UNITY SOFTWARE INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Please read the following discussion and analysis of our financial condition and
results of operations together with our condensed consolidated financial
statements and related notes included under Part I, Item 1 of this Quarterly
Report on Form 10-Q. The following discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Forward-looking
statements are statements that attempt to forecast or anticipate future
developments in our business, financial condition or results of operations. When
reviewing the discussion below, you should keep in mind the substantial risks
and uncertainties that could impact our business. In particular, we encourage
you to review the risks and uncertainties described in "Part II-Other
Information, 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, like all
statements in this report, speak only as of their date (unless another date is
indicated), and we undertake no obligation to update or revise these statements
in light of future developments. See the section titled "Note Regarding
Forward-Looking Statements" in this report.

Insight

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 three months ended March 31, 2022, 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 announces the release of Unity 2021 LTS. Unity 2021 LTS delivers powerful
improvements to workflows, rendering capabilities, and platform support to help
creators realize their creative ambitions. New enhancements prioritize quality,
productivity, and performance for any platform, genre, or artistic style. The
announcement was made at Game Developers Conference 2022 and represents more
than a year of focused development across the entire Unity Editor and underlying
foundational features. In 2021 LTS, Unity continued its commitment to putting
quality first in order to make the creator experience working in Unity more
stable, productive, and efficient than ever before.

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•Unity releases Enemies cinematic demo. A brand-new cinematic teaser featuring
major advances for photorealistic eyes, hair, skin, and more - all rendered in
real-time and running in 4K resolution, Enemies was released at the Game
Developers Conference 2022. Unity announced a plan to release a Digital Human
tech package that contains all of the updates and enhancements made since the
version shared for The Heretic, and noted that most of the improvements in Unity
that originated from the production of Enemies, or were directly adopted in it,
are already in Unity 2021.2 or will be shipping in 2022.1 or 2022.2.

•Unity announces Gigaya playable sample game. At GDC 2022, Unity highlighted a
glimpse of our upcoming puzzle-platformer sample game, Gigaya. Gigaya is still
in active development, but when it's done, it will be a free downloadable
project designed to help developers learn from its creation process. The sample
game was created using an ecosystem of Unity tools and features and is built on
long-term support. Throughout the project, you'll find real-world examples of
how these systems work, not just as standalone features but operating in
parallel to offer a high-quality development product for games.

•Unity Operate Solutions announces Unity Gaming Services GA release. Unity
Gaming Services products will officially graduate out of open beta this July. In
October of last year, Unity Gaming Services (UGS) was announced as a suite of
tools and services built to simplify every developer's ability to create, host,
and manage their games. Unity has since launched nine products into open beta
and more than 54,000 game developers signed up to test the service and UGS tools
have been installed into over 6,000 unique game projects.

•Unity Sports & Live Entertainment Announces New Partnership with Insomniac
Events. With nearly 30 years of creating experiences, the Insomniac Events team
has partnered with Unity to bring a brand new, persistent metaverse world to its
fans community where they can gather and engage virtually for live music
performances regardless of location. We believe this partnership will define a
new standard of live entertainment by delivering the next evolution of the
Insomniac experience in 2022.

•Unity has been hired by The Orlando Economic Partnership (The Orlando
Partnership). The Orlando Partnership, a public-private, not-for-profit economic
and community development organization representing hundreds of the region's top
private businesses, has hired Unity to create a digital twin of the entire
region to be showcased on display at the Orlando Partnership's new headquarters
in downtown Orlando, Florida later this year. The Digital Twin will help examine
and is intended to potentially solve regional challenges for the 800-square mile
area, including transportation, climate change and utility mapping. The Orlando
Partnership also plans to use the platform to show open land and office space to
company leaders considering expanding or locating in the Orlando region.

•Unity Announces Unity For Humanity 2022 Grant Winners. The program was created
to assist creators using 3D art/creations to make the world a better place.
Grantees will be aided with funding, mentorship, and technical support. The
winners' projects were selected based on vision, impact, inclusion, and
viability. In addition, Unity partnered with entertainer Common to create the
Imagine Grant, which was given to the project that best inspires audiences to
imagine a better world.

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

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Impact of COVID-19

While our total revenue, cash flows, and overall financial condition have not
been adversely impacted to date, the COVID-19 pandemic has caused general
business disruption worldwide beginning in January 2020. The full extent to
which the COVID-19 pandemic, including any new strains or mutations such as the
delta or omicron variants, will directly or indirectly impact our business,
results of operations, and financial condition will depend on future
developments that are highly uncertain and cannot be accurately predicted.
Although we experienced a modest adverse impact on our sales of Create Solutions
as well as our Strategic Partnerships early in the pandemic, 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 since then. 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 in 2020 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, both of which moderated over time. This increased demand
for our Operate Solutions has moderated, 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. 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.

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.

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Clients contributing more than $100,000 of sales

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 1,083 and 837 of such customers in the trailing 12 months as of March 31,
2022 and 2021, respectively, demonstrating our ability to grow our revenues with
existing customers, and our strong and growing penetration of larger
enterprises, including AAA gaming studios and large organizations in industries
beyond gaming. While these customers represented the substantial majority of
revenue for the three months ended March 31, 2022 and 2021, respectively, no one
customer accounted for more than 10% of our revenue for either period.

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
                                         March 31, 2022          March 31, 2021
Dollar-based net expansion rate                       135  %              

140%


Our dollar-based net expansion rate as of March 31, 2022 and 2021, 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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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-20220331_g1.jpg]]

Operating results

The following table summarizes the historical data for our Consolidated Statements of Income for the periods indicated (in thousands):

                                                  Three Months Ended March 31,
                                                      2022                   2021
Revenue                                     $       320,126              $  234,772
Cost of revenue                                      93,833                  58,734
Gross profit                                        226,293                 176,038
Operating expenses
Research and development                            221,040                 154,015
Sales and marketing                                 103,939                  69,793
General and administrative                           72,475                  63,132
Total operating expenses                            397,454                 286,940
Loss from operations                               (171,161)               (110,902)
Interest expense                                     (1,111)                   (115)
Interest income and other expense, net                  941                 

1,565

Loss before provision for income taxes             (171,331)               

(109,452)

Provision for (benefit from) income taxes             6,224                  (1,992)
Net loss                                    $      (177,555)             $ (107,460)


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

                                                  Three Months Ended March 31,
                                                        2022                  2021
Revenue                                                            100  %     100  %
Cost of revenue                                                     29         25
Gross margin                                                        71         75
Operating expenses
Research and development                                            69         66
Sales and marketing                                                 32         30
General and administrative                                          23         27
Total operating expenses                                           124        123
Loss from operations                                               (53)       (47)
Interest expense                                                     -          -
Interest income and other expense, net                               -      

1

Loss before provision for income taxes                             (53)     

(46)

Provision for (benefit from) income taxes                            2         (1)
Net loss                                                           (55) %     (45) %


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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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, a real-time bidding exchange that
gives our customers access to Unity's network of over 60+ diverse demand
sources. 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.

During the three months ended March 31, 2022, we experienced challenges with our
Operate products that negatively affected revenue in February and March and that
we expect to persist through the third quarter and have minimal impact in the
fourth. These challenges with our Operate products, which included the
consequences of ingesting bad data from a large customer, reduced the efficacy
of such products. We see these challenges as temporary and not structural and
expect them to impact our business by approximately $110.0 million in 2022, with
no carry-over impacts in 2023.

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

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

                                        Three Months Ended
                                            March 31,                    Change
                                       2022           2021          Amount         %
Create Solutions                    $ 116,413      $  70,387      $ 46,026        65  %
Operate Solutions                     184,019        146,578        37,441        26  %
Strategic Partnerships and Other       19,694         17,807         1,887        11  %
Total revenue                       $ 320,126      $ 234,772      $ 85,354        36  %


The increase in revenue in the three months ended March 31, 2022 compared to the
three months ended March 31, 2021 was substantially due to revenue growth among
existing customers. 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.

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, information technology ("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):

                           Three Months Ended
                                March 31,                          Change
                           2022                2021          Amount          %
Cost of revenue   $               93,833    $    58,734    $    35,099      60  %
Gross profit      $              226,293    $   176,038    $    50,255      29  %
Gross margin                       71  %         75   %                     (4) %


Cost of revenue for the three months ended March 31, 2022 increased primarily
due to an increase of $14.7 million in personnel-related expense, including
higher stock-based compensation expense of $3.7 million as headcount increased
to support our Create Solutions and Strategic Partnerships. In addition,
amortization expense increased by $7.6 million related to intangible assets
acquired through our business acquisitions. IT hosting expense also increased by
$4.0 million to support growth in our Create and Operate Solutions.

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Operating Expenses

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.

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):

                               Three Months Ended
                                   March 31,                    Change
                              2022           2021          Amount         %
Research and development   $ 221,040      $ 154,015      $ 67,025        44  %


Research and development expense for the three months ended March 31, 2022
increased primarily due to an increase of $44.3 million in personnel-related
expenses, including higher stock-based compensation expense of $23.6 million as
headcount increased to support continued product innovation. Amortization
expense also increased by $13.6 million related to intangible assets acquired
through our business acquisitions. In addition, IT hosting expense increased by
$3.7 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):

                            Three Months Ended
                                March 31,                    Change
                            2022           2021         Amount         %
Sales and marketing     $  103,939      $ 69,793      $ 34,146        49  %


Sales and marketing expense for the three months ended March 31, 2022 increased
primarily due to an increase of $23.1 million in personnel-related expenses,
including higher stock-based compensation expense of $11.8 million as headcount
increased to support the growth of our sales and marketing teams. Amortization
expense also increased by $5.8 million related to intangible assets acquired
through our business acquisitions. In addition, travel and conference
expenditures increased by $4.6 million due to the softening of COVID-19
restrictions.

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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):

                                  Three Months Ended
                                      March 31,                    Change
                                  2022           2021        Amount         %
General and administrative    $   72,475      $ 63,132      $ 9,343        15  %

General and administrative expenses for the three months ended March 31, 2022
increased mainly due to an increase in $3.6 million payroll costs as the workforce increases. In addition, professional and contractual expenses increased by $3.2 million to support the growth of our finance, accounting, human resources, IT and legal functions.

Interest charges

Interest expense consists primarily of interest expense associated with our
amortization of convertible debt issuance costs and Credit Agreement for the
three months ended March 31, 2022 and 2021, respectively. Interest expense is
summarized as follows (in thousands, except percentages):

                          Three Months Ended
                               March 31,                    Change
                           2022             2021       Amount        %
Interest expense     $    (1,111)         $ (115)     $ (996)      866  %

Interest expense for the three months ended March 31, 2022 increased due to the amortization of our debt issuance costs $1.1 million.

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):

                                               Three Months Ended
                                                    March 31,                    Change
                                                2022            2021        Amount        %
Interest income and other expense, net    $    941            $ 1,565      

($624) (40)%

Interest income and other charges, net, for the three months ended March 31, 2022 decreased mainly due to foreign exchange revaluation losses.

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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 net operating loss ("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 13, "Income Taxes," of the Notes to Condensed Consolidated Financial
Statements.

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

                                                 Three Months Ended
                                                     March 31,                     Change
                                                 2022           2021       

Amount % Provision for (profit) income taxes $6,224 $(1,992) $8,216 (412)%


Provision for income taxes for the three months ended March 31, 2022 increased
primarily due to the tax expense recognized as a result of a base-erosion and
anti-abuse tax ("BEAT") mainly arising as a result of mandatory R&D
capitalization under IRC Section 174. Also, for the quarter ended March 31,
2021, a tax benefit from stock-based compensation activities in the U.K. was
recognized, while for period ended March 31, 2022 we maintained a valuation
allowance against the deferred tax assets in the U.K., thereby increasing tax
expense in the current period.

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, amortization of acquired
intangible assets expense, and costs incurred from a legal entity reorganization
in China.

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

• non-GAAP operating loss excludes costs incurred as a result of the reorganization of a legal entity into China; and

•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):

                                                                             Three Months Ended
                                                                                 March 31,
                                                                        2022                       2021
GAAP gross profit                                             $                226,293       $         176,038
Add:
Stock-based compensation expense                                                 8,794                   5,117
Employer tax related to employee stock transactions                              1,388                   2,761
Amortization of intangible assets expense                                        7,555                       -
Non-GAAP gross profit                                         $                244,030       $         183,916
GAAP gross margin                                                              71    %                 75    %
Non-GAAP gross margin                                                          76    %                 78    %


The year-over-year change in non-GAAP gross margin was primarily due to product
mix of revenues, which includes increase of personnel-related costs to support
Weta Digital.

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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):

                                                           Three Months Ended
                                                               March 31,
                                                          2022            2021
GAAP loss from operations                             $ (171,161)     $ (110,902)
Add:
Stock-based compensation expense                         103,427          

66,561

Employer tax related to employee share transactions 9,752 16,458 Amortization of intangible assets

                 32,702           

4,459

Legal entity reorganization costs                          2,330               -

Non-GAAP loss from operations                         $  (22,950)     $  (23,424)


The year-over-year change in our non-GAAP loss from operations was relatively
flat due to 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. This was offset by strong revenue growth in
Create Solutions.

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, amortization of acquired intangible assets
expense, and costs incurred from a legal entity reorganization in China as well
as the related tax effects of these items. We use non-GAAP net loss and non-GAAP
net loss per share in conjunction with traditional GAAP measures to evaluate our
financial performance. 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 costs generated by a reorganization of the legal entity in China;

• 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.

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Tax implications of non-GAAP adjustments

We utilize a fixed annual projected tax rate in our computation of non-GAAP
income tax effects to provide better consistency across interim reporting
periods. In projecting this non-GAAP tax rate, we utilize a financial projection
that excludes the direct impact of the non-GAAP adjustments described above, and
eliminates the effects of non-recurring and period specific items which can vary
in size and frequency. 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 year ended
December 31, 2021, the non-GAAP tax rate was (22)%. For the year ending
December 31, 2022, we have determined the projected non-GAAP tax rate to be
(10)%. We will periodically re-evaluate this tax rate, as necessary, for
significant events, based on relevant tax law changes, material changes in the
forecasted geographic earnings mix, and any significant acquisitions.

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):

                                                                       Three Months Ended
                                                                            March 31,
                                                                    2022                 2021
GAAP net loss                                                  $  (177,555)         $  (107,460)
Add:
Stock-based compensation expense                                   103,427               66,561
Employer tax related to employee stock transactions                  9,752               16,458
Amortization of intangible assets expense                           32,702                4,459
Legal entity reorganization costs                                    2,330                    -

Income tax effect of non-GAAP adjustments                            3,912               (7,337)
Non-GAAP net loss                                              $   (25,432) 

($27,319)

GAAP net loss per share attributable to our common stockholders, basic and diluted

                                $     (0.60) 

$(0.39)
Total impact on net loss per share, basic and diluted, of non-GAAP adjustments

                                                  0.52                 0.29

Non-GAAP net loss per share attributable to our common stockholders, basic and diluted

                                $     (0.08) 

$(0.10)

Weighted average common shares used in the calculation of net loss per share under GAAP, basic and diluted

                                     294,341              276,068

Weighted average common shares used in the calculation of non-GAAP net loss per share, basic and diluted

                               294,341              276,068


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 provided by (used in) operating activities;

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•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.

The following table is 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):

                                                                   Three Months Ended March 31,
                                                                    2022                   2021
Net cash provided by (used in) operating activities           $      101,300          $   (88,882)
Less:
Purchase of property and equipment                                   (14,929)             (11,744)
Free cash flow                                                $       86,371          $  (100,626)
Net cash used in investing activities                         $      (35,460)         $   (89,626)
Net cash provided by financing activities                     $       

30,216 $22,624


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

Cash and capital resources

From March 31, 2022our primary sources of liquidity were cash, cash equivalents and marketable securities totaling $1.8 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.

Our significant cash requirements arising from contractual and other obligations known to March 31, 2022 is as follows (in thousands):

Payments due by period

                                                          Remainder of
                                        Total                 2022              2023 - 2024           2025-2026            Thereafter
Operating leases (1)                $   136,823          $    24,118          $     68,628          $    11,746          $    32,331
Purchase commitments (2)                656,988               81,637               279,745              295,606                    -
Convertible note (3)                  1,725,000                    -       
             -            1,725,000                    -
Total (4)                           $ 2,518,811          $   105,755          $    348,373          $ 2,032,352          $    32,331

(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 due 2026. See Note 10, “Borrowings”, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further 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.

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Since our inception, we have generated losses from our operations as reflected
in our accumulated deficit of $1.5 billion as of March 31, 2022. We expect to
continue to incur operating losses for the foreseeable future due to the
investments we will continue to make in research and development, sales and
marketing, and general and administrative. As a result, we may require
additional capital to execute our strategic initiatives to grow our business.

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.

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