Unity Software Inc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Accounting Policies

Description of Business

We provide a comprehensive set of software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices, among others.

We are headquartered in San Francisco, California and have operations in the United States, Denmark, Israel, Belgium, Canada, China, Colombia, Czech Republic, Finland, France, Germany, Ireland, Japan, Lithuania, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland, the U.K., and the United Arab Emirates.

We market our solutions directly through our online store and field sales operations in North America, Denmark, China, Finland, the U.K., Germany, Israel, Japan, Singapore, South Korea, and Spain, and indirectly through independent distributors and resellers worldwide.

Basis of Presentation and Consolidation

We prepared the accompanying consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). The consolidated financial statements include the accounts of Unity Software Inc., its wholly owned subsidiaries, and entities consolidated under the voting interest model. We have eliminated all intercompany balances and transactions. 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 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.

Revenue Recognition

Revenue is measured based on the amount of consideration that we expect to receive from our customers. Revenue excludes sales and indirect taxes. In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price ("SSP"). We generally determine SSP based on observable pricing. When observable pricing is not available, we use cost plus margin analysis to determine SSP.

Our business focuses ontwo complementary sets of solutions: (1) Create Solutions and (2) Grow Solutions.

Create Solutions are a combination of software and services that enable customers to edit, run, and iterate real-time 2D and 3D experiences. Revenue is primarily derived from Create Solution Subscriptions, Enterprise Support, Professional Services, and Cloud and Hosting services.

Create Solutions subscriptions provide customers with software, embedded cloud functionality, and software updates. As the software and software updates are highly interdependent and interrelated and these services have the same pattern of performance as the embedded cloud functionality, we combine these promises and account for them as a single performance obligation that is recognized over time. Enterprise customers may purchase an enhanced support offering ("Enterprise Support") that is sold separately and is considered its own performance obligation. Create Solutions subscriptions and enterprise support typically have a term ofone tofive years and are billed in monthly, quarterly and annual installments, and recognized ratably over the service period.

Professional services revenue is primarily composed of consulting, platform integration, training, and custom application and workflow development. Revenue is recognized as services are rendered. We typically invoice our customers on a milestone basis or when promised services are delivered.

Our Cloud and Hosting service arrangements are based on a fixed fee or consumption-based model. For fixed fee arrangements revenue is recognized ratably over the contractual service term as our obligations are generally fulfilled evenly throughout the hosting period. For consumption-based arrangements, we recognize revenue as services are provided.

Grow Solutions revenue primarily consists of advertising services provided through our monetization solutions that allow publishers, which include mobile application developers, original equipment manufacturers ("OEM") and mobile carriers to sell available advertising inventory on their mobile applications or hardware devices to advertisers for in-app or on-device placements. 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 or on-device placement and on a gross basis for advertising sales where we are the publisher and have control of the in-app or on-device placement. Advertising revenue is recognized at a point in time when the agreed upon action is completed or when the advertisement is displayed to users.

Cost of Revenue

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

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 often 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 and employee stock purchase plan ("ESPP") purchases are based upon our historical volatility and the historical volatility of a number of publicly traded companies in similar industries over similar durations. We have historically not declared or paid any dividends and do 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 and ESPP purchases.

The fair value of price-vested units ("PVUs"), which are RSUs that contain both service-based and market-based vesting conditions, is estimated using the Monte Carlo simulation model and is based on the closing stock price of our common stock on the grant date modified to reflect the impact of the market-based vesting condition, including the estimated payout level based on that condition. We do not adjust compensation cost for subsequent changes in the expected outcome of the market-based vesting conditions.

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 ofone year tofour years. We recognize stock-based compensation expense related to the 2020 ESPP on a straight-line basis over the offering period. We do not estimate forfeitures but instead account for them as they occur.

Cash, Cash Equivalents, and Restricted Cash

We consider all highly liquid investments with original maturities of three months or less at date of purchase to be cash equivalents. Our cash equivalents include money market funds, time deposits, and commercial paper.

As of December 31, 2023 and 2022, restricted cash was $13.9 million and $20.6 million, respectively. Restricted cash consists of secured letters of credit issued in connection with our operating leases and other amounts held in escrow. Restrictions typically lapse at the end of the lease term, and restricted cash is classified as current or non-current based on the remaining term of the restriction.

Short-term Investments

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 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. 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 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. The estimated losses on uncollectible amounts are recorded in general and administrative expense on our consolidated statements of operations. 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

Financial instruments that potentially subject us to a concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, and accounts receivable. We place our domestic and foreign cash and cash equivalents, as well as our short-term investments, with large, creditworthy financial institutions. Balances in these accounts may exceed federally insured limits at times.

In general, we do not require our customers to provide collateral or other security to support accounts receivable. To reduce credit risk, management performs credit evaluations of our customers’ financial condition, as warranted, and continually analyzes the allowance for doubtful accounts, which we maintain based upon the expected collectability of accounts receivable.

As of December 31, 2023 and 2022, no individual customer represented 10% or more of the aggregate receivables. For the years ended December 31, 2023, 2022, and 2021, no individual customer represented 10% or more of total revenue.

Fair Value of Financial Instruments

We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which to transact and the market-based risk. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued liabilities, due to their short-term nature.

Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive loss. Our other comprehensive loss includes unrealized gains and losses on available-for-sale investments, derivative instruments, and foreign currency translation adjustment.

Property and Equipment, Net

Property and equipment are stated at cost less accumulated depreciation and amortization, computed using the straight-line method based on the estimated useful lives of the assets, which is generally three years for computer and other hardware andfive years for furniture. Leasehold improvements are amortized over the shorter of their estimated useful life or the remaining term of the lease. Software licenses are amortized over the shorter of their estimated useful life or license term, which is generally three tofive years.

The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized.

Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to the consolidated statement of operations.

Leases

Primarily all of our leases have been categorized as operating leases at inception. On certain of our lease agreements, we may receive rent holidays and other incentives provided by the landlord. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Additionally, incentives we receive are treated as a reduction of our costs over the term of the agreement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the non-cancellable term of the lease.

We establish assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are depreciated over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement costs.

Convertible Senior Notes and Capped Call Transactions

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.

Goodwill and Intangible Assets

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. 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 tosix years. Certain contractual relationships are amortized using an accelerated method of amortization, which reflects the pattern in which the economic benefits from the intangible assets are expected to be recognized.

On an annual basis, we evaluate the estimated remaining useful life of acquired intangible assets and whether events or changes in circumstances warrant a revision to the remaining amortization period. No changes to the useful lives of our intangible assets were deemed necessary during the years ended December 31, 2023, 2022, and 2021 based on management's evaluation.

Segments

We operate as a single operating segment. The chief operating decision maker is our Chief Executive Officer, who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis, accompanied by disaggregated information of our revenue. Accordingly, we have determined that we have a single reportable segment and operating segment structure.

Capitalized Software Costs and Software Implementation Costs

We capitalize implementation costs incurred in our cloud computing service arrangements related to enterprise software solutions ("capitalized implementation costs") and costs associated with customized internal‑use software systems that have reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll‑related expenses for employees, who are directly associated with the development of the applications. We capitalize such costs during the application development stage, which begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose. Capitalized software costs are amortized on a straight-line basis over their estimated useful life, which is generallytwo tothree years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Capitalized implementation costs are expensed over the term of the hosting arrangement, which is the fixed, non-cancellable term of the arrangement, plus any reasonably certain renewal periods.

The amount of capitalized software costs and capitalized implementation costs was $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.

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. The

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

Impairment Analysis

We evaluate intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset’s carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.

We evaluate and test the recoverability of our goodwill for impairment at least annually during our fourth quarter of each calendar year or more often if and when circumstances indicate that goodwill may not be recoverable.

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.

Income Taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.

We record an income tax expense (or benefit) for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for NOL and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize the deferred income tax effects of a change in tax rates in the period of the enactment.

We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance.

We recognize tax benefits from uncertain tax positions only if we believe that the position is more likely than not to be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect our income tax expense (or benefit) in the period in which such determination is made and could have a material impact on our financial condition and operating results.

We recognize interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statement of operations. Accrued interest and penalties are included in income and other taxes payable on the consolidated balance sheets.

Translation of Foreign Currencies

The functional currency of the majority of our foreign subsidiaries is the U.S. dollar. Foreign currency transaction gains and losses are included in interest and other income (expense), net, on the consolidated statements of operations for the period. For U.S. dollar functional currency subsidiaries, all assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses 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. dollars are recorded in accumulated other comprehensive loss in stockholders’ equity.

Warranties and Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third-party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. As of December 31, 2023 and 2022, there were no known events or circumstances that have resulted in a material indemnification liability to us, and we did not incur material costs to defend lawsuits or settle claims related to these indemnifications.

We generally do not offer warranties for our software products. With certain customers, we will warrant that our software products will operate without material error and/or substantially in conformity with product documentation. We have not experienced any warranty claims to date, and no liabilities have been recorded as of December 31, 2023 and 2022.

Advertising Costs

Advertising costs are expensed as incurred as a component of sales and marketing expense in the consolidated statements of operations. Advertising expense was approximately $12.6 million, $18.8 million, and $24.2 million for the years ended December 31, 2023, 2022, and 2021, respectively.

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.

2. Revenue

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

The following table presents our revenue disaggregated by geography, based on the invoice address of our customers (in thousands):

(1) Greater China includes China, Hong Kong, and Taiwan.

(2)Europe, the Middle East, and Africa ("EMEA").

(3)Asia-Pacific, excluding Greater China ("APAC").

(4)Canada and Latin America ("Other Americas").

Sales Commissions

Sales commissions that have a benefit beyond one year are capitalized and amortized on a straight-line method over the expected period of benefit, which is generally three years. As of December 31, 2023, capitalized commissions, net of amortization, included in prepaid expenses and other and other assets were $6.8 million and $4.8 million, respectively. As of December 31, 2022, capitalized commissions, net of amortization, included in prepaid expenses and other and other assets were $8.8 million and $5.3 million, respectively.

For the years ended December 31, 2023 and 2022, we recorded amortization costs of $9.9 million and $9.4 million, respectively, in sales and marketing expenses. We didnot incur any impairment losses for the years ended December 31, 2023 and 2022.

Contract Balances and Remaining Performance Obligations

Contract assets (unbilled receivables) included in accounts receivable, net, are recorded when revenue is earned in advance of customer billing schedules. Unbilled receivables totaled $31.3 million and $37.5 million as of December 31, 2023 and 2022, respectively.

Contract liabilities (deferred revenue) relate to payments received in advance of performance under the contract. 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 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 nextone tofive years and we expect to recognize approximately $200 million or 52% of this revenue during the next 12 months.

3. Financial Instruments

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. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value.

•Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities.

•Level 2—Valuations based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration.

•Level 3—Valuations based on unobservable inputs reflecting our own assumptions used to measure assets and liabilities at fair value. These valuations require significant judgment.

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):

(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

We hold equity investments in certain unconsolidated entities without a readily determinable fair value. 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. We use the measurement alternative to account for adjustments to these investments for observable transactions for the same or

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.

4. Investment in Unity China

In August 2022, we formed a company in China ("Unity China") to perform research and development activities and to facilitate commercialization in the Greater China region. 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 ¥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, on the issuance date. The investors' equity interest was valued using a discounted cash flow analysis and market approach. The redemption right was valued using the Black-Scholes option-pricing model adjusted for probabilities of successfully completing an initial public offering. The difference between the fair value of the redeemable noncontrolling interests and cash consideration received was recognized as a customer incentive, as the equity interest holders are also customers. The customer incentive will be amortized against revenue over thefive-year term of the redemption right.

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 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):

5. Acquisitions

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. The fair value assigned to identifiable intangible assets acquired was determined using the income approach and the cost approach. 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.

The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, is recorded as goodwill. Goodwill is not subject to amortization and it typically is not deductible for U.S. income tax purposes.

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

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. The purchase consideration was primarily allocated to goodwill of approximately $1.3 billion and intangible assets of approximately $790 million. These acquisitions were strategic in nature as they enhanced our product offerings. The revenue and earnings of the acquired businesses have been included in our results since the acquisition date.

6. Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to net tangible and identifiable intangible assets acquired in business combinations.

The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2023 and 2022 (in thousands):

Intangible Assets, Net

The following tables present details of our intangible assets, excluding goodwill (in thousands, except for weighted-average useful life):

(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):

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

7. Balance Sheet Components

The following tables provide details of selected balance sheet items (in thousands):

The following table presents the depreciation and amortization of property and equipment included on our consolidated statements of operations (in thousands):

Long-lived Assets, Net, by Geographic Area

The following table presents our long-lived assets, net, disaggregated by geography, which consists of our property and equipment, net, but excludes internally developed software and purchased software (in thousands):

(1) No individual country, other than those disclosed above, exceeded 10% of our total long-lived assets, net, for any period presented.

8. Leases

We have operating leases for offices which have remaining lease terms of up tonine years, some of which include options to extend the lease with renewal terms fromone tofive years. Some leases include an option to terminate the lease for up tofive years from the lease commencement date.

Components of lease expense were as follows (in thousands):

Supplemental balance sheet information related to leases was as follows (in thousands, except weighted-average figures):

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):

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

9. Borrowings

Convertible Notes

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):

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

10. Commitments and Contingencies

The following table summarizes our non-cancelable contractual commitments as of December 31, 2023 (in thousands):

(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," 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 the amount of loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Legal costs related to such potential losses are expensed as incurred. In addition, recoveries are shown as a reduction in legal costs in the period in which they are realized.

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. Cal.). 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.

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. 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, and waste of corporate assets, as well as insider trading claims against the individual defendants. 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.

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 condensed consolidated financial statements. However, litigation is inherently uncertain, and the outcome of these matters cannot be predicted with certainty. Accordingly, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these matters. 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 as other assets on our consolidated balance sheets.

11. Stockholders' Equity and Employee Compensation Plans

Stockholders' Equity

Employee Compensation Plans

Stock Award Plans

Our stock compensation plans allow us to grant or assume through acquisition stock options and RSUs, including PVUs, to employees and non-employee directors.

As of December 31, 2023, we had reserved a total of 101.1 million shares of common stock under our collective compensation plans, of which 32.2 million were available for future grant.

Employee Stock Purchase Plan

We offer an ESPP that permits employees to purchase shares of our common stock through payroll deductions of up to 15% of their earnings. Unless otherwise determined by the administrator, the purchase price of the shares will be 85% of the lower of the fair market value of our common stock on (i) the first day of an offering or (ii) on the date of purchase. No participant may purchase more than 1,000 shares of common stock in any one offering period. Participants may end their participation at any time during an offering and will be paid their accrued contributions that have not yet been used to purchase shares. Participation ends automatically upon termination of employment with us.

The maximum number of shares of our common stock that may be issued under our 2020 ESPP is 14.7 million shares, of which 13.0 million were available for issuance as of December 31, 2023.

Share Repurchase Program

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. 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

We have a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code. U.S. full-time employees qualify for participation in the plan. Contribution to the plan is under our discretion. For the years ended December 31, 2023, 2022, and 2021, we contributed and expensed $15.0 million, $10.8 million, and $9.1 million, respectively, to the plan.

Defined Contribution Pension Plan

For other operations outside the United States, we have a defined contribution pension plan. We contribute up to 18% of total salary into the plan annually when employees contribute to the plan. For the years ended December 31, 2023, 2022, and 2021, we contributed and expensed $25.8 million, $24.7 million, and $18.3 million, respectively, to the plan.

12. Stock‑Based Compensation

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

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):

In future periods, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain employees.

Stock Options

A summary of our stock option activity is as follows:

(1) Includes assumed equity awards from the ironSource Merger.

A summary of intrinsic and fair values of our stock options is as follows (in thousands, except fair value amounts):

(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.

The calculated grant-date fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following assumptions:

Restricted Stock Units

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

(1) Includes assumed equity awards from the ironSource Merger.

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.

Price-Vested Units

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 tofour years and the achievement of a stock price hurdle during the relevant performance period that extends up toseven 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, andno units vested.

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

Employee Stock Purchase Plan

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:

Additional information related to the ESPP is provided below (in thousands, except per share amounts):

No shares were issued under the ESPP during the year ended December 31, 2021.

13. Income Taxes

Loss before provision for income taxes consisted of the following for the years ended December 31, 2023, 2022, and 2021 (in thousands):

The components of the provision for income taxes consists of the following for the years ended December 31, 2023, 2022, and 2021 (in thousands):

Reconciliations of the income tax provision at the U.S. federal statutory tax rate to the provision for income taxes are as follows (in thousands):

(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. statutory rate, losses that cannot be benefited due to the valuation allowance against the net deferred tax assets of our United States, Denmark, U.K., and China entities, base-erosion and anti-abuse tax ("BEAT") mainly arising as a result of the U.S. mandatory research and development capitalization rules. 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.

The types of temporary differences that give rise to significant portions of our deferred tax assets and liabilities as of December 31, 2023 and 2022 are set forth below (in thousands):

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. We regularly assess the ability to realize our deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including our history of losses, we believe that it is more likely than not that our U.S. federal, state, and certain foreign deferred tax assets will not be realized as of December 31, 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. The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which the valuation allowance is released. The valuation allowance against our U.S. federal, state and foreign deferred tax assets increased by $456 million and $64.5 million in the years ended December 31, 2023 and 2022, respectively. 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.

Our NOL carryforwards for U.S. 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 U.S. federal, state, and foreign NOL carryforwards, if not utilized, will begin to expire in 2032, 2025, and 2025, respectively. Our U.S. federal, state, and foreign research and development credit carryforwards were $103 million, $48.9 million and $3.4 million,

respectively. The U.S. federal credit carryforwards, if not utilized, will begin to expire in 2032, while the California credit carryforwards have no expiration. The foreign credit carryforwards, if not utilized, will begin to expire in 2043.

Federal and state tax laws impose restrictions on the utilization of NOL and research and development credit carryforwards in the event of a change in ownership of our business as defined by the Internal Revenue Code, Sections 382 and 383. Under Section 382 and 383 of the Code, substantial changes in our ownership may limit the amount of NOL and research and development credit carryforwards that are available to offset taxable income. The annual limitation would not automatically result in the loss of NOL or research and development credit carryforwards but may limit the amount available in any given future period.

We 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.

A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits, excluding accrued net interest and penalties, is as follows (in thousands):

As of December 31, 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, 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. The material jurisdictions in which we are subject to potential examination include the United States, Denmark, and Israel. Our 2012 and subsequent tax years remain open to examination by the Internal Revenue Service. Our 2019 and subsequent tax years remain open to examination in Israel and Denmark.

We believe that adequate amounts have been reserved in accordance with ASC 740 for any adjustments to the provision for income taxes or other tax items that may ultimately result from examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the taxing authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, or cash flows.

14. Net Loss per Share of Common Stock

Basic and diluted net loss per share is the same for all periods presented because the effects of potentially dilutive items were antidilutive given our net loss in each period.

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:

15. 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.