UNITY SOFTWARE INC. 
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.
Overview
Unity is the world's leading platform for creating and operating interactive, RT3D content.
Our platform provides a comprehensive set of software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices.
Our platform consists of two distinct, but connected and synergistic, sets of solutions: Create Solutions and Operate Solutions.
Impact of Macroeconomic Trends and COVID-19
Recent negative macroeconomic factors could negatively impact our business,
particularly our Operate Solutions. The relative strength of the
In addition, the global impact of the COVID-19 pandemic continues to 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. 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 variants. The impact of these macroeconomic trends and the COVID-19 pandemic remains uncertain, and 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 Metrics
As further discussed in Item 2 of Part I, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in our Annual Report on Form
10-K, we monitor the following key metrics to help us evaluate the health of our
business, identify trends affecting our growth, formulate goals and objectives,
and make strategic decisions.
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Customers Contributing More Than
We had 1,085 and 888 customers contributing more than$100,000 of revenue in the trailing 12 months as ofJune 30, 2022 and 2021, respectively. While we continue to demonstrate 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, our rate of growth slowed down due to challenges observed in Operate Solutions. While these customers represented the substantial majority of revenue for the six months endedJune 30, 2022 and 2021, respectively, no one customer accounted for more than 10% of our revenue for either period.
Dollar-Based Net Expansion Rate
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.
As of
June 30, 2022 June 30 , 2021
Dollar-based net expansion rate 121 % 142 % Our dollar-based net expansion rate as ofJune 30, 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. Dollar-based net expansion rate decreased, compared to the comparable prior year period, primarily due to the decline in Operate Solutions revenue. The chart below illustrates that our dollar-based net expansion rate has been healthy, showing a strong relationship with existing customers despite a recent decline due to short-term headwinds and challenges in Operate Solutions.
[[Image Removed: unity-20220630_g1.jpg]]
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--------------------------------------------------------------------------------Table of ContentsUnity Software Inc. Results of Operations
The following table summarizes our historical consolidated statements of operations data for the periods indicated (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue $ 297,043 $ 273,562 $ 617,169 $ 508,334
Cost of revenue 96,836 57,725 190,669 116,459
Gross profit 200,207 215,837 426,500 391,875
Operating expenses
Research and development 215,960 154,216 437,000 308,231
Sales and marketing 100,908 74,888 204,847 144,681
General and administrative 81,005 135,917 153,480 199,049
Total operating expenses 397,873 365,021 795,327 651,961
Loss from operations (197,666) (149,184) (368,827) (260,086)
Interest expense (1,123) (485) (2,234) (600)
Interest income and other expense, net (3,058) 70 (2,117) 1,635
Loss before for income taxes (201,847) (149,599) (373,178) (259,051)
Provision for (benefit from) income taxes 2,311 (1,257) 8,535 (3,249)
Net loss $ (204,158) $ (148,342) $ (381,713) $ (255,802)
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 June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 33 21 31 23
Gross margin 67 79 69 77
Operating expenses
Research and development 73 56 71 61
Sales and marketing 34 27 33 28
General and administrative 27 50 25 39
Total operating expenses 134 133 129 128
Loss from operations (67) (55) (60) (51)
Interest expense - - - -
Interest income and other expense, net (1) - - -
Loss before income taxes (68) (55) (60) (51)
Provision for (benefit from) income taxes 1 - 1 (1)
Net loss (69) % (55) % (61) % (50) %
Revenue
We derive revenue from Create Solutions, Operate Solutions, and Strategic Partnerships and Other.
Create Solutions
We generate Create Solutions revenue primarily through the sale of subscription arrangements for the use of our products and related support services.
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Table of Contents Unity Software Inc.
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.
We generate additional Create Solutions revenue from the sale of professional
services to our subscription customers. These services primarily consist of
consulting, integration, training and custom application and workflow
development, and may be billed in advance or on a time and materials basis. We
generate Create revenue from a mix of customers both within and outside of
gaming, with an increasing proportion generated from customers outside of
gaming.
Operate 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. 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 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 facilitate 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 previously 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. End-user opt-in rates due to these requirements have resulted in a limitation in our ability to help our customers monetize through personalized advertising. Additional modifications to the foregoing Apple requirements or changes to Apple's enforcement of its policies across the industry may result in further impacts to the efficacy of mobile personalized advertising. Google has also announced Privacy Sandbox for Android, which will introduce new advertising and attribution technologies that operate without advertising identifiers, including by creating isolated processes for third-party advertising code to run separately from an app's code in order to limit advertisers' ability to collect app and user data. 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, will grow as a percentage of our revenue as we further scale newer products and services for gaming customers as well as customers in other industries. During the three months endedJune 30, 2022 , we focused our resources on addressing the data quality and accuracy challenges we observed with certain monetization tools in the first quarter of 2022. We started to see signs that our interventions have been effective during the quarter resulting in improvements in our performance in June. External factors, including the competitive landscape, and recent negative macroeconomic factors combined with complexity in accurately predicting the pace of the recovery, lead us to believe that the recovery will extend at least through the fourth quarter of 2022.
Strategic Partnerships and Other
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. In addition, certain partners pay us royalties based on the sales of
applications sold on their platform that incorporate or use our customized
software.
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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.
Our total revenue is summarized as follows (in thousands, except percentages):
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Create Solutions $ 120,876 $ 72,614 $ 237,289 $ 143,001
Operate Solutions 158,500 182,916 342,519 329,493
Strategic Partnerships and Other 17,667 18,032 37,361 35,840
Total revenue $ 297,043 $ 273,562 $ 617,169 $ 508,334
The increase in total revenue in the three and six months ended June 30, 2022 ,
compared to the comparable prior year periods, was primarily due to an increase
in new customers as well as growth among existing customers within Create
Solutions. Revenue from Operate Solutions declined in the three months ended
June 30, 2022 and only grew to a small extent during the six months ended June
30, 2022 due to the challenges with our Operate Solutions products. We did see
an increase in revenue per customer as customers increased their consumption
across our Operate Solutions portfolio of products and services.
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 in the
long term, but we expect our gross profit as a percentage of revenue, or gross
margin, to fluctuate from period to period.
Cost of revenue for the three and six months ended June 30, 2022 increased,
compared to the comparable prior year periods, primarily due to higher
personnel-related expenses associated with increased headcount, as well as an
increase of $7.6 million and $15.2 million , respectively, in amortization
expenses related to intangible assets acquired through our business acquisitions
and an increase of $7.1 million and $14.2 million , respectively, related to
professional service fees.
Gross profit for the three months ended June 30, 2022 decreased, compared to the
comparable prior year period, primarily due the decline in Operate Solutions
revenue and the aforementioned expense increases in cost of revenue. Gross
profit for the six months ended June 30, 2022 increased, compared to the
comparable prior year period, primarily due to an increase in revenue in our
Create Solutions.
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Table of ContentsUnity Software Inc. 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. Although personnel-related costs contributed to the majority of the increase in expense period over period, we are observing a slow down in hiring.
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 for the three and six months endedJune 30, 2022 increased, compared to the comparable prior year periods, primarily due to higher personnel-related expenses as headcount increased to support continued product innovation, as well as an increase of$13.9 million and$30.2 million , respectively, in amortization expense related to intangible assets acquired through our business acquisitions.
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 for the three and six months endedJune 30, 2022 increased, compared to the comparable prior year periods, primarily due to higher personnel-related expenses as headcount increased to support the growth of our sales and marketing teams, as well as an increase of$5.1 million and$10.4 million , respectively, in amortization expense related to intangible assets acquired through our business acquisitions. The increase in the three and six months endedJune 30, 2022 was further driven, to a lesser extent, by increased travel and conference expenditures due to the softening of COVID-19 restrictions. 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 for the three and six months endedJune 30, 2022 decreased, compared to the comparable prior year periods, primarily due to a one-time charge of$49.8 million for the termination of a future lease contract and the incremental equity award modification expense of$10.5 million associated with the separation of our former Chief Financial Officer recognized in the three months endedJune 30, 2021 . The decrease was partially offset primarily by higher personnel-related expenses as headcount increased, as well as an increase of$5.8 million in expenses associated with a legal entity reorganization inChina and acquisition-related expenses. 27 --------------------------------------------------------------------------------
Table of ContentsUnity Software Inc. Interest Expense
Interest expense consists primarily of interest expense associated with our amortization of convertible debt issuance costs and Credit Agreement.
Interest expense for the three and six months endedJune 30, 2022 increased, compared to the comparable prior year periods, due to our debt issuance costs amortization.
Interest Income and Other Expense, 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, for the three and six months ended
Provision for (Benefit from) 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 9, "Income Taxes," of the Notes to Condensed Consolidated Financial
Statements.
Provision for income taxes for the three and six months ended June 30, 2022
increased, compared to the comparable prior year periods, 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 the IRC Section
174. Also, for the quarter ended June 30, 2021 , a tax benefit from stock-based
compensation activities in the U.K. was recognized, while for the period ended
June 30, 2022 we maintained a valuation allowance against the deferred tax
assets in the U.K. The quarter ended June 30, 2021 also included a tax benefit
related to the U.K. corporate tax rate change, effective April 1, 2023 , that was
enacted during the three months ended June 30, 2021 .
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.
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Table of Contents Unity Software Inc. Non-GAAP Gross Profit and Non-GAAP Loss from Operations
We define non-GAAP gross profit as gross profit excluding stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, and restructuring charges. 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, costs incurred from a legal entity reorganization inChina , acquisition-related costs, restructuring charges, and a one-time expense for the termination of a future lease agreement. 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 expenses that we do not consider to be indicative of our overall operating performance.
Non-GAAP gross profit and non-GAAP loss from operations have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of 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; •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 loss from operations excludes costs incurred from a legal entity
reorganization in
•non-GAAP loss from operations excludes costs incurred from our acquisitions;
•non-GAAP gross profit and non-GAAP loss from operations excludes costs incurred from restructuring activities that we initiated during the three months endedJune 30, 2022 ; •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 •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. 29 -------------------------------------------------------------------------------- Table of Contents Unity Software Inc. 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 June 30, 2022 2021 GAAP gross profit $ 200,207 $ 215,837 Add: Stock-based compensation expense 11,839 5,340 Employer tax related to employee stock transactions 205 511 Amortization of intangible assets expense 7,630 - Restructuring charges 264 - Non-GAAP gross profit $ 220,145 $ 221,688 GAAP gross margin 67 % 79 % Non-GAAP gross margin 74 % 81 %
The year-over-year change in non-GAAP gross margin was primarily due to product
mix of revenues and an increase of personnel-related costs to support
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
June 30,
2022 2021
GAAP loss from operations $ (197,666) $ (149,184)
Add:
Stock-based compensation expense 105,995 85,400
Employer tax related to employee stock transactions 3,028 6,126 Amortization of intangible assets expense
33,131 4,709
Legal entity reorganization costs 2,315 - Acquisition-related costs 3,437 2,470 Restructuring charges 5,635 - Lease termination expense - 49,795 Non-GAAP loss from operations$ (44,125) $ (684) The year-over-year change in our non-GAAP loss from operations was primarily due to the slower revenue growth, outpaced by our operating expenses, which were driven by an increase in headcount across the entire company to support investments in the business. 30 -------------------------------------------------------------------------------- Table of Contents Unity Software Inc.
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, costs incurred from a legal entity reorganization inChina , acquisition-related costs, restructuring charges, and a one-time expense for the termination of a future lease agreement 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 analysis of 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 incurred from a legal entity reorganization in
•they exclude the costs incurred from our acquisitions;
•they exclude costs incurred from restructuring activities that we initiated
during the three months ended
•they exclude 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;
•as further described below, we must make certain assumptions in order to determine the income tax effect adjustment for non-GAAP net loss, which assumptions may not prove 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.
Income Tax Effects 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 endedDecember 31, 2021 , the non-GAAP tax rate was (22)%. For the year endingDecember 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, relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions. 31 -------------------------------------------------------------------------------- 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): Three Months Ended June 30, 2022 2021 GAAP net loss$ (204,158) $ (148,342) Add: Stock-based compensation expense 105,995 85,400 Employer tax related to employee stock transactions 3,028 6,126 Amortization of intangible assets expense 33,131 4,709 Legal entity reorganization costs 2,315 - Acquisition-related costs 3,437 2,470 Restructuring charges 5,635 - Lease termination expense - 49,795 Income tax effect of non-GAAP adjustments (2,520) (1,499) Non-GAAP net loss $
(53,137)
GAAP net loss per share attributable to our common stockholders, basic and diluted
$
(0.69)
0.51 0.52
Non-GAAP net loss per share attributable to our common stockholders, basic and diluted
$
(0.18)
Weighted-average common shares used in GAAP net loss per share computation, basic and diluted
296,849 280,374
Weighted-average common shares used in non-GAAP net loss per share computation, basic and diluted
296,849 280,374 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 analysis of our results as reported under GAAP. Some of these limitations are:
•it is not a substitute for net cash provided by (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 utility of free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for any given period.
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Table of Contents Unity Software Inc. 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):
Six Months Ended June 30,
2022 2021
Net cash provided by (used in) operating activities $ 58,430 $ (115,563)
Less:
Purchases of property and equipment (30,357) (18,551)
Free cash flow $ 28,073 $ (134,114)
Net cash provided by (used in) investing activities $ 10,434 $ (203,765)
Net cash provided by financing activities $ 37,718 The year-over-year change in free cash flow was primarily due to the receipt of four years of license fees of approximately$200.0 million from Weta FX, which was connected to the acquisition of certain assets fromWeta Digital , partially offset by the payment in 2022 of the corporate bonus for the year endedDecember 31, 2021 , our net loss, prepayments of software licenses, and an increase in working capital as our business grows.
Liquidity and Capital Resources
As of
Our material cash requirements from known contractual and other obligations as
of
Payments Due by Period
Remainder of
Total 2022 2023 - 2024 2025-2026 Thereafter
Operating leases (1) $ 125,433 $ 14,931 $ 49,924 $ 28,990 $ 31,588
Purchase commitments (2) 927,162 77,786 403,498 416,453 29,425
Convertible note (3) 1,725,000 -
- 1,725,000 -
Total (4) $ 2,777,595 $ 92,717 $ 453,422 $ 2,170,443 $ 61,013 (1) Operating lease obligations consist primarily of obligations for real estate.
(2) The substantial majority of our purchase commitments are related to agreements with our data center hosting providers.
(3) Convertible note due 2026. See Note 6, "Borrowings," of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
(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$1.7 billion as ofJune 30, 2022 . We expect to continue to incur operating losses on a GAAP basis 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. 33
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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. OnJuly 13, 2022 , we entered into an Agreement and Plan of Merger to acquire ironSource. If consummated, the merger with ironSource may have a significant impact on our liquidity, financial condition, and results of operations. In connection with the merger with ironSource, we entered into an investment agreement withSilver Lake Alpine II, L.P. , andSilver Lake Partners VI, L.P. andSequoia Capital Fund, L.P. (the "Investors") relating to the issuance and sale to the Investors of$1.0 billion in aggregate principal amount of our 2.0% Convertible Senior Notes due 2027 (the "2027 Notes"). The closing of the issuance and sale of the 2027 Notes (the "PIPE Closing") is expected to occur promptly following the closing of the merger with ironSource, subject to such closing and certain customary closing conditions. The proceeds from the issuance and sale of the 2027 Notes are expected to be used following the closing of the merger with ironSource to partially fund the repurchase of shares of our common stock pursuant to a 24-month,$2.5 billion stock repurchase program authorized by our Board of Directors effective upon the closing of the acquisition of ironSource. We may repurchase shares at our discretion in the open market, pursuant to accelerated repurchase agreements and/or in accordance with Rule 10b-18 under the Exchange Act and all other applicable federal and state securities laws and regulations and in accordance with Delaware General Corporation Law. The program may be modified, suspended or discontinued at any time. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, and market conditions.
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