Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in "Part I, Item 1A. Risk Factors" included elsewhere in this report. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the section titled "Note Regarding Forward-Looking Statements" in this report. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussion of 2019 and year-over-year comparisons between fiscal 2020 and 2019 that are not included in this Form 10-K can be found under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , that was filed with theSEC onMarch 5, 2021 .
Overview
Unity is the world’s leading platform for creating and exploiting interactive RT3D content.
Our platform provides a complete set of software solutions to create, run and monetize real-time interactive 2D and 3D content for mobile phones, tablets, PCs, consoles and augmented and virtual reality devices.
Our platform consists of two distinct, but connected and synergistic, sets of solutions: Create Solutions and Operate Solutions. Our Create Solutions are used by content creators-developers, artists, designers, engineers, and architects-to create interactive, real-time 2D and 3D content. Content can be created once and deployed to more than 20 platforms, including Windows, Mac, iOS, Android, PlayStation, Xbox, Nintendo Switch, and the leading augmented and virtual reality platforms, among others. Our Operate Solutions offer customers the ability to grow and engage their end-user base, as well as run and monetize their content with the goal of optimizing end-user acquisition and operational costs, while increasing the lifetime value of their end users. We launched our first game development engine in 2004, bringing together a set of tools, such as rendering, lighting, physics, sound, animation, and user interface, that were designed to address the challenges faced by most game developers. Prior to Unity, developers primarily created these tools individually and repetitively across different target platforms, which was an expensive and time-consuming process. Unity made game development easier and faster. In the year endedDecember 31, 2021 , we built upon our history of innovation by achieving a number of milestones that secured our position as the leading platform for creating and operating interactive, RT3D content including those identified below. •Unity's Operate Solutions continued to command attention: In 2021, Operate Solutions contributed to the stability and success of more than 200 thousand games. Use of Unity monetization services drove more than 2 billion net-new installs, and as cross-platform, multiplayer games became more mainstream, our Multiplay andVivox offerings continue to grow. They supported some of the most successful game launches last year including Amazon'sNew World and Splitgate by 1,047 Games. 64
-------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. •Unity's Create Solutions accelerated throughout the year: Create Solutions experienced a strong year across games and non-gaming. In late 2021 particularly,AAA publishers and platform providers launched made with Unity games, including Riot Games' Ruined King: ALeague of Legends Story . Unity continued to expand market share within the top 1,000 mobile games in 2021. Outside of gaming, Unity's RT3D capabilities led to more customers across industries and use-cases to implement Unity software as part of their digital strategies. For example, Hyundai Motors and Unity partner to connect a physical factory with its digital twin to enhance plant management, drive productivity and innovate in the manufacturing process. eBay partnered with unity to enable sellers to showcase the actual item they are selling in Unity's proprietary, interactive 360-view. •Unity expanded its addressable market through strategic acquisitions and product innovations: In 2021, Unity added key capabilities and expanded its addressable market with key acquisitions, heavily focused on supporting artists. In the remote collaboration space, Unity brought on remote access platform Parsec and SyncSketch, which enables cloud-based, secure collaboration between separated creators and artists. With certain tools and technologies fromWeta Digital , Interactive Data Visualization (makers of SpeedTree), and most recently, Ziva Dynamics, Unity aims to democratize access to some of artistry's most exclusive tools and services via the cloud. On the product front, Unity introduced Unity Game Services, which unifies existing solutions and introduces new tools and services to simplify launching cross-platform, multiplayer games. These initiatives expanded the company's total addressable market, increased its serviceable market and strengthened the value of the Unity platform to customers.
We continue to invest in research and development and seek selective acquisitions and partnerships to enhance and expand our platform.
Impact of COVID-19
While our total revenue, cash flows, and overall financial condition have not been adversely impacted to date, the COVID-19 pandemic has caused general business disruption worldwide beginning inJanuary 2020 . The full extent to which the COVID-19 pandemic, including any new strains or mutations such as the delta or omicron variants, will directly or indirectly impact our business, results of operations, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Although we experienced a modest adverse impact on our sales of Create Solutions as well as our Strategic Partnerships in 2020, our pipeline of customer opportunities for our Create Solutions and Strategic Partnerships were largely back to normal levels by the end of 2020 and we have not experienced COVID-19 related impacts on our Create Solutions during 2021. We did see an increase in demand for our portfolio of products and services within Operate Solutions following the implementation of shelter-in-place orders to mitigate the outbreak of COVID-19, which resulted in higher levels of end-user engagement in Operate Solutions and an increase in revenue, along with a decrease in operating expense due to materially reduced travel and spending on events and facilities, which moderated over time. This increased demand for our Operate Solutions will likely continue to moderate over time, particularly as vaccines are becoming widely available, and as shelter-in-place orders and other related measures and community practices evolve. As restrictions related to COVID-19 ease, we expect travel and spending on events and facilities to increase. In response to the COVID-19 pandemic, we are also requiring or have required substantially all of our employees to work remotely to minimize the risk of the virus to our employees and the communities in which we operate. We are currently planning for most of our employees to return to in-person offices later in 2022, however our plans may change if the number of COVID-19 cases rises where our offices are located or if there is an increase in new strains such as the delta or omicron variants, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners. 65 -------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. The global impact of the COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations closely. We do not yet know the full extent of potential impacts on our business or operations or on the global economy as a whole, particularly as the COVID-19 pandemic persists. The return of more in-person activities will result in an increase in our expenses and could result in a range of impacts to our customers, which could impact our business. Given the uncertainty, we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition. For additional details, refer to the section titled "Risk Factors."
Key indicators
We monitor the following key metrics to help us assess the health of our business, identify trends affecting our growth, formulate goals and objectives, and make strategic decisions.
Clients contributing more than
We have a history of strong growth in our customer base. We focus on the number of customers that generated more than$100,000 of revenue in the trailing 12 months, as this segment of our customer base represents the majority of our revenue and revenue growth. We expect that trend to continue. We define a customer as an individual or entity that generated revenue during the measurement period. A single organization with multiple divisions, segments, or subsidiaries is generally counted as a single customer, even though we may enter into commercial agreements with multiple parties within that organization. We had 1,052, 793, and 600 of such customers in the trailing 12 months as ofDecember 31, 2021 , 2020, and 2019, respectively, demonstrating our ability to grow our revenues with existing customers, and our strong and growing penetration of larger enterprises, includingAAA gaming studios and large organizations in industries beyond gaming. While these customers represented the substantial majority of revenue for the years endedDecember 31, 2021 , 2020, and 2019, respectively, no one customer accounted for more than 10% of our revenue for either year.
Net expansion rate in dollars
Our ability to drive growth and generate incremental revenue depends, in part,
on our ability to maintain and grow our relationships with our Create and
Operate Solutions customers and to increase their use of our platform. We track
our performance by measuring our dollar-based net expansion rate, which compares
our Create and Operate Solutions revenue from the same set of customers across
comparable periods, calculated on a trailing 12-month basis.
Our dollar-based net expansion rate as of a period end is calculated as current
period revenue divided by prior period revenue. Prior period revenue is the
trailing 12-month revenue measured as of such prior period end and includes
revenue from all customers that contributed revenue during such trailing
12-month period. Current period revenue is the trailing 12-month revenue from
these same customers as of the current period end. Our dollar-based net
expansion rate includes the effect of any customer renewals, expansion,
contraction, and churn but excludes revenue from new customers in the current
period.
As of December 31,
2021 2020 2019
Dollar-based net expansion rate 140 % 138 % 133 %
Our dollar-based net expansion rate as of December 31, 2021 , 2020, and 2019 was
driven primarily by the sales of additional subscriptions and services to our
existing Create Solutions customers, expanded consumption among our existing
Operate Solutions customers, and improvements in cross-selling our solutions to
all of our customers.
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-------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. The chart below illustrates our strong relationship with existing customers by presenting our dollar-based net expansion rate as of the end of each of the past eight quarters. [[Image Removed: unity-20211231_g2.jpg]]
Operating results
The following table summarizes the historical data for our Consolidated Statements of Income for the periods indicated (in thousands):
Year Ended December 31,
2021 2020 2019
Revenue $ 1,110,526 $ 772,445 $ 541,779
Cost of revenue 253,630 172,347 118,597
Gross profit 856,896 600,098 423,182
Operating expenses
Research and development 695,710 403,515 255,928
Sales and marketing 344,939 216,416 174,135
General and administrative 347,912 254,979 143,788
Total operating expenses 1,388,561 874,910 573,851
Loss from operations (531,665) (274,812) (150,669)
Interest expense (1,131) (1,520) -
Interest income and other expense, net 1,566 (3,885) (2,573)
Loss before provision for income taxes (531,230) (280,217) (153,242)
Provision for income taxes 1,377 2,091 9,948
Net loss $ (532,607) $ (282,308) $ (163,190)
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The following table shows the data components of our Consolidated Statements of Income as a percentage of revenue for the periods indicated:
Year Ended December 31,
2021 2020 2019
Revenue 100 % 100 % 100 %
Cost of revenue 23 22 22
Gross margin 77 78 78
Operating expenses
Research and development 63 52 47
Sales and marketing 31 28 32
General and administrative 31 33 27
Total operating expenses 125 113 106
Loss from operations (48) (36) (28)
Interest expense - - -
Interest income and other expense, net - (1) -
Loss before provision for income taxes (48) (37) (28)
Provision for income taxes - - 2
Net loss (48) % (37) % (30) %
Revenue
We derive revenue from Creating Solutions, Operating Solutions, and Strategic and Other Partnerships.
Create Solutions
We generate revenue from Create Solutions primarily through the sale of subscription fee arrangements for the use of our products and related support services.
We offer subscription plans at various price points and recognize revenue over a service period that generally ranges from one to three years. We typically bill our customers on a monthly, quarterly or annual basis, depending on the size of the contract. As a result of billing our customers in advance, we record deferred revenue, and a portion of the revenue we report in each period is attributable to the recognition of deferred revenue related to subscription and support agreements that we entered into during previous periods.
We generate additional revenue from Create Solutions through the sale of professional services to our subscriber clients. These services primarily consist of consulting, integration, training, and development of custom applications and workflows, and can be billed in advance or on a time and material basis.
Operating solutions
We generate Operate Solutions revenue through a combination of revenue-share and
consumption-based business models that we manage as a portfolio of products and
services.
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-------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. Our monetization products are primarily based on a revenue-share model. These products were introduced in 2014 as our first set of Operate Solutions products and currently account for a substantial majority of our Operate Solutions revenue. We recognize monetization revenue when an end user installs an application after seeing an advertisement (contracted on a cost-per-install basis), and when an advertisement starts (contracted on a cost-per-impression basis). Our revenue represents the amount we retain from the transaction we are facilitating through our Unified Auction. Actions by operating system platform providers or application stores such as Apple or Google may affect the manner in which we or our customers collect, use and share data from end-user devices. For example, Apple recently implemented a requirement for applications using its mobile operating system, iOS, to affirmatively (on an opt-in basis) obtain an end user's permission to "track them across apps or websites owned by other companies" or access their device's advertising identifier for advertising and advertising measurement purposes, as well as other restrictions. If end-users do not opt-in to participate in such tracking as defined by Apple, our ability to monetize through advertising could suffer. The long-term impact of these and other privacy and regulatory changes remains uncertain. We also provide cloud-based services to support the ongoing operation of games and applications. These include application hosting services, as well as end-user engagement tools and voice chat services. These services are generally sold based on consumption and billed monthly in arrears. Some of our consumption-based contracts include a minimum fixed-fee consumption amount. We expect that our Operate Solutions beyond monetization, including cloud operations and hosting services, such as Multiplay, which we introduced in 2018, will grow as a percentage of our revenue in the long term as we further scale newer products and services and as we launch additional solutions for gaming customers as well as customers in other industries.
Strategic and other partnerships
We generate Strategic Partnerships revenue primarily from partnership contracts with hardware, operating system, device, game console, and other technology providers. Typically, we recognize revenue from these contracts as services are performed. These partnerships are typically multi-year software development arrangements with payments that are either made in advance on a quarterly basis or milestone-based. In addition, certain partners pay us royalties based on the sales of applications sold on their platform that incorporate or use our customized software. We generate Other revenue primarily from our share of sales from ourAsset Store , a marketplace and scaled aggregator for software, content, and tools used in the creation of real-time interactive games and applications, and from ourVerified Solutions Partners , which sell software and tools certified for quality and compatibility with our platform. 69 -------------------------------------------------------------------------------- Table of Contents Unity Software Inc. Our total revenue is summarized as follows (in thousands, except percentages): Year Ended Year Ended December 31, Change December 31, Change 2021 2020 Amount % 2020 2019 Amount % Create Solutions$ 326,636 $ 231,314 $ 95,322 41 %$ 231,314 $ 168,626 $ 62,688 37 % Operate Solutions 709,140 471,161 237,979 51 %$ 471,161 $ 293,317 $ 177,844 61 % Strategic Partnerships and Other 74,750 69,970 4,780 7 %$ 69,970 $ 79,836 $ (9,866) (12) % Total revenue$ 1,110,526 $ 772,445 $ 338,081 44 %$ 772,445 $ 541,779 $ 230,666 43 % The increase in revenue in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 was substantially due to revenue growth among existing customers. In the year endedDecember 31, 2021 , the increase in revenue was primarily due to an increase in revenue from our Create Solutions and Operate Solutions. Create Solutions revenue growth was largely attributable to an increase in new customers, as well as expansion of existing customers. Within Operate Solutions, the substantial majority of our revenue growth was driven by an increase in revenue per customer as customers increased their consumption across our Operate portfolio of products and services due in part to the higher levels of end-user engagement as a result of strong product and sales execution. We also saw an increase in new customers within Operate Solutions.
Cost of revenue, gross profit and gross margin
Cost of revenue consists primarily of hosting expenses, personnel costs (including salaries, benefits, and stock-based compensation) for employees associated with our product support and professional services organizations, allocated overhead (including facilities, IT, and security costs), third-party license fees, and credit card fees, as well as amortization of related capitalized software and depreciation of related property and equipment. Gross profit, or revenue less cost of revenue, has been and will continue to be affected by various factors, including our product mix, the costs associated with third-party hosting services, and the extent to which we expand and drive efficiencies in our hosting costs, professional services, and customer support organizations. We expect our gross profit to increase in absolute dollars, but we expect our gross profit as a percentage of revenue, or gross margin, to fluctuate from period to period.
Our cost of sales, gross profit and gross margin are summarized as follows (in thousands, except percentages):
Year Ended Year Ended
December 31, Change December 31, Change
2021 2020 Amount % 2020 2019 Amount %
Cost of revenue $ 253,630 $ 172,347 $ 81,283 47 % $ 172,347 $ 118,597 $ 53,750 45 %
Gross profit $ 856,896 $ 600,098 $ 256,798 43 % $ 600,098 $ 423,182 $ 176,916 42 %
Gross margin 77 % 78 % (1) % 78 % 78 % - %
Cost of revenue for the year ended December 31, 2021 increased primarily due to
an increase of $43.0 million in personnel-related expense driven by higher
stock-based compensation expense of $14.2 million as headcount increased to
support our Create Solutions and Strategic Partnerships. IT hosting expense also
increased by $21.5 million to support growth in our Create and Operate
solutions.
Functionnary costs
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. The most significant component of our
operating expenses is personnel-related costs, including salaries and wages,
sales commissions, bonuses, benefits, stock-based compensation, and payroll
taxes.
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Research and Development
Research and development expenses primarily consist of personnel-related costs
for the design and development of our platform, third-party software services,
professional services, and allocated overhead. We expense research and
development expenses as they are incurred. We expect our research and
development expenses to increase in absolute dollars and may fluctuate as a
percentage of revenue from period to period as we expand our teams to develop
new products, expand features and functionality with existing products, and
enter new markets.
Research and development expense is summarized as follows (in thousands, except
percentages):
Year Ended Year Ended
December 31, Change December 31, Change
2021 2020 Amount % 2020 2019 Amount %
Research and development $ 695,710 $ 403,515 $ 292,195 72 % $ 403,515 $ 255,928 $ 147,587 58 %
Research and development expense for the year ended December 31, 2021 increased
primarily due to an increase of $239.1 million in personnel-related expenses,
including higher stock-based compensation expense of $99.6 million as headcount
increased to support continued product innovation. IT hosting expense increased
by $26.7 million due to growing data and compute needs.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs;
advertising and marketing programs, including digital account-based marketing,
user events such as developer-centric conferences and our annual Unite user
conferences; and allocated overhead. We expect that our sales and marketing
expense will increase in absolute dollars as we hire additional personnel,
increase our account-based marketing, direct marketing and community outreach
activities, invest in additional tools and technologies, and continue to build
brand awareness. Our expenses may fluctuate as a percentage of revenue from
period to period.
Sales and marketing expense is summarized as follows (in thousands, except
percentages):
Year Ended Year Ended
December 31, Change December 31, Change
2021 2020 Amount % 2020 2019 Amount %
Sales and marketing $ 344,939 $ 216,416 $ 128,523 59 % $ 216,416 $ 174,135 $ 42,281 24 %
Sales and marketing expense for the year ended December 31, 2021 increased
primarily due to an increase of $97.9 million in personnel-related expenses,
including higher stock-based compensation expense of $46.9 million as headcount
increased to support the growth of our sales and marketing teams. In addition,
advertisement expenditures on various social media platforms increased by
$8.4 million .
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General and Administrative
Our general and administrative expenses primarily consist of personnel-related
costs for finance, legal, human resources, IT, and administrative employees;
professional fees for external legal, accounting, and other professional
services; and allocated overhead. We expect that our general and administrative
expenses will increase in absolute dollars and may fluctuate as a percentage of
revenue from period to period as we scale to support the growth of our business.
General and administrative expense is summarized as follows (in thousands,
except percentages):
Year Ended Year Ended
December 31, Change December 31, Change
2021 2020 Amount % 2020 2019 Amount %
General and administrative $ 347,912 $ 254,979 $ 92,933 36 % $ 254,979 $ 143,788 $ 111,191 77 %
General and administrative expense for the year ended December 31, 2021
increased primarily due to a one-time charge of $49.8 million for the
termination of a future lease contract, including associated construction in
progress write-offs. Personnel-related costs also increased $80.6 million ,
including higher stock-based compensation expense of $51.9 million primarily
related to an increase in headcount to support the growth of our finance,
accounting, human resources, IT, and legal functions, as well as the incremental
equity award modification expense associated with the separation of our former
Chief Financial Officer. In addition, professional and insurance expense
increased $30.9 million due to increased administrative costs as part of being a
public company, in addition an increase in costs related to our business
combinations. The increase in expense was partially offset by a one-time charge
of $63.6 million related to the donation of our common stock to a charitable
foundation during the year ended December 31, 2020 .
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Interest Expense
Interest expense consists primarily of interest expense associated with our
Credit Agreement. Interest expense is summarized as follows (in thousands,
except percentages):
Year Ended Year Ended
December 31, Change December 31, Change
2021 2020 Amount % 2020 2020 2019 Amount %
Interest expense $ (1,131) $ (1,520) $ 389 (26) % $ (1,520) $ (1,520) $ - $ (1,520) *
* Not meaningful
Interest expense was accrued during the year ended
Interest income and other expenses, net
Interest income and other expense, net, consists primarily of interest income
earned on our cash, cash equivalents, and marketable securities, amortization of
premium arising at acquisition of marketable securities, foreign currency
remeasurement gains and losses, and foreign currency transaction gains and
losses. As we have expanded our global operations, our exposure to fluctuations
in foreign currencies has increased, and we expect this to continue.
Interest income and other expense, net, is summarized as follows (in thousands,
except percentages):
Year Ended Year Ended
December 31, Change December 31, Change
2021 2020 Amount % 2020 2019 Amount %
Interest income and
other expense, net $ 1,566 $ (3,885) $ 5,451 (140) % $ (3,885) $ (2,573) $ (1,312) 51 %
Interest income and other charges, net, for the year ended
increased mainly due to currency revaluation gains.
Provision for income taxes
Provision for income taxes consists primarily of income taxes in certain foreign
jurisdictions where we conduct business. We have a valuation allowance against
certain of our deferred tax assets, including NOL carryforwards and tax credits
related primarily to research and development. Our overall effective income tax
rate in future periods may be affected by the geographic mix of earnings in the
countries in which we operate. Our future effective tax rate may also be
affected by changes in the valuation of our deferred tax assets or liabilities,
or changes in tax laws, regulations, or accounting principles in the
jurisdictions in which we conduct business. See Note 14, "Income Taxes," of the
Notes to Consolidated Financial Statements.
Provision for income taxes is summarized as follows (in thousands, except
percentages):
Year Ended Year Ended
December 31, Change December 31, Change
2021 2020 Amount % 2020 2019 Amount %
Provision for
income taxes $ 1,377 $ 2,091 $ (714) (34) % $ 2,091 $ 9,948 $ (7,857) (79) %
Provision for income taxes for the year ended December 31, 2021 decreased
primarily due to the tax benefit recognized as a result of a partial release of
our valuation allowance against our deferred tax assets in connection with
business combinations, partially offset by a one time tax expense recognized
from an intercompany transaction with our subsidiary in Israel .
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Non-GAAP Financial Measures
To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use certain non-GAAP performance financial measures, as described below, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe the following non-GAAP measures are useful in evaluating our operating performance. We are presenting these non-GAAP financial measures because we believe, when taken collectively, they may be helpful to investors because they provide consistency and comparability with past financial performance. In the future, we may also exclude non-recurring expenses and other expenses that do not reflect our overall operating results. However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. As a result, our non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered in isolation or as a substitute for our consolidated financial statements presented in accordance with GAAP.
Non-GAAP gross profit and non-GAAP operating loss
We define non-GAAP gross profit as gross profit excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense. We define non-GAAP loss from operations as loss from operations excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense. We use non-GAAP gross profit and non-GAAP loss from operations in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that non-GAAP gross profit and non-GAAP loss from operations provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as these metrics exclude stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, a one-time expense for the termination of a future lease agreement, and non-cash charitable contribution expense, which we do not consider to be indicative of our overall operating performance.
Non-GAAP gross profit and non-GAAP operating loss have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analyzing our results as reported under the GAAPs. Some of these limitations are:
•they exclude expense associated with our equity compensation plan, although
equity compensation has been, and will continue to be, an important part of our
compensation strategy;
•non-GAAP loss from operations excludes the expense of amortization of acquired
intangible assets, and although these are non-cash expenses, the assets being
amortized may have to be replaced in the future and non-GAAP loss from
operations does not reflect cash expenditure for such replacements;
•non-GAAP loss from operations excludes the expense associated with the
charitable contribution of common stock to a donor-advised fund, and although
this is a non-cash expense, we may make similar charitable contributions in the
future;
•non-GAAP loss from operations excludes the one-time expense for the termination
of a future lease agreement, although there is no guarantee that the company
will not incur similar expenses in the future; and
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•the expenses and other items that we exclude in our calculation of non-GAAP
gross profit and non-GAAP loss from operations may differ from the expenses and
other items, if any, that other companies may exclude from this measure or
similarly titled measures, which reduces their usefulness as comparative
measures.
The following table presents a reconciliation of our non-GAAP gross profit to
our GAAP gross profit, the most directly comparable measure as determined in
accordance with GAAP, for the periods presented (in thousands):
Year Ended
December 31,
2021 2020 2019
GAAP gross profit $
856 896
Add: Stock-based compensation expense
24,811 10,626 $ 3,198 Employer tax related to employee stock transactions 5,434 1,117 193 Amortization of intangible assets expense 2,274 - - Non-GAAP gross profit$ 889,415 $ 611,841 $ 426,573 GAAP gross margin 77 % 78 % 78 % Non-GAAP gross margin 80 % 79 % 79 %
The year-over-year increase in non-GAAP gross margin in 2021 compared to 2020 was primarily due to strong product optimizations and lower unit costs in Operate Solutions as well as lower platform costs to support strategic partnerships.
The following table presents a reconciliation of our non-GAAP loss from
operations to our GAAP loss from operations, the most directly comparable
measure as determined in accordance with GAAP, for the periods presented (in
thousands):
Year Ended
December 31,
2021 2020 2019
GAAP loss from operations $ (531,665) $ (274,812) $ (150,669)
Add:
Stock-based compensation expense 347,159 134,629 44,480
Employer tax related to employee stock
transactions 50,574 8,176 2,808
Amortization of intangible assets expense 33,483 17,755 11,570
Lease termination expense 49,795 - -
Charitable contribution to donor-advised fund - 63,615 -
Non-GAAP loss from operations $ (50,654) $ (50,637) $ (91,811)
The year-over-year change in our non-GAAP loss from operations in 2021 compared
to 2020 was relatively flat due to strong product optimizations and lower unit
costs in Operate Solutions as well as lower platform costs to support Strategic
Partnerships. This was partially offset by higher personnel-related costs,
driven by an increase in headcount across the entire company to support the
growth in the business, as well as an increase in IT hosting costs to support
growth in our Operate Solutions and our growing data and compute needs.
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Non-GAAP net loss and non-GAAP net loss per share
We define non-GAAP net loss and non-GAAP net loss per share as net loss and net loss per share excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense, a one-time expense for the termination of a future lease agreement, and non-cash charitable contribution expense, as well as the related tax effects of these items. Non-GAAP net loss per share also adds back expense relating to deemed dividends representing excess paid over initial issuance price to repurchase convertible preferred stock. We use non-GAAP net loss and non-GAAP net loss per share in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that these non-GAAP measures provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations.
Non-GAAP net loss and non-GAAP net loss per share have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:
•they exclude expense associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy; •they exclude the expense of amortization of acquired intangible assets, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and non-GAAP loss from operations does not reflect cash expenditure for such replacements; •they exclude the expense associated with the charitable contribution of common stock to a donor-advised fund, and although this is a non-cash expense, we may make similar charitable contributions in the future;
•they exclude the one-time expense for the termination of a future lease, although there is no guarantee that the company will not incur similar expenses in the future;
• as described in more detail below, we must make certain assumptions in order to determine the tax effect adjustment for non-GAAP net loss, which assumptions may not turn out to be accurate; and
•the expenses and other items that we exclude in our calculation of non-GAAP net loss and non-GAAP net loss per share may differ from the expenses and other items, if any, that other companies may exclude from this measure or similarly titled measures, which reduces their usefulness as comparative measures.
Tax implications of non-GAAP adjustments
We utilize a fixed projected tax rate in our computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this non-GAAP tax rate, we utilize a financial projection that excludes the direct impact of the non-GAAP adjustments described above, and eliminates the effects of non-recurring and period specific items which can vary in size and frequency. The projected rate considers other factors such as our current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where we operate. For the years endedDecember 31, 2021 ,December 31, 2020 , andDecember 31, 2019 , the non-GAAP tax rate was (22)%, (17)%, and (20)%, respectively. 76 -------------------------------------------------------------------------------- Table of Contents Unity Software Inc. The following table presents a reconciliation of our non-GAAP net loss and non-GAAP net loss per share to our GAAP net loss and GAAP net loss per share, respectively, which are the most directly comparable measures as determined in accordance with GAAP, for the periods presented (in thousands, except per share data): Year Ended December 31, 2021 2020 2019 GAAP net loss$ (532,607) $ (282,308) $ (163,190) Add: Stock-based compensation expense 347,159 134,629 44,480 Employer tax related to employee stock transactions 50,574 8,176 2,808 Amortization of intangible assets expense 33,483 17,755 11,570 Lease termination expense 49,795 - - Charitable contribution to donor-advised fund - 63,615 - Income tax effect of non-GAAP adjustments (10,182) (7,437) (8,671) Non-GAAP net loss$ (61,778)
GAAP net loss per share attributable to our common stockholders, basic and diluted
$ (1.89) $ (1.66) $ (2.39) Total impact on net loss per share, basic and diluted, from non-GAAP adjustments 1.67 1.27 0.44 Non-GAAP net loss per share attributable to our common stockholders, basic and diluted $
(0.22)
Weighted-average common shares used in GAAP net loss per share computation, basic and diluted 282,195 169,973 114,442 Weighted-average common shares used in non-GAAP net loss per share computation, basic and diluted 282,195 169,973 114,442 Free Cash Flow We define free cash flow as net cash provided by (used in) operating activities less cash used for purchases of property and equipment. We believe that free cash flow is a useful indicator of liquidity as it measures our ability to generate cash, or our need to access additional sources of cash, to fund operations and investments.
Free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:
•it does not replace the net cash used in operating activities;
•other companies may calculate free cash flow or similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a tool for comparison; and
•the usefulness of free cash flow is further limited because it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period.
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The following table presents a reconciliation of free cash flow to net cash
provided by (used in) operating activities, the most directly comparable measure
as determined in accordance with GAAP, for the periods presented (in thousands):
Year Ended
December 31,
2021 2020 2019
Net cash provided by (used in) operating
activities $ (111,449) $ 19,913 $ (67,936)
Less:
Purchase of property and equipment (41,938) (40,156) (27,035)
Free cash flow $ (153,387) $ (20,243) $ (94,971)
Net cash used in investing activities $ (1,837,360) $ (575,190) $ (219,541)
Net cash provided by financing activities $ 1,721,002
The year-over-year decrease in free cash flow was primarily due to the payment of the corporate bonus for the year endedDecember 31, 2020 , our net loss, higher payroll taxes on stock-based compensation, a one-time payment related to our real estate, prepayments of software licenses, and an increase in working capital as our business grows.
Cash and capital resources
Since inception, we have financed our operations primarily through the net proceeds we have received from the sales of our convertible preferred stock and common stock and through payments received from customers using our platform. As ofDecember 31, 2021 , our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling$1.7 billion , which were primarily held for working capital purposes. Our cash equivalents and marketable securities are invested primarily in fixed income securities, including government and investment-grade debt securities and money market funds. InNovember 2021 , we also received net proceeds of approximately$1.7 billion from the issuance of convertible notes, after deducting$22.6 million of debt issuance costs and$48.1 million of payments made to enter into the related capped call transactions.
Our significant cash requirements arising from contractual and other obligations known to
Payments Due by Period
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
Operating leases (1) $ 132,533 $ 28,193 $ 62,619 $ 10,174 $ 31,547
Purchase commitments (2) 692,215 116,865 279,744 295,606 -
Convertible note (3) 1,725,000 -
- 1,725,000 - Total (4)$ 2,549,748 $ 145,058 $ 342,363 $ 2,030,780 $ 31,547
(1) Obligations under operating leases mainly consist of obligations relating to real estate.
(2) The vast majority of our purchase commitments relate to agreements with our data center hosting providers.
(3) Convertible note maturing in 2026. Refer to footnote 10 for more details.
(4) This table excludes amounts related to income tax liabilities for uncertain tax positions, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities. Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of$1.3 billion as ofDecember 31, 2021 . We expect to continue to incur operating losses for the foreseeable future due to the investments we will continue to make in research and development, sales and marketing, and general and administrative. As a result, we may require additional capital to execute our strategic initiatives to grow our business. 78 -------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. We believe our existing sources of liquidity will be sufficient to meet our working capital and capital expenditures for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions. Our future capital requirements, however, will depend on many factors, including our growth rate; the timing and extent of spending to support our research and development efforts; capital expenditures to build out new facilities and purchase hardware and software; the expansion of sales and marketing activities; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in complementary products, teams and technologies, including intellectual property rights, which could increase our cash requirements. As a result of these and other factors, we may choose or be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.
Changes in our cash flows are as follows (in thousands):
Year
Ended
2021 2020 2019 Net cash provided by (used in) operating activities$ (111,449) $ 19,913 $ (67,936) Net cash used in investing activities (1,837,360) (575,190) (219,541) Net cash provided by financing activities 1,721,002 1,701,455 161,472 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash 459 673 (172) Net change in cash, cash equivalents, and restricted cash$ (227,348) $
1,146,851
Cash provided by (used in) operating activities
During the year endedDecember 31, 2021 , net cash used in operating activities was$111.4 million and was primarily due to the payment of the corporate bonus for our fiscal year endedDecember 31, 2020 , our net loss, higher payroll taxes on stock-based compensation, prepayments of software licenses, an increase in working capital as our business grows, and a one-time payment related to our real estate. During the year endedDecember 31, 2020 , cash provided by operating activities was$19.9 million , which consisted of a net loss of$282.3 million , adjusted by non-cash charges of$244.5 million and net cash inflows from the change in net operating assets and liabilities of$57.8 million . The non-cash charges primarily consisted of depreciation and amortization of$43.0 million , stock-based compensation of$134.6 million , and a common stock charitable donation expense of$63.6 million .The net cash inflows from the change in our net operating assets and liabilities was primarily due to a$41.6 million increase in accrued expenses and other current liabilities, a$44.6 million increase in publisher payables, and a$37.4 million increase in deferred revenue. This was partially offset by a$63.3 million increase in accounts receivable and a$13.0 million increase in other current assets. For the years endedDecember 31, 2021 and 2020, a substantial portion of our accounts receivable balance comes from advertising partners and is offset by an accounts payable amount due to our publishers (Operate Solutions customers). However, the payment terms that we offer our advertising partners are generally shorter than the payment terms with our publishers (Operate Solutions customers). As such, our cash flows fluctuate from period to period due to revenue seasonality, timing of billings, collections, and publisher payments. Historical cash flows are not necessarily indicative of our results in any future period. 79 -------------------------------------------------------------------------------- Table of ContentsUnity Software Inc.
Cash used in investing activities
During the year endedDecember 31, 2021 , cash used in investing activities was$1.8 billion , consisting of the purchase of marketable securities of$519.7 million , cash used in acquisitions of$1.6 billion , and capital expenditures of$41.9 million , partially offset by proceeds of$309.0 million from marketable security principal repayments and maturities.
During the year ended
Cash provided by financing activities
During the year endedDecember 31, 2021 , cash provided by financing activities was$1.7 billion and consisted of$1.7 billion in net proceeds received from the issuance of the convertible notes, after deducting debt issuance costs of$22.6 million and$48.1 million of payments made to enter into the related capped call transactions, and$66.7 million of proceeds from the exercise of stock options. During the year endedDecember 31, 2020 , cash provided by financing activities was$1.7 billion , primarily consisting of net proceeds of$1.4 billion from our initial public offering, net proceeds of$250.0 million from the issuance of convertible preferred stock and common stock, proceeds of$125.0 million from the revolving credit facility, and proceeds of$25.4 million from the exercise of stock options. The net cash outflows from financing activities was primarily due to the$125.0 million repayment of principal on our revolving credit facility.
Significant Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. These principles require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other assumptions that we believe are reasonable under the circumstances. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. The critical accounting estimates, assumptions and judgements that we believe have the most significant impact on our consolidated financial statements are described below. Revenue Recognition We generate revenue through three sources: (1) Create Solutions, which is composed primarily of our subscription offerings and professional services; (2) Operate Solutions, which includes our monetization services, hosting, and multiplayer services, and voice services; and (3) Strategic Partnerships and Other, which are primarily arrangements with strategic hardware, operating system, device, game console, and other technology providers for the customization and development of our software to enable interoperability with these platforms.
We measure and recognize revenue by:
• identify the contract(s) with the customer;
• identify the performance obligation(s) in the contract(s);
•determine the price of the transaction;
• allocate the transaction price to the performance obligations in the contract(s); and
•recognize revenue as each performance obligation is satisfied by transferring a promised good or service to a customer, which we call a transfer of control.
80 -------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. Our contracts are generally non-cancellable. Once we have determined the transaction price, the total transaction price is allocated to each performance obligation in the contract on a relative stand-alone selling price basis, or SSP. The determination of SSP for each distinct performance obligation requires judgment. Generally, we determine SSP using observable pricing, which takes into consideration market conditions and customer specific factors. When observable pricing is not available, we use cost plus margin analysis to determine SSP. Revenue is recognized upon the transfer of control of promised products and services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We use the output method for our Create Solutions and Operate Solutions contracts, and generally use the input method for ourStrategic Partnership contracts. We determined that these methods are the most appropriate measure of progress as they faithfully represent when the value of the services are simultaneously received and consumed by the customer, and control is transferred. For advertisements placed through the Unified Auction, we evaluate whether we are the principal (i.e., report revenue on a gross basis) or the agent (i.e., report revenue on a net basis). The evaluation to present revenue on a gross versus net basis requires significant judgment. We have concluded that the publisher is our customer and we are the agent in facilitating the fulfillment of the advertising inventory in the Unified Auction primarily because we do not control the advertising inventory prior to the placement of an advertisement. Typically we do not retain a share of the revenue generated through Unity IAP (In-App Purchases). Stock-Based Compensation Stock-based compensation expense related to our employees and non-employee directors is calculated based on the fair value on the grant date. For restricted stock units ("RSUs"), fair value is based on the closing price of our common stock on the grant date. The fair value of stock options and purchases made under the 2020 Employee Stock Purchase Plan ("2020 ESPP") is estimated using the Black-Scholes pricing model. This model requires certain assumptions be used as inputs, such as the fair value of the underlying common stock, expected term of the option before exercise, expected volatility of our common stock, expected dividend yield, and a risk-free interest rate. Options granted during the year have a maximum contractual term of ten years. We have limited historical stock option activity and therefore estimate the expected term of stock options granted using the simplified method, which represents the average of the contractual term of the stock option and its weighted-average vesting period. The expected volatility of stock options is based upon the historical volatility of a number of publicly traded companies in similar industry. We have historically not declared or paid any dividends and does not currently expect to do so in the foreseeable future. The risk-free interest rates used are based on theU.S. Department of Treasury ("U.S. Treasury ") yield in effect at the time of grant for zero-couponU.S. Treasury notes with maturities approximately equal to the expected term of the stock options. We recognize stock-based compensation expense for stock options and RSUs, on a straight-line basis, over the requisite service period, generally, a vesting period of one year to four years. We recognize stock-based compensation expense related to the 2020 ESPP on a straight-line basis over the offering period. We have elected to account for forfeitures as they occur.
Accounting for business combinations
We allocate the fair value of purchase consideration to the tangible assets
acquired, liabilities assumed, and intangible assets acquired based on their
estimated fair values as of the acquisition date. The excess of the fair value
of purchase consideration over the fair values of these identifiable assets and
liabilities is recorded as goodwill.
Accounting for business combinations requires us to make significant estimates
and assumptions, especially with respect to intangible assets. Although we
believe the assumptions and estimates we have made are reasonable, they are
based in part on historical experience and information obtained from the
management of the acquired companies and are inherently uncertain. Examples of
critical estimates used in valuing certain of the intangible assets we have
acquired or may acquire in the future include but are not limited to:
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•the income and future cash flows expected from the intangible assets acquired;
•the economic life used on acquired company's trade name, trademark, existing customer relationship, and contractual relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our product portfolio;
•the expected use of the intangible fixed assets acquired; and
•discount percentages.
These estimates are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
We evaluate and test the recoverability of our goodwill for impairment at least annually during our fourth quarter of each calendar year or more often if and when circumstances indicate that goodwill may not be recoverable. We use judgments when assessing qualitative factors of impairment that include macroeconomic conditions, other relevant events and factors affecting the market and industry, our financial performance, and other factors. To the extent we determine that it is more likely than not that the fair value of our single reporting unit is less than its carrying value, a quantitative test is then performed. We evaluate intangible assets other than goodwill for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions or other events that indicate an asset's carrying amount may not be recoverable. Recoverability of the intangible assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value. We also evaluate the estimated remaining useful lives of intangible assets for changes in circumstances that warrant a revision to the remaining periods of amortization.
Income taxes
We are subject to income tax in
We use the asset and liability method underFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 740, Income Taxes, when accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability. 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. 82 -------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. 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 the provision for income taxes 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.
Accounting election of the JOBS law
EffectiveDecember 31, 2021 , we are no longer an "emerging growth company," as defined in the JOBS Act. Prior to losing our status as an emerging growth company, the JOBS ACT allowed us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made to private companies, and we had elected to use this extended transition period. We can no longer take advantage of this extended transition period.
Recent accounting pronouncements
See Note 2, “Summary of Accounting Pronouncements,” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
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