Unity Software Inc

UNITY SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Accounting Policies

Basis of Presentation and Consolidation

We prepared the accompanying unaudited condensed consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. The condensed 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. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, all adjustments, which include normal recurring adjustments necessary for a fair presentation, have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or other periods. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our 2023 Annual Report on Form 10-K.

Use of Estimates

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

Employee Separation and Restructuring Costs

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. Following these announcements, we incurred incremental employee separation costs of approximately $193 million in the first quarter of 2024, which included $126 million of incremental stock-based compensation. Additionally we incurred $19 million of restructuring costs, primarily related to office closures.

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")

Accounts Receivable, Net

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 condensed consolidated statement of operations. As of March 31, 2024 and December 31, 2023, the allowance for uncollectible amounts was $16.6 million and $16.9 million, respectively. For the three months ended March 31, 2024 and 2023, the provision for uncollectible amounts was $1.8 million and $2.9 million.

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 March 31, 2024, capitalized commissions, net of amortization, included in prepaid expenses and other and other assets were $6.4 million and $4.9 million, respectively. During the three months ended March 31, 2024, we recorded amortization costs of $2.4 million in sales and marketing expenses, as compared to $2.5 million during the three months ended March 31, 2023, respectively.

Contract Balances and Remaining Performance Obligations

Contract assets (unbilled receivables), primarily included in accounts receivable, net, are recorded when revenue is earned in advance of customer billing schedules. Unbilled receivables totaled $20.1 million and $31.3 million as of March 31, 2024 and December 31, 2023, respectively. Of this total as of March 31, 2024, $6.0 million was included in Other Long-Term Assets on our consolidated balance sheets.

Contract liabilities (deferred revenue) relate to payments received in advance of performance under the contract. Revenue recognized during the three months ended March 31, 2024 that was included in the deferred revenue balances at January 1, 2024 was $76.3 million.

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 March 31, 2024, were $357 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 $205 million or 57% of this revenue during the next 12 months.

3. Financial Instruments

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash 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, and restricted cash 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.

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 March 31, 2024 and December 31, 2023, such equity investments totaled $33.6 million. No adjustments to the carrying value of these equity investments were recorded for the three months ended March 31, 2024 and 2023.

4. Investment in Unity China

The results of Unity China, of which third-party investors hold a 20.5% ownership interest, are included in our condensed consolidated financial statements. Under certain conditions we may be required to repurchase the third-party interest in Unity China. The redeemable noncontrolling interests in Unity China are recorded as temporary equity on our condensed consolidated balance sheet.

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

5. Leases

We have operating leases for offices, which have remaining lease terms of up tonine years.

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 March 31, 2024 and December 31, 2023, our operating leases had a weighted-average remaining lease term of 5.0 years and 5.1 years, respectively, and a weighted-average discount rate of 5.2% and 5.2%, respectively.

As of March 31, 2024, our lease liabilities were as follows (in thousands):

6. Borrowings

Convertible Notes

As of March 31, 2024, we had $2.2 billion of unsecured convertible notes outstanding including $1.0 billion issued in November 2022 (the "2027 Notes") and $1.2 billion issued in November 2021 (the "2026 Notes"). 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 $6.0 million and $6.1 million for the three months ended March 31, 2024 and March 31, 2023, respectively.

As of March 31, 2024 and December 31, 2023, the estimated fair value of the 2027 Notes were approximately $1.1 billion and 1.3 billion, respectively, and the estimated fair value of the 2026 Notes were approximately $1.1 billion and 1.4 billion, respectively. 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 2026 Notes are convertible at the option of the holder if a conversion condition of the 2026 Notes is triggered. During the three months ended March 31, 2024, none of the conversion conditions of the 2026 Notes were triggered and the 2026 Notes were not convertible as of March 31, 2024. The 2027 Notes are convertible at the option of the holder prior to maturity. Upon conversion of the Notes, we will deliver cash, shares of our common stock, or a combination of cash and shares of our common stock,at our election. The conversion rates for the Notes is 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 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, upon the occurrence of certain corporate events and subject to certain exceptions, 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. The 2026 Notes are also redeemable at our option if certain conditions are met, as described in the Indenture governing the 2026 Notes.

As of March 31, 2024, 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.

Convertible Note Repurchase

During the first quarter of 2024, the Company repurchased in privately negotiated transactions and extinguished a portion of the 2026 Notes, with a total principal balance of $480 million. The aggregate repurchase price for these notes was $415 million, resulting in pre-tax gains of $61.4 million, net of the write-off of unamortized issuance costs. The gain was included in Interest income and other income (expense), net, in the condensed consolidated statement of operations.

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 with 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 adjustments in certain circumstances. 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 March 31, 2024, the Capped Call Transactions met the conditions for equity classification and were not in the money.

7. Commitments and Contingencies

The following table summarizes our non-cancelable contractual commitments as of March 31, 2024 (in thousands):

(1) Operating leases consist of obligations for real estate that are active.

(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 6, "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. 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.

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 March 31, 2024, 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.

Letters of Credit

We had $14.5 million and $13.9 million of secured letters of credit outstanding as of March 31, 2024 and December 31, 2023, 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 condensed consolidated balance sheets.

8. Stock‑Based Compensation

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

Included in the above expenses for the three months ended March 31, 2024, is $93 million of incremental stock-based compensation expense from modifications, primarily within general and administrative. These amounts predominately relate to the modification of awards held by the founders of ironSource Ltd. that departed in the first quarter of 2024.

Stock Options

A summary of our stock option activity is as follows:

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 restricted stock unit ("RSU"), including price-vested unit ("PVU"), activity is as follows:

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 three months ended March 31, 2024, the service period condition and stock price hurdle were not met.

Employee Stock Purchase Plan

The fair value of shares offered under our Employee Stock Purchase Plan ("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):

9. Income Taxes

Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate is subject to volatility due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in how we do business, and tax law developments.

Our effective tax rate for the three months ended March 31, 2024 differs from the U.S. federal statutory tax rate of 21% primarily due to the need to record a valuation allowance on U.S. losses, a tax benefit on foreign losses in connection with employee separation costs, and to a lesser extent tax expense on foreign earnings taxed at different rates. In addition, during the first quarter of 2024, we continued to restructure our tax operations which resulted in a reduction to our U.S. valuation allowance. Our effective tax rate for the three months ended March 31, 2023 differed from the U.S. federal statutory tax rate of 21% primarily due to the need to record a valuation allowance in the U.S. on losses and to a lesser extent, tax expense on foreign earnings taxed at different rates. In addition, the Company undertook certain tax restructuring efforts during the period 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.

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. In performing this assessment with respect to each jurisdiction, we review all available positive and negative evidence. Primarily due to our history of losses, we believe that it is more likely than not that the deferred tax assets of our U.S. federal, certain U.S. states, Denmark, U.K., and other non-U.S. jurisdictions will not be realized and we have maintained a full valuation allowance against such deferred tax assets.

As of March 31, 2024, we had $184.3 million of gross unrecognized tax benefits, of which $29.7 million would impact the effective tax rate, if recognized. It is reasonably possible that the amount of unrecognized tax benefits as of March 31, 2024 could increase or decrease significantly as the timing of the resolution, settlement, and closure of audits is highly uncertain. We believe that we have adequately provided for any reasonably foreseeable outcome related to our tax audits and that any settlement will not have a material impact on our financial condition and operating results at this time.

10. 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 common stock excluded from the computation of diluted net loss per share (in thousands) because the impact of including them would have been antidilutive: