year ended December 31, 2023, we sold the remainder of our short-term investments.

Accounts Receivable

Accounts receivable are recorded at the original amount, net of allowances for uncollectible amounts.

Accounts receivable are recorded at the original invoiced amount, net of allowances for uncollectible amounts.

We estimate losses on uncollectible amounts based on expected losses, including our historical experience of actual losses.

1 unchanged sentence

As of December 31, 2023 and 2022, the allowance for uncollectible amounts was $ 16.9 million and $ 9.4 million, respectively.

For the years ended December 31, 2023 and 2022, the provision for uncollectible amounts was $ 14.3 million and $ 5.4 million.

Credit Risk and Concentrations

4 unchanged sentences

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.

Unity Software Inc.

As of December 31, 2023 and 2022, no individual customer represented 10% or more of the aggregate receivables.

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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.

Unity Software Inc.

Primarily all of our leases have been categorized as operating leases at inception.

6 unchanged sentences

Convertible Senior Notes and Capped Call Transactions

We account for each issuance of our Convertible Senior Notes as single liabilities measured at their amortized cost.

Interest expense related to the amortization of debt issuance costs are recorded in other income and expense.

We account for each issuance of the Notes as single liabilities measured at their amortized cost.

Debt issuance costs are amortized to interest expense using the straight-line method (which approximates the effective interest method) and 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.

Unity Software Inc.

Goodwill and Intangible Assets

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The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

Intangible assets, with the exception of certain contractual relationships, that have a finite life are amortized on a straight-line basis over their estimated useful lives, which typically range from three to six years .

Intangible assets, with the exception of certain contractual relationships, which have a finite 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.

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Accordingly, we have determined that we have a single reportable segment and operating segment structure.

Unity Software Inc.

Capitalized Software Costs and Software Implementation Costs

6 unchanged sentences

The amount of capitalized software costs and capitalized implementation costs was $ 49.9 million and $ 1.1 million, respectively, during the year ended December 31, 2023 and $ 5.7 million and $ 5.9 million, respectively, during the year ended December 31, 2022.

The increases in these costs were driven by the acquisition of ironSource in late 2022, and development projects related to offerings within Create Solutions.

The closing amount of capitalized software costs and capitalized implementation costs on the balance sheet was $ 52.0 million and $ 4.6 million, respectively, as of December 31, 2023 and $ 5.8 million and $ 10.2 million, respectively, as of December 31, 2022.

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.

Research and development costs related to internally developed software, which consist primarily of software development costs, are expensed as incurred.

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.

The costs to develop software that is marketed externally consist of payroll and payroll related costs for employees, who are directly associated with the development of the software.

We capitalize such costs when technological feasibility is established and a working model is complete through the point of general release.

All costs outside of this window are charged to research and development expense.

Unity Software Inc.

amount of costs capitalized for software developed for external use was $ 3.3 million during the year ended December 31, 2023.

Impairment Analysis

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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.

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, 2022, 2021, and 2020.

During the year ended December 31, 2023 we recorded $ 16.5 million of impairment charges on operating lease assets, primarily related to closures of corporate offices in the fourth quarter of 2023.

Apart from those operating lease asset impairments, 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, 2023, 2022, and 2021.

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.

Unity Software Inc.

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.

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Accrued interest and penalties are included in income and other taxes payable on the consolidated balance sheets.

Unity Software Inc.

Translation of Foreign Currencies

3 unchanged sentences

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.

Revenue and expenses denominated in a foreign currency are translated at the average exchange rate during the period.

Equity transactions denominated in a foreign currency 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.

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We have not experienced any warranty claims to date, and no liabilities have been recorded as of December 31, 2023 and 2022.

Unity Software Inc.

Advertising Costs

1 unchanged sentence

Advertising expense was approximately $ 12.6 million, $ 18.8 million, and $ 24.2 million for the years ended December 31, 2023, 2022, and 2021, respectively.

The table below presents our revenue (in thousands) disaggregated by source, which also have similar economic characteristics.

Our results for the years ended December 31, 2022, 2021, and 2020 have been adjusted to align with our focus on Create and Grow Solutions 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 Games Services from Operate Solutions to Create Solutions.

Recent Accounting Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (FASB) issued a new Accounting Standards Update ("ASU 2023-07"), amending the existing segment reporting disclosure guidance, primarily requiring enhanced disclosure of significant segment expenses on an annual and interim basis.

ASU 2023-07 is effective for annual reporting periods beginning after December 15, 2023, with early adoption permitted and should be applied on a retroactive basis.

We are currently evaluating ASU 2023-07 to determine its impact on our segment disclosures.

In December 2023, the FASB issued a new Accounting Standards Update ("ASU 2023-09") amending existing income tax disclosure guidance, primarily requiring more detailed disclosure for income taxes paid and the effective tax rate reconciliation.

ASU 2023-09 is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted and can be applied on either a prospective or retroactive basis.

We are currently evaluating ASU 2023-09 to determine its impact on our income tax disclosures.

Unity Software Inc.

The following table presents our revenue disaggregated by source, which also have similar economic characteristics (in thousands):

Year Ended December 31,

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We did not incur any impairment losses for the years ended December 31, 2023 and 2022.

Unity Software Inc.

Contract Balances and Remaining Performance Obligations

3 unchanged sentences

Revenue recognized during the year ended December 31, 2023 that was included in the deferred revenue balances at January 1, 2023 was $ 308 million.

Included in that amount was $ 146 million of deferred revenue from Wētā FX Limited which was recognized in the current year, primarily due to the termination of Wētā FX Limited's subscription rights in exchange for a perpetual license in the fourth quarter of 2023.

Additionally, we have performance obligations associated with commitments in customer contracts to perform in the future that had not yet been recognized in our consolidated financial statements.

For contracts with original terms that exceed one year, those commitments not yet recognized were $ 620.0 million and relate primarily to Create Solutions subscriptions, Enterprise Support, and Strategic Partnerships.

Unity Software Inc.

contracts with original terms that exceed one year, those commitments not yet recognized as of December 31, 2023 were $ 384 million and relate primarily to Create Solutions subscriptions, Enterprise Support, and Strategic Partnerships.

These commitments generally extend over the next one to five years and we expect to recognize approximately $ 200 million or 52 % of this revenue during the next 12 months.

Financial Instruments

Restricted cash, cash equivalents, and short-term investments are recorded at fair value.

Cash, Cash Equivalents, Restricted Cash, and Short-term Investments

Cash, cash equivalents, restricted cash, and short-term investments are recorded at fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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These valuations require significant judgment.

The following table summarizes, by major security type, our restricted cash, cash equivalents, and short-term investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy as of December 31, 2022 (in thousands) :

Amortized Cost Unrealized Gains Unrealized Losses Fair Value

The following table summarizes, by major security type, our cash, cash equivalents, restricted cash, and short-term investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):

December 31, 2023 December 31, 2022

Fair Value (1)

Cash $ 834,877 $ 699,340

Restricted cash and cash equivalents:

4 unchanged sentences

Short-term investments $ — $ 101,711

Short-term deposits $ 101,711 $ — $ — $ 101,711

Total short-term investments $ 101,711 $ — $ — $ 101,711

Unity Software Inc.

Cash equivalents and short-term investments consisted of the following as of December 31, 2021 (in thousands) :

Amortized Cost Unrealized Gains Unrealized Losses Fair Value

Restricted cash and cash equivalents:

Restricted cash $ 10,823 $ — $ — $ 10,823

Money market funds 73,138 — — 73,138

Total restricted cash and cash equivalents $ 83,961 $ — $ — $ 83,961

Short-term investments:

Commercial paper $ 59,792 $ — $ — $ 59,792

Asset-backed securities 40,965 — ( 23 ) 40,942

Corporate bonds 237,735 20 ( 353 ) 237,402

treasury securities 272,678 1 ( 379 ) 272,300

Supranational bonds 71,121 1 ( 235 ) 70,887

Total short-term investments $ 682,291 $ 22 $ ( 990 ) $ 681,323

We did not recognize any credit losses related to our available-for-sale debt securities during the years ended December 31, 2022 and 2021.

Total cash, cash equivalents, restricted cash, and short-term investments $ 1,604,267 $ 1,607,399

(1) Due to the highly liquid nature of our investments, amortized cost approximates fair value.

We did not recognize any credit losses related to our available-for-sale debt securities during the year ended December 31, 2022.

There were no material realized or unrealized gains or losses, either individually or in the aggregate, during the years ended December 31, 2023 and 2022.

During the year ended December 31, 2022, we sold the entirety of our available-for-sale debt securities portfolio.

During the year ended December 31, 2023, we sold the remainder of our short-term investments.

Nonrecurring Fair Value Measurements

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These strategic investments represent less than a 20 % ownership interest in each of the entities, and we do not have significant influence over or control of the entities.

At December 31, 2022, equity investments totaled $ 31.1 million.

Approximately $ 15.6 million of these equity investments were measured at cost.

As part of the merger with ironSource, $ 15.5 million of these equity investments were measured at fair value using the market approach.

We use the measurement alternative to account for adjustments to these investments for observable transactions for the same or

Unity Software Inc.

similar investments of the same issuer in any given quarter.

If we determine an impairment has occurred, the investment is written down to the estimated fair value.

As of December 31, 2023 and December 31, 2022, such equity investments totaled $ 33.6 million and $ 31.1 million, respectively.

No adjustments to the carrying value of these equity investments were recorded for the year ended December 31, 2023 and 2022.

Investment in Unity China

1 unchanged sentence

Upon formation, we agreed to sell to third-party investors an ownership interest of approximately 20.5 % in Unity China for cash consideration of $ 197 million.

Under the agreement and pursuant to certain conditions that include successfully completing an initial public offering of Unity China at a valuation greater than $ 3.6 billion, the investors have the option to require us to repurchase their interest at a redemption value based on the greater of Unity China's then current equity fair value or a guaranteed floor value in the aggregate amount of $ 278.0 million.

Under the agreement and pursuant to certain conditions that include successfully completing an initial public offering of Unity China at a valuation greater than ¥ 25.0 billion CNY, the investors have the option to require us to repurchase their interest at a redemption value based on the greater of Unity China's then current equity fair value or a guaranteed floor value in the aggregate amount of ¥ 1.9 billion CNY.

The redeemable noncontrolling interests are initially measured at its issuance date fair value and then adjusted for its proportionate net income or loss and accreted to its estimated redemption value through the applicable redemption date, which is August 2027.

We valued the combination of the investors' equity interest in Unity China and their redemption right at approximately $ 217.9 million.

We valued the combination of the investors' equity interest in Unity China and their redemption right at approximately $ 217.9 million, on the issuance date.

The investors' equity interest was valued using a discounted cash flow analysis and market approach.

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Subsequent and contingent to the initial investment from third-party investors, a management investor contributed $ 14.4 million for an ownership interest of 1.5 % with no redemption rights.

The results of Unity China are included in our consolidated financial statements and were not material for the year ended December 31, 2022, and the redeemable noncontrolling interests are recorded as temporary equity on our consolidated balance sheet.

The results of Unity China are included in our consolidated financial statements, and the redeemable noncontrolling interests are recorded as temporary equity on our consolidated balance sheet.

The following table presents the changes in redeemable noncontrolling interests (in thousands):

December 31, 2022

Year Ended December 31,

Balance at beginning of period $ 219,563 $ —

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Net loss attributable to redeemable noncontrolling interests ( 4,017 ) ( 1,207 )

Adjustments for redeemable noncontrolling interests 2,870

Accretion for redeemable noncontrolling interests 15,543 3,699

Foreign currency translation and foreign exchange adjustments for redeemable noncontrolling interests ( 5,292 ) ( 829 )

Balance at end of period $ 225,797 $ 219,563

The revenue and earnings of the acquired businesses have been included in our results from the respective dates of the acquisitions and, other than the ironSource Merger, were not material to our consolidated financial statements in the year of acquisition.

The revenue and earnings of the acquired businesses have been included in our results from the respective dates of the acquisitions.

The total purchase price allocated to the net assets acquired is assigned based on the fair values as of the date of acquisition.

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The identifiable intangible assets are subject to amortization on a straight-line basis over their estimated useful lives, as this best approximates the benefit period related to these assets.

Unity Software Inc.

The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, is recorded as goodwill.

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income tax purposes.

For 2022, 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.

Unity Software Inc.

The measurement period for the fair values of assets acquired and liabilities assumed in previous years is now closed, including for the merger with ironSource Ltd., for which we have now substantially completed our tax returns.

2023 Acquisitions

ironSource Ltd.

On November 7, 2022, we completed the acquisition of ironSource, a leading business platform for the app economy.

The purchase consideration was payable through the issuance of 112,547,375 shares of our common stock valued at approximately $ 2.8 billion, and assumed 17,326,341 equity awards valued at approximately $ 126.7 million for services rendered through the acquisition date.

Total purchase consideration transferred was approximately $ 2.9 billion.

We recorded $ 33.0 million in transaction costs associated with the acquisition for the year ended December 31, 2022.

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.The revenue and income related to ironSource were $ 120.3 million and $ 5.4 million, respectively, for the year ended December 31, 2022.

The following table summarizes the consideration paid for ironSource and the estimated fair values of the assets acquired at the acquisition date (in thousands):

Consideration:

Common stock issued $ 2,788,924

Assumed equity awards 126,700

Fair value of total consideration transferred $ 2,915,624

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents $ 138,216

Accounts receivable 292,670

Prepaid expenses and other 44,457

Property, plant, and equipment 7,063

Intangible assets, net 1,270,000

Short term investments 103,831

Other assets 66,951

Accounts payable ( 25,681 )

Accrued expenses and other ( 99,419 )

Publisher payables ( 258,227 )

Deferred revenue ( 1,325 )

Other long-term liabilities ( 165,996 )

Total identifiable net assets assumed 1,372,540

Total $ 2,915,624

(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 is not deductible for U.S.

income tax purposes.

Unity Software Inc.

MindKick, Inc.

On January 28, 2022, we completed the purchase of MindKick, Inc.

("MindKick") for a total purchase consideration of approximately $ 46.6 million.

This consideration included a combination of approximately $ 26.7 million in cash and the issuance of 169,321 shares of our common stock valued at approximately $ 16.1 million.

An additional 42,330 shares of our common stock subject to a service-based vesting condition were granted to certain employees of Mindkick;

these shares of common stock are accounted for outside of the business combination and will be recognized as post-combination expense.

MindKick provides 2D game creation tools and game templates with the goal of providing consumers the ability to create, play, and share their own 2D games on mobile.

Prior to the completion of the acquisition, we held a minority investment in MindKick that we accounted for using the equity method of accounting.

In circumstances where a business combination is achieved in stages, previously-held equity interests are remeasured at fair value.

The remeasured fair value assigned to the previously-held equity interest in MindKick of $ 3.7 million approximates cost, and therefore, no gain or loss was recognized.

The identifiable assets and liabilities acquired are primarily $ 37.0 million in goodwill, $ 7.5 million in intangible assets, $ 2.8 million in cash, and ($ 0.7 million) in other net assets and liabilities.

The transaction costs associated with the acquisition are not material.

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 results.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the consolidated results of ironSource for the years ended December 31, 2022 and 2021, giving effect to the acquisition as if it had occurred on January 1, 2021, and combines the historical financial results of ironSource.

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,

Unaudited pro forma financial information

Pro forma revenue $ 2,016,557 $ 1,660,432

Pro forma net loss $ ( 983,563 ) $ ( 804,318 )

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.

During the year ended December 31, 2023, we completed no acquisitions.

2022 Acquisitions

During the year ended December 31, 2022, we completed the acquisitions of certain companies, primarily ironSource, for a total purchase consideration of approximately $ 3.0 billion payable primarily in stock.

The purchase consideration was primarily allocated to goodwill of approximately $ 1.6 billion and intangible assets of approximately $ 1.3 billion.

These acquisitions were strategic in nature, and primarily enhanced Unity's Grow offerings.

The revenue and earnings of the acquired businesses have been included in our results since the acquisition dates.

2021 Acquisitions

During the year ended December 31, 2021, we completed the acquisitions of certain companies for a total purchase consideration of approximately $ 2.1 billion payable in cash and stock.

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The revenue and earnings of the acquired businesses have been included in our results since the acquisition date.

Pro forma results of operations for these acquisitions have not been presented because they are not material to the consolidated statements of operations.

Unity Software Inc.

Goodwill and Intangible Assets

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Balance as of December 31, 2023 $ 3,166,304

Unity Software Inc.

Intangible Assets, Net

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Total intangible assets $ 2,171,324 $ ( 249,090 ) $ 1,922,234

(1) Based on weighted-average useful life established as of the acquisition date.

(1) Based on weighted-average useful life remaining.

(2) Decrease in 2023, due to amendment of our Wētā FX Limited agreement.

The following table presents the amortization of finite-lived intangible assets included on our consolidated statements of operations (in thousands):

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Amortization expense $ 515,489 $ 172,551 $ 33,483

Unity Software Inc.

As of December 31, 2022, the estimated future amortization of finite-lived intangible assets for each of the next five years and thereafter was as follows (in thousands):

As of December 31, 2023, the estimated future amortization of finite-lived intangible assets was as follows (in thousands):

2024 $ 352,253

Thereafter 120,747

Total $ 1,406,745

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Leasehold improvements $ 105,102 $ 99,868

Computer and other hardware 96,829 74,953

Software, computers, and other hardware 113,829 105,131

Furniture 32,089 30,046

Internally developed and purchased software 8,264 4,957

Vehicles 38 —

Construction in progress 10,442 12,075

Capital projects in progress 33,771 10,442

Total gross property and equipment 284,791 245,487

Accumulated depreciation and amortization ( 143,904 ) ( 123,624 )

( 123,624 ) ( 97,801 )

Property and equipment, net $ 140,887 $ 121,863

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18,111 22,336

10,095 12,243

Total long-lived assets, net $ 88,664 $ 113,334

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Operating lease expense $ 41,195 $ 31,707

Short-term lease expense 1,317 728

Variable lease expense 5,221 5,528

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Total operating lease liabilities $ 150,801 $ 142,245

As of December 31, 2022, our operating leases had a weighted-average remaining lease term of 5.0 years and a weighted-average discount rate of 4.0 %.

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, 2023 and December 31, 2022, our operating leases had a weighted-average remaining lease term of 5.1 years and 5.0 years, respectively, and a weighted-average discount rate of 5.2 % and 4.0 %, respectively.

On November 28, 2023, we committed to a plan to close corporate offices in approximately 14 locations, to reduce our real estate costs.

In connection with this plan, during the three months ended December 31, 2023 we recorded $ 15.6 million of impairment charges on operating lease assets, which we currently estimate to be the majority of the costs associated with this plan.

As of December 31, 2023, our lease liabilities were as follows (in thousands):

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Present value of lease liabilities $ 150,801

(1) Excludes future minimum payments for leases which have not yet commenced as of December 31, 2022.

As of December 31, 2022, we had entered into leases that have not yet commenced with future minimum lease payments of $ 40.1 million that are not yet reflected on our consolidated balance sheets.

These operating leases will commence in 2023 with lease terms of approximately five to ten years .

As of December 31, 2023, we have not entered into any leases that have not yet commenced .

Convertible Notes

In November 2022, we issued the 2027 Notes.

The closing of the issuance and sale of the 2027 Notes (the "PIPE") occurred promptly following the closing of the ironSource Merger, pursuant to an indenture dated November 8, 2022 (the “Indenture”).

Proceeds from the issuance of the 2027 Notes were approximately $ 1.0 billion, net of debt issuance costs.

The debt issuance costs are amortized to interest expense using the straight-line method, which approximates the effective interest method.

The 2027 Notes are general unsecured obligations which bear regular interest of 2.0 %.

We may elect for additional interest to accrue on the 2027 Notes as the sole remedy for any failure by us to comply with certain reporting requirements under the Indenture.

Holders of the 2027 Notes may receive additional interest under specified circumstances as outlined in the Indenture.

Additional interest, if any, will be payable in the same manner as the regular interest, which is semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2023.

The 2027 Notes will mature on November 15, 2027 unless earlier converted, redeemed, or repurchased.

The 2027 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 20.4526 shares of common stock per $1,000 principal amount of 2027 Notes, which is equivalent to an initial conversion price of approximately $ 48.89 per share of our common stock.

The conversion rate is subject to customary adjustments for certain events as described in the Indenture governing the 2027 Notes.

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 a notice of redemption, in each case as described in the Indentures, we will increase the conversion rate for a holder of the 2027 Notes who elects to convert its 2027 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 2027 Notes may require us to repurchase all or a portion of the 2027 Notes at a price equal to 100 % of the principal amount of 2027 Notes to be repurchased, plus any accrued and unpaid additional interest, if any, to, but excluding, the fundamental change repurchase date.

We accounted for the issuance of the 2027 Notes as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives.

The table below summarizes the principal and unamortized debt issuance cost for the 2027 Notes (in thousands):

December 31, 2022

Convertible note:

Principal $ 1,000,000

Unamortized debt issuance cost ( 368 )

Net carrying amount $ 999,632

Interest expense on the 2027 Notes related to regular interest was $ 2.9 million and interest expense related to the amortization of debt issuance costs was immaterial for the year ended December 31, 2022.

As of December 31, 2022, no holders of the 2027 Note have exercised the conversion rights, and the if-converted value of the 2027 Notes did not exceed the principal amount.

In November 2021, we issued an aggregate of $ 1.7 billion principal amount of 0 % Convertible Senior Notes due 2026 (the "2026 Notes").

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.

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.

The table below summarizes the principal and unamortized debt issuance cost for the 2026 Notes (in thousands):

December 31, 2022

Convertible note:

Principal $ 1,725,000

Unamortized debt issuance cost ( 17,461 )

As of December 31, 2023, we had $ 2.7 billion of unsecured convertible notes outstanding including $ 1.0 billion issued in November 2022 and $ 1.7 billion issued in November 2021.

The table below summarizes the principal and unamortized debt issuance costs and other material features of the Notes (in thousands):

Carrying Amount as of,

Conversion Rate per

$1,000 Principal Initial Conversion Price Maturities Stated Interest Rates December 31, 2023 December 31, 2022

Convertible notes:

Principal - 2026 Notes 3.2392 $ 308.72 2026 0.0 % $ 1,725,000 $ 1,725,000

Principal - 2027 Notes 20.4526 $ 48.89 2027 2.0 % 1,000,000 1,000,000

Unamortized debt issuance costs, net ( 13,250 ) ( 17,829 )

Net carrying amount $ 2,711,750 $ 2,707,171

Interest expense related to the amortization of debt issuance costs was $ 4.5 million for the year ended December 31, 2022 and $ 0.5 million for the year ended December 31, 2021.

Interest on the Notes is payable semi-annually in arrears.

The combined interest expense on the Notes related to regular interest and the amortization of debt issuance cost was $ 24.6 million and $ 7.4 million for the year ended December 31, 2023 and December 31, 2022, respectively.

As of December 31, 2023 the estimated fair value of the 2027 Notes were approximately $ 1.3 billion and the estimated fair value of the 2026 Notes were approximately $ 1.4 billion.

The fair value of the 2027 Notes was based on a combination of a discounted cash flow and Black-Scholes option-pricing model.

The fair value of the 2026 Notes was based on quoted prices as of that date.

The Notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election, subject to customary adjustments for certain events as described in the indentures governing the Notes.

The Notes are subject to additional terms.

In connection with certain corporate events, as defined and described in the Indentures, we will increase the conversion rate for a holder of the Notes who elects to convert those notes in connection with the event.

Additionally, subject to certain other events, as described in the Indentures, holders of the Notes may require us to repurchase all or a portion of their notes at a price equal to 100 % of the principal amount to be repurchased, plus any accrued and unpaid interest to date.

As of December 31, 2023, no holders of the 2027 and 2026 Notes have exercised the conversion rights, and the if-converted value of the 2027 and 2026 Notes did not exceed the principal amount.

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.

In connection with the pricing of the 2026 Notes, we entered into the Capped Call Transactions at a net cost of $ 48.1 million, with call options totaling approximately 5.6 million of our common shares, and expiration dates ranging from September 18, 2026 to November 12, 2026.

The strike price is $ 308.72 , and the cap price is initially $ 343.02 per share, subject to certain adjustments.

The Capped Call Transactions are freestanding and are considered separately exercisable from the 2026 Notes.

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, 2022, the Capped Call Transactions were not in the money and met the conditions for equity classification.

As of December 31, 2023, the Capped Call Transactions met the conditions for equity classification and were not in the money.

Unity Software Inc.

Commitments and Contingencies

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Operating leases (1)

$ 171,699 $ 45,407 $ 62,052 $ 37,203 $ 27,037

Purchase commitments (2)

687,675 224,857 433,393 29,425 —

Convertible notes (3)

Convertible note principal and interest (3)

2,805,000 20,000 1,765,000 1,020,000 —

Total $ 3,664,374 $ 290,264 $ 2,260,445 $ 1,086,628 $ 27,037

(1) The operating lease obligation consists of obligations for real estate

(1) Operating leases consist of obligations for leased real estate.

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

(3) Convertible notes due 2026 and 2027.

See Note 9, "Borrowings," of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

We expect to meet our remaining commitment.

Unity Software Inc.

See Note 9, "Borrowings," above for further discussion.

We expect to meet our remaining commitments.

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 that the amount of loss can be reasonably estimated.

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.

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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.

The Company is involved from time to time in claims, proceedings, and litigation, including the following:

On July 6, 2022, a putative securities class action complaint was filed in U.S.

District Court in the Northern District of California against the Company and certain of its executives (the "Securities Class Action").

The complaint was amended on March 24, 2023, and captioned In re Unity Software Inc.

Securities Litigation, Case No.

5:22-cv-3962 (N.D.

The operative complaint names as defendants Unity, its former Chief Executive Officer, Chief Financial Officer, and General Manager of Operate Solutions, as well as Unity shareholders, Sequoia Capital, Silver Lake Group, and OTEE 2020 ApS.

The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and alleges that the Company and its executives made false or misleading statements and/or failed to disclose issues with the Company's product platform and the likely impact of those issues on the Company's fiscal 2022 guidance.

The plaintiffs seek to represent a class of all persons and entities (other than the defendants) who acquired Unity securities between May 11, 2021 and May 10, 2022, and requests unspecified damages, pre- and post-judgment interest, and an award of attorneys' fees and costs.

The Company intends to vigorously defend the case.

On May 25, 2023, all defendants moved to dismiss the amended complaint.

The plaintiffs filed an opposition to the motions to dismiss on July 26, 2023.

The Company filed a response to the plaintiffs' opposition on September 1, 2023.

The motion is fully briefed and the Company is awaiting a ruling.

On November 22, 2022, a derivative suit, captioned Movva v.

Unity Software, Inc., et al., Case 5:22-cv-07416 (N.D.

Cal.) (the "Movva Suit"), was filed by a purported stockholder against eleven of the Company's current and former officers and directors.

The complaint, which asserts claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and violations of Section 14(a) of the Exchange Act, borrows the allegations of the Securities Class Action, and recasts them as derivative claims.

On December 16, 2022, a related derivative suit, captioned Duong vs.

Unity Software Inc., et al., Case 5:22-c-08926 (N.D.

Cal.), was filed by a purported stockholder against the same defendants as in the Movva Suit (the "Duong Suit," and together with the Movva Suit, the "Federal Derivative Actions").

The two Federal Derivative Actions were consolidated after the parties jointly moved to do so.

The Federal Derivative Actions have been stayed pending the outcome of the motions to dismiss in the Securities Class Action.

On May 8, 2023, a stockholder derivative suit, captioned Wen v.

Botha, et al.., Case No.

Unity Software Inc.

2023-0499 (the "Wen Suit"), was filed in the Court of Chancery of the State of Delaware.

The case was filed by a purported Unity stockholder against twelve of the Company's current and former officers and directors, and asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, and waste of corporate assets.

On December 15, 2023, a stockholder derivative suit, captioned Flesner v.

Riccitiello, et al., Case No.

2023-1240 (the "Flesner Suit" and together with the Wen Suit, the "Delaware Derivative Actions"), was filed in the Court of Chancery of the State of Delaware.

As with the Federal Derivative Actions, the Delaware Derivative Actions borrow the allegations of the Securities Class Action, and recast them as derivative claims.

The Delaware Derivative Actions have also been stayed pending the outcome of the motion to dismiss in the Securities Class Action.

It is possible that additional suits will be filed, or allegations received from shareholders, with respect to these same or other matters, naming Unity and/or its officers and directors as defendants.

We dispute these allegations and intend to vigorously defend ourselves in these matters.

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.

We are currently subject to a putative class action complaint and related derivative claims, which we believe is without merit and intend to vigorously defend against.

See Part I, Item 3.

"Legal Proceedings" for additional information regarding the class action complaint.

From time to time, we may be subject to other legal proceedings and claims arising in the ordinary course of business.

Letters of Credit

We had $ 13.9 million and $ 20.6 million of secured letters of credit outstanding as of December 31, 2023 and 2022, 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 .

These primarily relate to our office space leases and are fully collateralized by certificates of deposit which we record in restricted cash as other assets on our consolidated balance sheets.

Stockholders' Equity and Employee Compensation Plans

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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 through November 2024.

Under the Share Repurchase Program, share repurchases may be made by us from time to time in privately negotiated transactions or in open market transactions.

The Share Repurchase Program does not require us to purchase a minimum number of shares, and may be suspended, modified, or discontinued at any time without prior notice.

In 2022, we repurchased 42.7 million shares of common stock under our Share Repurchase Program in open market transactions for an aggregate purchase price of $ 1.5 billion.

As of December 31, 2022, $ 1.0 billion remained available for future share repurchases under the Share Repurchase Program.

During the years ended December 31, 2023 and 2022, we repurchased 7.6 million and 42.7 million shares of common stock under this program for an aggregate purchase price of $ 250 million and $ 1.5 billion, respectively.

As of December 31, 2023, $ 750 million remained available for future share repurchases under this program.

Employee 401(k) Plan

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Stock‑Based Compensation

We recorded stock-based compensation expense related to grants to employees on our consolidated statements of operations as follows (in thousands):

Stock-based compensation expense is as follows (in thousands):

Year Ended December 31,

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Total stock-based compensation expense $ 648,696 $ 550,065 $ 347,159

Included in the above expenses for the year ended December 31, 2023, is $ 14.3 million of incremental stock expense primarily within general and administrative, associated with the modification of awards held by key employees that departed in the fourth quarter of 2023.

Unrecognized compensation expense is as follows (in thousands, except for weighted-average remaining vesting period):

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Balance as of December 31, 2021 29,226,041 $ 13.28 6.26

Granted 1,325,352 $ 107.10

11,835,061 $ 26.68

Exercised ( 4,512,850 ) $ 6.69

13 unchanged sentences

Fair value of stock options vested $ 68,008 $ 51,962 $ 48,918

$ 51,962 $ 48,918 $ 44,100

(1) 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.

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A summary of our RSU, including PVU, activity is as follows:

Unvested Restricted Stock Units (1)

Unvested RSUs (1)

Shares Weighted-Average

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The total fair value of RSUs vested as of the vesting dates during the years ended December 31, 2023, 2022, and 2021 was $ 448 million, $ 322 million, and $ 442 million, respectively.

No PVUs have vested during the year ended December 31, 2022.

Price-Vested Units

In October 2022, our board of directors granted to certain of our executive officers a total of 989,880 PVUs for which vesting is subject to the fulfillment of both a service period that extends up to four years and the achievement of a stock price hurdle during the relevant performance period that extends up to seven years .

The fair value of each PVU award is estimated using a Monte Carlo stimulation that uses assumptions determined on the date of grant.

In October 2022, we granted to certain of our executive officers a total of 989,880 PVUs, which are RSUs for which vesting is subject to the fulfillment of both a service period that extends up to four years and the achievement of a stock price hurdle during the relevant performance period that extends up to seven years .

The fair value of each PVU award is estimated using a Monte Carlo simulation that uses assumptions determined on the date of grant.

During the years ended December 31, 2023 and 2022, the stock price hurdles were not met, and no units vested.

The following table summarizes the weighted-average assumptions relating to our PVUs:

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Employee Stock Purchase Plan

The fair value of shares offered under our ESPP was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:

The fair value of shares offered under our ESPP was determined on the grant date using the Black-Scholes option pricing model.

The following table summarizes the assumptions used and the resulting grant-date fair values of our ESPP:

Year Ended December 31,

2023 2022 2021

Expected dividend yield — — —

Risk-free interest rate 5.2 % - 5.5 %

0.6 % - 3.3 %

Expected volatility 65.9 % - 94.5 %

35.5 % - 40.0 %

Expected term (in years) 0.50 0.50 0.50

Estimated fair value $ 10.51 - $ 27.42

Grant-date fair value per share $ 12.44 - $ 12.65

$ 10.51 - $ 27.42

Unity Software Inc.

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Year Ended December 31,

Share issued under the ESPP 607,009

Shares issued under the ESPP 1,064,463 607,009

Weighted-average price per share issued $ 25.56 $ 54.87

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Total tax provision $ 28,477 $ 37,063 $ 1,377

(1) Certain prior year amounts have been reclassified to conform to current year presentation.

Our income tax provision for the year ended December 31, 2023 was primarily driven by losses that cannot be benefited due to the valuation allowance on U.S., Denmark, United Kingdom ("U.K."), China, and Canada entities, and to a lesser extent, foreign earnings taxed at different tax rates.

In addition, we undertook certain tax restructuring efforts during the first quarter of 2023 that enhanced our ability to offset deferred tax liabilities in the U.S.

in future periods, thereby partially reducing the need for a valuation allowance.

Our income tax provision for the year ended December 31, 2022 was primarily driven by the earnings of our foreign subsidiaries, which are taxed at rates that differ from the U.S.

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mandatory research and development capitalization rules.

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

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 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.

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 U.K.

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.

Unity Software Inc.

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As of December 31,

2022 2021 (1)

Deferred tax assets:

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Net deferred tax assets $ ( 98,155 ) $ ( 140,367 )

(1) Certain prior year amounts have been reclassified to conform to current year presentation.

In the tax year ended December 31, 2022, we capitalized certain research and development costs incurred by our U.S.

and foreign subsidiaries, which resulted in a deferred tax asset of $ 255.1 million.

This deferred tax asset associated with capitalized research and development costs is offset by a valuation allowance and future taxable temporary differences.

In the tax years ended December 31, 2023 and 2022, we capitalized certain research and development costs incurred by our U.S.

and foreign subsidiaries, which resulted in a deferred tax assets of $ 666 million and $ 255 million respectively.

These deferred tax assets associated with capitalized research and development costs are offset by valuation allowances and future taxable temporary differences.

The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods.

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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, 2022 and 2021, and as such, we have maintained a full valuation allowance against such deferred tax assets.

federal, state, and certain foreign deferred tax assets will not be realized as of December 31, 2023 and 2022, and as such, we have maintained a valuation allowance against such deferred tax assets.

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.

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The increase in the valuation allowance in the years ended December 31, 2023 and 2022 was primarily related to deferred tax assets for which insufficient positive evidence exists to support their realizability, including NOL carryforwards, capitalized research and development expenses, and credits for research and development.

Unity Software Inc.

Our NOL carryforwards for U.S.

federal, state, and foreign purposes were $ 785.8 million, $ 415.0 million, and $ 1.1 billion, respectively, with most of our foreign NOL carryforward balances arising from Denmark and the U.K.

federal, state, and foreign purposes were $ 642 million, $ 398 million, and $ 936 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.

federal, state, and foreign research and development credit carryforwards were $ 90.0 million, $ 44.4 million and $ 10.4 million, respectively.

federal, state, and foreign NOL carryforwards, if not utilized, will begin to expire in 2032, 2025, and 2025, respectively.

federal, state, and foreign research and development credit carryforwards were $ 103 million, $ 48.9 million and $ 3.4 million,

Unity Software Inc.

respectively.

federal credit carryforwards, if not utilized, will begin to expire in 2032, while the California credit carryforwards have no expiration.

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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, 2022, which is that all earnings are permanently reinvested for all jurisdictions.

We maintain our reinvestment assertion with respect to foreign earnings for the period ended December 31, 2023, 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, 2023.

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Unrecognized tax benefits, ending balance $ 182,515 $ 176,584 $ 110,315

(1) Certain prior year amounts have been reclassified to conform to current year presentation.

As of December 31, 2023 and 2022, we had unrecognized tax benefits of $ 183 million and $ 177 million, respectively, of which $ 28.9 million and $ 24.3 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, 2022 and 2021 were $ 3.0 million and $ 2.5 million.

The amount of interest and penalties accrued as of December 31, 2023 and 2022 were $ 4.9 million and $ 3.0 million, respectively.

We are subject to taxation in the United States and various other state and foreign jurisdictions.

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Our 2019 and subsequent tax years remain open to examination in Israel and Denmark.

Unity Software Inc.

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.

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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.

Unity Software Inc.

Net Loss per Share of Common Stock

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The following table presents potentially dilutive items excluded from the computation of diluted net loss per share for the following periods (in thousands) because the impact of including them would have been antidilutive:

Year Ended December 31,

As of December 31,

2023 2022 2021

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Unvested RSUs and PVUs 37,333 38,105 13,697

Subsequent Event (Unaudited)

As part of our efforts to restructure and streamline our organizational structure, in January 2024, we committed to a plan to eliminate approximately 25 % of our workforce, and we mutually agreed to the departure of the founders of ironSource Ltd.

In total, we currently estimate that we will incur approximately $ 195 million in employee separation costs, primarily in the first quarter of 2024, in connection with these decisions, largely driven by the modification of equity awards.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data