Unity Software Inc. - Quarter Report: 2021 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 30, 2021 | |||||
OR | |||||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______ | ||||||||
Commission File Number: 001-39497 |
UNITY SOFTWARE INC. | ||||||||
(Exact name of registrant as specified in its charter) |
Delaware | 27-0334803 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
30 3rd Street | ||||||||
San Francisco, California 94103‑3104 | ||||||||
(Address, including zip code, of principal executive offices) | ||||||||
(415) 539‑3162 | ||||||||
(Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common stock, $0.000005 par value | U | The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o | ||||||||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o | ||||||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. | ||||||||||||||
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
Non‑accelerated filer | ☒ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☒ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | |||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No x |
As of August 4, 2021, there were 282,518,597 shares of the registrant’s common stock outstanding.
UNITY SOFTWARE INC.
FORM 10‑Q
For the Quarter Ended June 30, 2021
TABLE OF CONTENTS
Page | ||||||||
Item 1. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 6. | ||||||||
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10‑Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical fact, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “toward,” “will,” “would,” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
•our expectations regarding our financial performance, including revenue, cost of revenue, gross profit or gross margin, operating expenses, key metrics, and our ability to achieve or maintain future profitability;
•our ability to effectively manage our growth;
•anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;
•our expectations regarding the demand for real-time 3D content in gaming and other industries and our ability to increase revenue from these industries;
•economic and industry trends;
•our ability to increase sales of our solutions;
•our ability to attract and retain customers;
•our ability to expand our offerings and cross-sell to our existing customers;
•our expectations regarding the plans implemented or announced by Apple with respect to access of advertising identifiers and related matters, and the potential impact on our financial performance;
•our ability to maintain and expand our relationships with strategic partners;
•our ability to continue to grow across all major global markets;
•the effects of increased competition in our markets and our ability to successfully compete with companies that are currently in, or may in the future enter, the markets in which we operate;
•our estimated market opportunity;
•our ability to timely and effectively scale and adapt our solutions;
•our ability to continue to innovate and enhance our solutions;
•our ability to develop new products, features and use cases and bring them to market in a timely manner, and whether our customers and prospective customers will adopt these new products, features and use cases;
•our ability to maintain, protect, and enhance our brand and intellectual property;
•our ability to identify and complete acquisitions that complement and expand the functionality of our platform;
•our ability to comply or remain in compliance with laws and regulations that currently apply or become applicable to our business in the United States and globally;
•our reliance on key personnel and our ability to attract, maintain, and retain management and skilled personnel;
•the effects of the COVID-19 pandemic or other public health crises; and
•the future trading prices of our common stock.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10‑Q.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10‑Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. Readers are cautioned that these forward‑looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Part II—Other Information, Item 1A. Risk Factors” and elsewhere herein. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10‑Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10‑Q. While we believe such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10‑Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10‑Q to reflect events or circumstances after the date of this Quarterly Report on Form 10‑Q or to reflect new information, actual results, revised expectations, or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.
Additional Information
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “our company,” and “Unity” refer to Unity Software Inc. and its consolidated subsidiaries. The Unity design logos, “Unity” and our other registered or common law trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of Unity Software Inc. or its affiliates. Other trade names, trademarks, and service marks used in this Quarterly Report are the property of their respective owners.
Investors and others should note that we may announce material business and financial information using our investor relations website (www.investors.unity.com), our filings with the Securities and Exchange Commission, press releases, public conference calls, and public webcasts as means of complying with our disclosure obligations under Regulation FD. We encourage investors and others interested in our company to review the information that we make available.
RISK FACTORS SUMMARY
Investing in our common stock involves numerous risks, including the risks described in “Part II—Other Information, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. Below are some of these risks, any one of which could materially adversely affect our business, financial condition, results of operations, and prospects.
•We have a history of losses and may not achieve or sustain profitability in the future.
•We have a limited history operating our business at its current scale, and as a result, our past results may not be indicative of future operating performance.
•Our core value of putting our users first may cause us to forgo short-term gains and may not lead to the long-term benefits we expect.
•Our business and operations have experienced recent rapid growth, which may not be indicative of our future growth. Our rapid growth also makes it difficult to evaluate our future prospects.
•Our business depends on our ability to retain our existing customers and expand their use of our platform.
•If we are unable to attract new customers, our business, financial condition and results of operations will be adversely affected.
•We derive a significant portion of our revenue from our Operate Solutions. If we fail to attract and retain Operate Solutions customers, our business and results of operations would be adversely affected.
•Operating system platform providers or application stores may change terms of service, policies or technical requirements to require us or our customers to change data collection and privacy practices, business models, operations, practices, advertising activities or application content, which could adversely impact our business.
•If we are unable to further expand into new industries, or if our solutions for any new industry fail to achieve market acceptance, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
•Our business relies on strategic relationships with hardware, operating system, device, game console and other technology providers. If we are unable to maintain favorable terms and conditions and business relations with respect to our strategic relationships, our business could be harmed.
•If we do not make our platform, including new versions or technology advancements, easier to use or properly train customers on how to use our platform, our ability to broaden the appeal of our platform and solutions and to increase our revenue could suffer.
•Interruptions, performance problems, or defects associated with our platform may adversely affect our business, financial condition, and results of operations.
•The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition, and results of operations could be harmed.
•If we or our third party service providers experience a security breach or unauthorized parties otherwise obtain access to our customers’ data, our data, or our platform, our platform may be perceived as not secure, our reputation may be harmed, our business operations may be disrupted, demand for our products may be reduced, and we may incur significant liabilities.
•If we fail to timely release updates and new features to our platform and adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, or changing customer needs, requirements, or preferences, our platform may become less competitive.
•We may not be able to successfully manage our growth, and if we are not able to grow efficiently, our business, financial condition, and results of operations could be harmed.
•We rely on the performance of highly skilled personnel, including our management and other key employees, and the loss of one or more of such personnel, or of a significant number of our team members, or the inability to attract and retain executives and employees we need to support our operations and growth, could harm our business.
•Our business depends on the interoperability of our solutions across third-party platforms, operating systems, and applications, and on our ability to ensure our platform and solutions operate effectively on those platforms. If we are not able to integrate our solutions with third party platforms in a timely manner, our business may be harmed.
•We are dependent on the success of our customers in the gaming market. Adverse events relating to our customers or their games could have a negative impact on our business.
•We rely upon third-party data centers and providers of cloud-based infrastructure to host our platform. Any disruption in the operations of these third-party providers, limitations on capacity or interference with our use could adversely affect our business, financial condition, and results of operations.
•We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price, and the value of your investment could decline.
•Seasonality may cause fluctuations in our sales and results of operations.
•Downturns or upturns in our sales may not be immediately reflected in our financial position and results of operations.
•Third parties with whom we do business may be unable to honor their obligations to us or their actions may put us at risk.
•We use resellers and other third parties to sell, market, and deploy our solutions to a variety of customers, and our failure to effectively develop, manage, and maintain our indirect sales channels would harm our business.
•Our direct sales force targets larger customers, and sales to these customers involve risks that may not be present or that are present to a lesser extent with respect to sales to smaller customers.
•If we fail to maintain and enhance our brand, our ability to expand our customer base will be impaired and our business, financial condition, and results of operations may suffer.
•Our culture emphasizes innovation, and if we cannot maintain this culture as we grow, our business could be harmed.
•We are subject to rapidly changing and increasingly stringent laws, contractual obligations, and industry standards relating to privacy, data security, and the protection of children. The restrictions and costs imposed by these requirements, or our actual or perceived failure to comply with them, could harm our business.
•Adverse changes in the geopolitical relationship between the United States and China or changes in China's economic and regulatory landscape could have an adverse effect on business conditions.
•Concentration of ownership of our common stock among our existing executive officers, directors, and principal stockholders may prevent new investors from influencing significant corporate decisions.
If we are unable to adequately address these and other risks we face, our business may be harmed.
Unity Software Inc. |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
UNITY SOFTWARE INC. | |||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||
(In thousands, except par value) | |||||||||||
(Unaudited) | |||||||||||
As of | |||||||||||
June 30, 2021 | December 31, 2020 | ||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 1,001,944 | $ | 1,272,578 | |||||||
Marketable securities | 587,080 | 479,406 | |||||||||
Accounts receivable, net of allowances of $5,778 and $2,714 as of June 30, 2021 and December 31, 2020, respectively | 340,716 | 274,255 | |||||||||
Prepaid expenses | 34,877 | 32,025 | |||||||||
Other current assets | 30,552 | 22,396 | |||||||||
Total current assets | 1,995,169 | 2,080,660 | |||||||||
Property and equipment, net | 95,948 | 95,544 | |||||||||
Operating lease right‑of‑use assets | 110,656 | 103,609 | |||||||||
Goodwill | 342,134 | 286,251 | |||||||||
Intangible assets, net | 65,701 | 57,459 | |||||||||
Restricted cash | 10,823 | 21,369 | |||||||||
Other assets | 41,301 | 26,333 | |||||||||
Total assets | $ | 2,661,732 | $ | 2,671,225 | |||||||
Liabilities and stockholders’ equity | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 8,306 | $ | 11,303 | |||||||
Accrued expenses and other current liabilities | 128,142 | 106,306 | |||||||||
Publisher payables | 221,368 | 182,269 | |||||||||
Income and other taxes payable | 49,336 | 64,116 | |||||||||
Deferred revenue | 123,461 | 113,853 | |||||||||
Operating lease liabilities | 25,783 | 25,375 | |||||||||
Total current liabilities | 556,396 | 503,222 | |||||||||
Long-term deferred revenue | 19,570 | 20,523 | |||||||||
Long-term operating lease liabilities | 104,574 | 98,532 | |||||||||
Other long-term liabilities | 11,409 | 11,805 | |||||||||
Total liabilities | 691,949 | 634,082 | |||||||||
Commitments and contingencies (Note 11) | |||||||||||
Stockholders’ equity: | |||||||||||
Preferred stock, $0.000005 par value; 100,000 shares authorized, and no shares issued and outstanding as of June 30, 2021; 100,000 shares authorized, no shares issued and outstanding as of December 31, 2020 | — | — | |||||||||
Common stock, $0.000005 par value; 1,000,000 and 1,000,000 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 282,177 and 273,537 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 2 | 2 | |||||||||
Additional paid-in capital | 3,028,077 | 2,838,057 | |||||||||
Accumulated other comprehensive loss | (3,474) | (3,418) | |||||||||
Accumulated deficit | (1,054,822) | (797,498) | |||||||||
Total stockholders’ equity | 1,969,783 | 2,037,143 | |||||||||
Total liabilities and stockholders’ equity | $ | 2,661,732 | $ | 2,671,225 |
See accompanying Notes to Condensed Consolidated Financial Statements.
Unity Software Inc. |
UNITY SOFTWARE INC. | |||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenue | $ | 273,562 | $ | 184,331 | $ | 508,334 | $ | 351,325 | |||||||||||||||
Cost of revenue | 57,725 | 40,432 | 116,459 | 72,300 | |||||||||||||||||||
Gross profit | 215,837 | 143,899 | 391,875 | 279,025 | |||||||||||||||||||
Operating expenses | |||||||||||||||||||||||
Research and development | 154,216 | 85,108 | 308,231 | 166,859 | |||||||||||||||||||
Sales and marketing | 74,888 | 43,716 | 144,681 | 86,975 | |||||||||||||||||||
General and administrative | 135,917 | 39,920 | 199,049 | 77,473 | |||||||||||||||||||
Total operating expenses | 365,021 | 168,744 | 651,961 | 331,307 | |||||||||||||||||||
Loss from operations | (149,184) | (24,845) | (260,086) | (52,282) | |||||||||||||||||||
Interest expense | (485) | (656) | (600) | (788) | |||||||||||||||||||
Interest income and other expense, net | 70 | (662) | 1,635 | 1,194 | |||||||||||||||||||
Loss before provision for income taxes | (149,599) | (26,163) | (259,051) | (51,876) | |||||||||||||||||||
Provision for (benefit from) income taxes | (1,257) | 1,188 | (3,249) | 2,211 | |||||||||||||||||||
Net loss | (148,342) | (27,351) | (255,802) | (54,087) | |||||||||||||||||||
Basic and diluted net loss per share: | |||||||||||||||||||||||
Net loss per share attributable to our common stockholders, basic and diluted | $ | (0.53) | $ | (0.21) | $ | (0.92) | $ | (0.42) | |||||||||||||||
Weighted-average shares used in per share calculation attributable to our common stockholders, basic and diluted | 280,374 | 129,826 | 278,233 | 128,804 |
See accompanying Notes to Condensed Consolidated Financial Statements.
2
Unity Software Inc. |
UNITY SOFTWARE INC. | |||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS | |||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net loss | $ | (148,342) | $ | (27,351) | $ | (255,802) | $ | (54,087) | |||||||||||||||
Other comprehensive loss, net of taxes: | |||||||||||||||||||||||
Change in foreign currency translation adjustment | 81 | 18 | 50 | (77) | |||||||||||||||||||
Change in unrealized losses on marketable securities | (3) | — | (106) | — | |||||||||||||||||||
Other comprehensive loss | 78 | 18 | (56) | (77) | |||||||||||||||||||
Comprehensive loss | $ | (148,264) | $ | (27,333) | $ | (255,858) | $ | (54,164) |
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Unity Software Inc. |
UNITY SOFTWARE INC. | |||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||
(In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred Stock | Common Stock | Paid-In | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | — | $ | — | 279,170,161 | $ | 2 | $ | 2,927,242 | $ | (3,552) | $ | (906,480) | $ | 2,017,212 | |||||||||||||||||||||||||||||||||
Issuance of common stock from exercise of stock options | — | — | 2,287,484 | — | 15,435 | — | — | 15,435 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock for settlement of RSUs | — | — | 719,399 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Stock‑based compensation expense | — | — | — | — | 74,913 | — | — | 74,913 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense in connection with modified awards for certain employees | — | — | — | — | 10,487 | — | — | 10,487 | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (148,342) | (148,342) | |||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 81 | — | 81 | |||||||||||||||||||||||||||||||||||||||
Unrealized loss on investments | — | — | — | — | — | (3) | — | (3) | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | — | $ | — | 282,177,044 | $ | 2 | $ | 3,028,077 | $ | (3,474) | $ | (1,054,822) | $ | 1,969,783 | |||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred Stock | Common Stock | Paid-In | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 102,717,396 | $ | 836,529 | 128,569,006 | $ | 1 | $ | 338,183 | $ | (3,727) | $ | (541,926) | $ | 629,060 | |||||||||||||||||||||||||||||||||
Issuance of common stock from exercise of stock options | — | — | 392,693 | — | 1,507 | — | — | 1,507 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock from exercise of stock options in connection with nonrecourse promissory note | — | — | 5,656,927 | — | 8,856 | — | — | 8,856 | |||||||||||||||||||||||||||||||||||||||
Common stock issued in connection with acquisitions | — | — | 1,030,711 | — | 23,362 | — | — | 23,362 | |||||||||||||||||||||||||||||||||||||||
Stock‑based compensation expense | — | — | — | — | 11,963 | — | — | 11,963 | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (27,351) | (27,351) | |||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 18 | — | 18 | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 102,717,396 | $ | 836,529 | 135,649,337 | $ | 1 | $ | 383,871 | $ | (3,709) | $ | (569,277) | $ | 647,415 |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Unity Software Inc. |
UNITY SOFTWARE INC. | |||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED | |||||||||||||||||||||||||||||||||||||||||||||||
(In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred Stock | Common Stock | Paid‑In | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | — | $ | — | 273,537,218 | $ | 2 | $ | 2,838,057 | $ | (3,418) | $ | (797,498) | $ | 2,037,143 | |||||||||||||||||||||||||||||||||
Cumulative effect of accounting change | — | — | — | — | — | — | (1,522) | (1,522) | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock from exercise of stock options | — | — | 6,831,982 | — | 38,059 | — | — | 38,059 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock for settlement of RSUs | — | — | 1,807,844 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Stock‑based compensation expense | — | — | — | — | 139,337 | — | — | 139,337 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense in connection with modified awards for certain employees | — | — | — | — | 12,624 | — | — | 12,624 | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (255,802) | (255,802) | |||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 50 | — | 50 | |||||||||||||||||||||||||||||||||||||||
Unrealized loss on investments | — | — | — | — | — | (106) | — | (106) | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | — | $ | — | 282,177,044 | $ | 2 | $ | 3,028,077 | $ | (3,474) | $ | (1,054,822) | $ | 1,969,783 | |||||||||||||||||||||||||||||||||
Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred Stock | Common Stock | Paid-In | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 95,899,214 | $ | 686,559 | 123,261,024 | $ | 1 | $ | 226,173 | $ | (3,632) | $ | (515,190) | $ | 393,911 | |||||||||||||||||||||||||||||||||
Issuance of common stock | — | — | 4,545,455 | — | 100,000 | — | — | 100,000 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock from exercise of stock options | — | — | 1,160,220 | — | 3,936 | — | — | 3,936 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock from exercise of stock options in connection with nonrecourse promissory note | — | — | 5,656,927 | — | 8,856 | — | — | 8,856 | |||||||||||||||||||||||||||||||||||||||
Common stock issued in connection with acquisitions | — | — | 1,030,711 | — | 23,362 | — | — | 23,362 | |||||||||||||||||||||||||||||||||||||||
Purchase and retirement of treasury stock | — | — | (5,000) | — | (110) | — | — | (110) | |||||||||||||||||||||||||||||||||||||||
Issuance of convertible Series E preferred stock, net of issuance costs | 6,818,182 | 149,970 | — | — | — | — | — | 149,970 | |||||||||||||||||||||||||||||||||||||||
Stock‑based compensation expense | — | — | — | — | 21,654 | — | — | 21,654 | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (54,087) | (54,087) | |||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (77) | — | (77) | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 102,717,396 | $ | 836,529 | 135,649,337 | $ | 1 | $ | 383,871 | $ | (3,709) | $ | (569,277) | $ | 647,415 |
See accompanying Notes to Condensed Consolidated Financial Statements.
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Unity Software Inc. |
UNITY SOFTWARE INC. | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
(In thousands) | |||||||||||
(Unaudited) | |||||||||||
Six Months Ended June 30, | |||||||||||
2021 | 2020 | ||||||||||
Operating activities | |||||||||||
Net loss | $ | (255,802) | $ | (54,087) | |||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | 24,102 | 20,010 | |||||||||
Stock-based compensation expense | 139,337 | 21,654 | |||||||||
Stock-based compensation expense in connection with modified awards for certain employees | 12,624 | — | |||||||||
Other | 7,680 | 1,393 | |||||||||
Changes in assets and liabilities, net of effects of acquisitions: | |||||||||||
Accounts receivable, net | (67,549) | (8,828) | |||||||||
Prepaid expenses | (2,806) | (4,870) | |||||||||
Other current assets | (9,959) | (11,837) | |||||||||
Operating lease right-of-use ("ROU") assets | 11,895 | 12,008 | |||||||||
Deferred tax, net | (3,139) | 114 | |||||||||
Other assets | (8,819) | (309) | |||||||||
Accounts payable | (1,274) | 1,205 | |||||||||
Accrued expenses and other current liabilities | 19,944 | 5,819 | |||||||||
Publisher payables | 39,099 | 1,671 | |||||||||
Income and other taxes payable | (16,477) | (3,400) | |||||||||
Operating lease liabilities | (12,804) | (12,065) | |||||||||
Other long-term liabilities | 149 | 5,173 | |||||||||
Deferred revenue | 8,236 | 10,930 | |||||||||
Net cash used in operating activities | (115,563) | (15,419) | |||||||||
Investing activities | |||||||||||
Purchase of marketable securities | (290,808) | — | |||||||||
Proceeds from principal repayments on marketable securities | 11,624 | — | |||||||||
Maturities of marketable securities | 168,000 | — | |||||||||
Purchase of non-marketable investments | (4,600) | — | |||||||||
Purchase of property and equipment | (18,551) | (19,275) | |||||||||
Acquisition of intangible assets | — | (750) | |||||||||
Business acquisitions, net of cash acquired | (69,430) | (23,338) | |||||||||
Net cash used in investing activities | (203,765) | (43,363) |
6
Unity Software Inc. |
UNITY SOFTWARE INC. | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
(In thousands) | |||||||||||
(Unaudited) | |||||||||||
Six Months Ended June 30, | |||||||||||
2021 | 2020 | ||||||||||
Financing activities | |||||||||||
Proceeds from revolving loan facility | — | 125,000 | |||||||||
Payment of debt issuance costs | — | (247) | |||||||||
Proceeds from issuance of convertible preferred stock, net of issuance costs | — | 149,970 | |||||||||
Proceeds from issuance of common stock | — | 100,000 | |||||||||
Purchase and retirement of treasury stock | — | (110) | |||||||||
Proceeds from exercise of stock options | 38,059 | 3,936 | |||||||||
Proceeds from exercise of stock options in connection with nonrecourse promissory note | — | 8,856 | |||||||||
Net cash provided by financing activities | 38,059 | 387,405 | |||||||||
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash | 89 | (52) | |||||||||
Increase (decrease) in cash, cash equivalents, and restricted cash | (281,180) | 328,571 | |||||||||
Cash and restricted cash, beginning of period | 1,293,947 | 147,096 | |||||||||
Cash, cash equivalents, and restricted cash, end of period | $ | 1,012,767 | $ | 475,667 | |||||||
Supplemental disclosure of cash flow information: | |||||||||||
Cash paid for interest | $ | 110 | $ | 723 | |||||||
Cash paid for income taxes, net of refunds | $ | 5,839 | $ | 9,453 | |||||||
Supplemental disclosures of non‑cash investing and financing activities: | |||||||||||
Fair value of common stock issued as consideration for business acquisitions | $ | — | $ | 23,126 | |||||||
Fair value of common stock issued as consideration for acquisition of intangible assets | $ | — | $ | 236 | |||||||
Accrued property and equipment | $ | 4,743 | $ | 3,180 | |||||||
The below table provides a reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets to the total of the same amounts shown on the condensed consolidated statements of cash flows (in thousands):
As of June 30, | |||||||||||
2021 | 2020 | ||||||||||
Cash and cash equivalents | $ | 1,001,944 | $ | 453,258 | |||||||
Restricted cash | 10,823 | 22,409 | |||||||||
Total cash, cash equivalents, and restricted cash | $ | 1,012,767 | $ | 475,667 |
See accompanying Notes to Condensed Consolidated Financial Statements.
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Unity Software Inc. |
UNITY SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
We were founded as Over the Edge Entertainment in Denmark in 2004. We reorganized as a Delaware corporation on May 28, 2009 as Unity Software Inc. (collectively referred to with its wholly owned subsidiaries as “we,” “our” or “us”). We provide a comprehensive set of software solutions to create, run and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices, among others.
We are headquartered in San Francisco, California and have operations in the United States, Denmark, Belgium, Canada, China, Colombia, Finland, France, Germany, Ireland, Israel, Japan, Lithuania, Singapore, South Korea, Spain, Sweden, and the United Kingdom.
We market our solutions directly through our online store and field sales operations in North America, Denmark, China, Finland, Germany, Israel, Japan, Singapore, South Korea, and Spain, and indirectly through independent distributors and resellers worldwide.
Basis of Presentation and Consolidation
We prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. The condensed consolidated financial statements include the accounts of Unity Software Inc. and its wholly owned subsidiaries. We have eliminated all intercompany balances and transactions. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, the information contained herein reflects all adjustments necessary for a fair presentation of our results of operations, financial position, cash flows, and stockholders’ equity. All such adjustments are of a normal, recurring nature. The results of operations for the three and six months ended June 30, 2021 shown in this report are not necessarily indicative of the results to be expected for the full year ending December 31, 2021 or any other period. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 5, 2021.
There have been no material changes in our significant accounting policies as described in our consolidated financial statements for the year ended December 31, 2020, other than the adoption of accounting pronouncements as described below in Note 2, “Summary of Accounting Pronouncements,” of the Notes to Condensed Consolidated Financial Statements.
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Unity Software Inc. |
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. For us, these estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, fair values of financial instruments, useful lives of fixed assets, the incremental borrowing rate ("IBR") we use to determine our operating lease liabilities, income taxes, valuation of deferred tax assets and liabilities, valuation of intangible assets, useful lives of intangible assets, assets acquired and liabilities assumed through business combinations, fair value of our common stock prior to our IPO, valuation of stock-based compensation, capitalization of software costs and software implementation costs, customer life for capitalized commissions, and other contingencies, among others. Actual results could differ from those estimates, and such differences could be material to our financial position and results of operations.
2. Summary of Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. This update replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The new impairment methodology eliminates the probable initial recognition threshold and, instead, estimates the expected credit losses in consideration of past events, current conditions and forecasted information. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities.
We adopted this new standard effective January 1, 2021, using the modified-retrospective approach, which resulted in a cumulative-effect adjustment of $1.5 million to accumulated deficit. We updated the following accounting policies as a result of the adoption of this guidance.
Accounts Receivable
We record accounts receivable at the original invoiced amount, net of allowances for credit losses for any potential uncollectible amounts. We make estimates of expected credit losses for the allowance for doubtful accounts based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified. The estimated credit loss allowance is recorded as a general and administrative expense on our condensed consolidated statement of operations. As of June 30, 2021, the allowance for credit losses was $5.8 million.
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Unity Software Inc. |
Marketable Securities
Our marketable securities consist of investments in U.S. treasury securities, asset-backed securities, corporate bonds, commercial paper, and supranational bonds. We classify our investments in debt securities as available-for-sale at the time of purchase. We consider all debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities as current assets in the consolidated balance sheets. When the fair value of a security is below its amortized cost, the amortized cost will be reduced to its fair value if it is more likely than not that we are required to sell the impaired security before recovery of its amortized cost basis, or we have the intention to sell the security. If neither of these conditions is met, we determine whether the impairment is due to credit losses by comparing the present value of the expected cash flows of the security with its amortized cost basis. The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security. An allowance for credit losses for the excess of amortized cost over the expected cash flows is recorded in interest income and other expense, net in our condensed consolidated statements of operations. Impairment losses that are not credit-related are included in accumulated other comprehensive loss in stockholders’ equity.
3. Revenue
Disaggregation of Revenue
Revenue by Source
The following table presents our revenue disaggregated by source (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Create Solutions | $ | 72,364 | $ | 55,091 | $ | 142,751 | $ | 101,787 | |||||||||||||||
Operate Solutions | 182,916 | 112,513 | 329,494 | 216,881 | |||||||||||||||||||
Strategic Partnerships and Other | 18,282 | 16,727 | 36,089 | 32,657 | |||||||||||||||||||
Total revenue | $ | 273,562 | $ | 184,331 | $ | 508,334 | $ | 351,325 |
Additional information regarding our revenue by source is discussed under the heading “Revenue Recognition” in Note 1, “Description of Business and Summary of Significant Accounting Policies,” of the Notes to Condensed Consolidated Financial Statements.
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Unity Software Inc. |
Revenue by Geographic Area
The following table presents our revenue disaggregated by geography, based on the invoice address of our customers (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
United States | $ | 62,566 | $ | 47,314 | $ | 119,572 | $ | 87,803 | |||||||||||||||
Greater China (1)(2) | 41,891 | 24,435 | 78,440 | 48,191 | |||||||||||||||||||
EMEA (1)(3) | 105,260 | 68,303 | 191,362 | 132,995 | |||||||||||||||||||
APAC (1)(4) | 53,905 | 35,237 | 99,584 | 65,648 | |||||||||||||||||||
Other Americas (1)(5) | 9,940 | 9,042 | 19,376 | 16,688 | |||||||||||||||||||
Total revenue | $ | 273,562 | $ | 184,331 | $ | 508,334 | $ | 351,325 |
(1) No individual country, other than those disclosed above, exceeded 10% of our total revenue for any period presented.
(2) Greater China includes China, Hong Kong, and Taiwan.
(3) Europe, the Middle East, and Africa (“EMEA”)
(4) Asia-Pacific, excluding Greater China (“APAC”)
(5) Canada and Latin America (“Other Americas”)
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets relate to performance completed in advance of scheduled billings. The primary changes in our contract assets and contract liabilities are due to our performance under the contracts and billings.
Contract assets (unbilled receivables) included in accounts receivable are recorded when revenue is recognized in advance of customer invoicing. Unbilled receivables totaled $22.0 million and $26.3 million as of June 30, 2021 and December 31, 2020, respectively. Contract liabilities (deferred revenue) relate to payments received in advance of performance under the contract. Revenue recognized during the three and six months ended June 30, 2021 that was included in the deferred revenue balances at April 1, 2021 and January 1, 2021 was $48.2 million and $75.2 million, respectively. The satisfaction of performance obligations typically lags behind payments received under contract from customers, which may lead to an increase in our deferred revenue balance over time.
Remaining Performance Obligations
As of June 30, 2021, we had total remaining performance obligations of $220.9 million, which represents the total contract transaction price allocated to undelivered performance obligations primarily for Create Solutions subscriptions, Enterprise Support, and Strategic Partnership contracts, which are generally recognized over the next three years. Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. This amount excludes contracts with an original expected term of one year or less and contracts for which we recognize revenue in the amount and in the same period in which we invoice for services performed. We expect to recognize $102.0 million or 46% of this revenue during the next 12 months. We expect to recognize the remaining $118.9 million or 54% of this revenue thereafter.
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Unity Software Inc. |
4. Cash Equivalents and Marketable Securities
Cash equivalents and marketable securities consisted of the following as of June 30, 2021 (in thousands):
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
Cash equivalents: | |||||||||||||||||||||||
Money market funds | $ | 93,223 | $ | — | $ | — | $ | 93,223 | |||||||||||||||
Commercial paper | 66,720 | — | — | 66,720 | |||||||||||||||||||
Total cash equivalents | $ | 159,943 | $ | — | $ | — | $ | 159,943 | |||||||||||||||
Marketable securities: | |||||||||||||||||||||||
Asset-backed securities | $ | 48,407 | $ | 22 | $ | (6) | $ | 48,423 | |||||||||||||||
Corporate bonds | 140,168 | 28 | (81) | 140,115 | |||||||||||||||||||
U.S. treasury securities | 327,050 | 67 | (42) | 327,075 | |||||||||||||||||||
Supranational bonds | 71,508 | 6 | (47) | 71,467 | |||||||||||||||||||
Total marketable securities | $ | 587,133 | $ | 123 | $ | (176) | $ | 587,080 |
Cash equivalents and marketable securities consisted of the following as of December 31, 2020 (in thousands):
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
Cash equivalents: | |||||||||||||||||||||||
Money market funds | $ | 660,086 | $ | — | $ | — | $ | 660,086 | |||||||||||||||
Commercial paper | 75,726 | — | — | 75,726 | |||||||||||||||||||
Total cash equivalents | $ | 735,812 | $ | — | $ | — | $ | 735,812 | |||||||||||||||
Marketable securities: | |||||||||||||||||||||||
Asset-backed securities | $ | 49,950 | $ | 54 | $ | (39) | $ | 49,965 | |||||||||||||||
Corporate bonds | 92,312 | 31 | (21) | 92,322 | |||||||||||||||||||
U.S. treasury securities | 327,025 | 81 | (56) | 327,050 | |||||||||||||||||||
Supranational bonds | 10,066 | 4 | (1) | 10,069 | |||||||||||||||||||
Total marketable securities | $ | 479,353 | $ | 170 | $ | (117) | $ | 479,406 |
We do not intend to sell any of the securities in an unrealized loss position and we expect to realize the full value of all these investments which may be upon maturity. We did not recognize any credit losses related to our available-for-sale debt securities during the three and six months ended June 30, 2021.
The following table summarizes the amortized cost and fair value of our marketable securities as of June 30, 2021, by contractual years to maturity (in thousands):
Amortized Cost | Fair Value | ||||||||||
Due within one year | $ | 355,765 | $ | 355,865 | |||||||
Due between one and three years | 231,368 | 231,215 | |||||||||
Total | $ | 587,133 | $ | 587,080 |
There were no material realized or unrealized gains or losses, either individually or in the aggregate.
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Unity Software Inc. |
5. Fair Value Measurements
We categorize assets and liabilities recorded or disclosed at fair value on our consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:
•Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
•Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.
The following table presents the fair value of our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of June 30, 2021 (in thousands):
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Cash equivalents: | |||||||||||||||||||||||
Money market funds | $ | 93,223 | $ | — | $ | — | $ | 93,223 | |||||||||||||||
Commercial paper | — | 66,720 | — | 66,720 | |||||||||||||||||||
Total cash equivalents | $ | 93,223 | $ | 66,720 | $ | — | $ | 159,943 | |||||||||||||||
Marketable securities: | |||||||||||||||||||||||
Asset-backed securities | $ | — | $ | 48,423 | $ | — | $ | 48,423 | |||||||||||||||
Corporate bonds | — | 140,115 | — | 140,115 | |||||||||||||||||||
U.S. treasury securities | — | 327,075 | — | 327,075 | |||||||||||||||||||
Supranational bonds | — | 71,467 | — | 71,467 | |||||||||||||||||||
Total marketable securities | $ | — | $ | 587,080 | $ | — | $ | 587,080 |
The following table presents the fair value of our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of December 31, 2020 (in thousands):
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Cash equivalents: | |||||||||||||||||||||||
Money market funds | $ | 660,086 | $ | — | $ | — | $ | 660,086 | |||||||||||||||
Commercial paper | — | 75,726 | — | 75,726 | |||||||||||||||||||
Total cash equivalents | $ | 660,086 | $ | 75,726 | $ | — | $ | 735,812 | |||||||||||||||
Marketable securities: | |||||||||||||||||||||||
Asset-backed securities | $ | — | $ | 49,965 | $ | — | $ | 49,965 | |||||||||||||||
Corporate bonds | — | 92,322 | — | 92,322 | |||||||||||||||||||
U.S. treasury securities | — | 327,050 | — | 327,050 | |||||||||||||||||||
Supranational bonds | — | 10,069 | — | 10,069 | |||||||||||||||||||
Total marketable securities | $ | — | $ | 479,406 | $ | — | $ | 479,406 |
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Unity Software Inc. |
6. Acquisitions
Acquisitions are accounted for in accordance with FASB ASC Topic 805, Business Combinations, and the revenue and earnings of the acquired businesses have been included in our results from the respective dates of the acquisitions and were not material to our condensed consolidated financial statements.
The total purchase price allocated to the net assets acquired is assigned based on the fair values as of the date of acquisition. The fair value assigned to identifiable intangible assets acquired was determined using the income approach and the cost approach. We believe that these identified intangible assets will have no residual value after their estimated economic useful lives. The identifiable intangible assets are subject to amortization on a straight-line basis, as this best approximates the benefit period related to these assets.
The excess of the purchase price over the identified tangible and intangible assets, less liabilities assumed, is recorded as goodwill. Goodwill is not subject to amortization and it typically is not deductible for U.S. income tax purposes.
For 2021 and certain 2020 acquisitions, the fair values of assets acquired and liabilities assumed, including current income taxes payable and deferred taxes, may change over the measurement period as additional information is received and certain tax returns are finalized. Accordingly, the provisional measurements of fair value of the current income taxes payable and deferred taxes are subject to change. We expect to finalize the valuation as soon as practicable, but not later than one year from the respective acquisition dates.
2021 Acquisitions
Metaverse Technologies Limited
In June 2021, we completed the acquisition of 100% of the issued share capital of Metaverse Technologies Limited ("Metaverse") for consideration of $45.7 million in cash.
Metaverse is a software company that develops first class software and solutions to help take the best out of computer-aided design ("CAD") data, reducing time and efforts and maximizing visualization performance. Metaverse bridges the gap between complex models that are made for design or engineering and the real-time 3D world.
The following table summarizes the consideration paid for Metaverse and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Consideration: | |||||
Cash | $ | 45,710 | |||
Fair value of total consideration transferred | $ | 45,710 | |||
Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
Cash | $ | 1,096 | |||
Intangible assets | 12,340 | ||||
Other assets and liabilities, net | 196 | ||||
Income and other taxes payable | (1,470) | ||||
Other payable | (345) | ||||
Deferred tax liability | (2,285) | ||||
Total identifiable net assets assumed | 9,532 | ||||
Goodwill | 36,178 | ||||
Total | $ | 45,710 |
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Unity Software Inc. |
We recorded $0.6 million and $0.8 million in transaction costs associated with the Metaverse acquisition for the three and six months ended June 30, 2021, respectively. These costs were recorded within general and administrative expenses.
Pro forma results of operations for the Metaverse acquisition have not been presented because the acquisition is not material to the condensed consolidated statements of operations and comprehensive loss.
Other 2021 Acquisition
During the six months ended June 30, 2021, we completed the acquisition of Visual Live 3D LLC ("Visual Live") for total consideration of approximately $24.8 million payable in cash. In aggregate, $5.1 million was attributed to intangible assets and represents acquired developed technology, customer relationships, and trademarks, $0.6 million was attributed to other assets, $19.8 million was attributed to goodwill and $0.6 million was attributed to other liabilities assumed. This acquisition was strategic in nature as it enhanced our product offerings.
We recorded $0.6 million in transaction costs associated with this acquisition for the six months ended June 30, 2021. These costs were recorded within general and administrative expenses.
Pro forma results of operations for this acquisition have not been presented because the acquisition is not material to the condensed consolidated statements of operations and comprehensive loss.
7. Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of purchase price and related costs over the value assigned to net tangible and identifiable intangible assets acquired in business combinations.
The following table presents the changes in the carrying amount of goodwill for the six months ended June 30, 2021 (in thousands):
Balance as of December 31, 2020 | $ | 286,251 | |||
Goodwill from Visual Live acquisition | 19,779 | ||||
Goodwill from Metaverse acquisition | 36,178 | ||||
Measurement period adjustments | (74) | ||||
Balance as of June 30, 2021 | $ | 342,134 |
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Unity Software Inc. |
Intangible Assets, Net
The following tables present details of our intangible assets, excluding goodwill (in thousands, except for weighted-average useful life):
As of June 30, 2021 | |||||||||||||||||||||||
Weighted-Average Useful Life (1) (In Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
Developed technology | 5.8 | $ | 96,074 | $ | (38,839) | $ | 57,235 | ||||||||||||||||
Customer relationships | 2.3 | 17,951 | (10,941) | 7,010 | |||||||||||||||||||
Trademark | 3.2 | 3,907 | (2,451) | 1,456 | |||||||||||||||||||
Total intangible assets | $ | 117,932 | $ | (52,231) | $ | 65,701 | |||||||||||||||||
As of December 31, 2020 | |||||||||||||||||||||||
Weighted‑Average Useful Life (1) (In Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
Developed technology | 5.8 | $ | 83,688 | $ | (32,342) | $ | 51,346 | ||||||||||||||||
Customer relationships | 2.2 | 13,327 | (8,682) | 4,645 | |||||||||||||||||||
Trademark | 3.3 | 3,507 | (2,039) | 1,468 | |||||||||||||||||||
Total intangible assets | $ | 100,522 | $ | (43,063) | $ | 57,459 |
(1) Based on weighted-average useful life established as of the acquisition date.
The following table presents the amortization of finite-lived intangible assets included on our condensed consolidated statements of operations and comprehensive loss (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Amortization expense | $ | 4,709 | $ | 4,150 | $ | 9,168 | $ | 8,294 |
As of June 30, 2021, the estimated future amortization of finite-lived intangible assets for each of the next five years and thereafter was as follows (in thousands):
Remainder of 2021 | $ | 10,114 | |||
2022 | 17,878 | ||||
2023 | 14,434 | ||||
2024 | 13,284 | ||||
2025 | 7,123 | ||||
Thereafter | 2,868 | ||||
Total | $ | 65,701 |
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8. Balance Sheet Components
The following tables provide details of selected balance sheet items (in thousands):
As of | |||||||||||
June 30, 2021 | December 31, 2020 | ||||||||||
Property and equipment, net: | |||||||||||
Gross property and equipment | |||||||||||
Leasehold improvements | $ | 69,939 | $ | 65,669 | |||||||
Computer and other hardware | 65,886 | 58,568 | |||||||||
Furniture | 25,068 | 23,685 | |||||||||
Internally developed software | 2,043 | 3,301 | |||||||||
Purchased software | 1,407 | 1,436 | |||||||||
Construction in progress | 15,133 | 13,343 | |||||||||
Total gross property and equipment | 179,476 | 166,002 | |||||||||
Accumulated depreciation and amortization (1) | (83,528) | (70,458) | |||||||||
Property and equipment, net | $ | 95,948 | $ | 95,544 |
(1) The following table presents the depreciation and amortization of property and equipment included on our condensed consolidated statements of operations and comprehensive loss (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Depreciation and amortization expense | $ | 7,561 | $ | 6,050 | $ | 14,934 | $ | 11,716 |
Long-lived Assets, Net, by Geographic Area
The following table presents our long-lived assets, net, disaggregated by geography, which consists of our property and equipment, net, but excludes internally developed software and purchased software (in thousands):
As of | |||||||||||
June 30, 2021 | December 31, 2020 | ||||||||||
United States | $ | 32,087 | $ | 35,494 | |||||||
Canada | 25,881 | 20,063 | |||||||||
United Kingdom | 16,380 | 17,846 | |||||||||
Greater China | 4,861 | 5,653 | |||||||||
EMEA, excluding United Kingdom (1) | 11,588 | 11,181 | |||||||||
APAC (1) | 2,961 | 3,546 | |||||||||
Other Americas, excluding Canada (1) | 778 | 809 | |||||||||
Total long-lived assets, net | $ | 94,536 | $ | 94,592 |
(1) No individual country, other than those disclosed above, exceeded 10% of our total long-lived assets, net, for any period presented.
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As of | |||||||||||
June 30, 2021 | December 31, 2020 | ||||||||||
Accrued expenses and other current liabilities: | |||||||||||
Accrued expenses | $ | 73,583 | $ | 53,535 | |||||||
Accrued compensation | 54,559 | 52,771 | |||||||||
Accrued expenses and other current liabilities | $ | 128,142 | $ | 106,306 |
Sales Commissions
We consider internal sales commissions as potential incremental costs of obtaining the contract with a customer. We apply a practical expedient to expense incremental costs incurred if the period of the benefit is one year or less. Incremental costs that have a period of benefit greater than one year are capitalized and amortized over the estimated period of benefit. Capitalized commissions, net of amortization, are included in other current assets and other assets on our condensed consolidated balance sheets. We capitalized $6.6 million and $8.8 million of sales commissions for the six months ended June 30, 2021 and the year ended December 31, 2020, respectively.
As of June 30, 2021, capitalized commissions, net of amortization, included in other current assets and other assets were $5.1 million and $6.5 million, respectively. Capitalized commissions, net of amortization, included in other current assets and other assets were $2.9 million and $4.4 million, respectively, as of December 31, 2020.
Capitalized commissions are amortized over the expected period of benefit, which we have determined, based on analysis, to be three years. Amortization of capitalized commissions are included in sales and marketing expenses on our condensed consolidated statements of operations and comprehensive loss. For the three months ended June 30, 2021 and 2020, we amortized $1.3 million and $0.2 million of capitalized commissions, respectively. For the six months ended June 30, 2021 and 2020, we amortized $2.3 million and $0.4 million of capitalized commissions, respectively. We did not incur any impairment losses for the six months ended June 30, 2021 and 2020.
9. Leases
We have operating leases for offices and equipment, which have remaining lease terms of less than one year to 10.5 years, some of which include options to extend the lease with renewal terms from to five years. Some leases include an option to terminate the lease from less than one year up to five years from the lease commencement date.
Components of lease expense were as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Operating lease expense, excluding ROU asset impairment | $ | 7,407 | $ | 7,680 | $ | 14,708 | $ | 14,793 | |||||||||||||||
Short-term lease expense | 125 | 220 | 242 | 527 | |||||||||||||||||||
Variable lease expense | 1,471 | 1,135 | 2,446 | 2,835 | |||||||||||||||||||
Sublease income | (93) | (8) | (186) | (26) | |||||||||||||||||||
Total lease expense | $ | 8,910 | $ | 9,028 | $ | 17,210 | $ | 18,129 |
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Other information related to operating leases was as follows (in thousands):
Six Months Ended June 30, | |||||||||||
2021 | 2020 | ||||||||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 15,532 | $ | 13,569 | |||||||
Operating lease ROU assets obtained in exchange for new operating lease liabilities | $ | 18,999 | $ | 23,834 | |||||||
As of June 30, 2021, our operating leases had a weighted-average remaining lease term of 6.25 years and a weighted-average discount rate of 4.3%.
As of June 30, 2021, future minimum lease payments under our non-cancellable operating leases were as follows (in thousands):
Operating Leases (1) | |||||
Remainder of 2021 | $ | 15,503 | |||
2022 | 29,902 | ||||
2023 | 24,422 | ||||
2024 | 21,307 | ||||
2025 | 16,290 | ||||
Thereafter | 41,875 | ||||
Total future minimum lease payments | 149,299 | ||||
Less: imputed interest | (18,942) | ||||
Present value of lease liabilities | $ | 130,357 |
(1) Excludes future minimum payments for leases which have not yet commenced as of June 30, 2021.
In August 2018, we entered into a lease agreement for approximately 150,000 square feet of office space in San Francisco, California. In June 2021, we entered into an agreement to terminate the lease, which involved a one-time payment of $43.5 million, all of which was recorded in general and administrative expense on our condensed consolidated statement of operations.
10. Borrowings
On December 20, 2019, we entered into a revolving credit agreement (the “Credit Agreement”), which provided for a committed revolving loan facility of up to $125.0 million (the “Revolving Facility”) and included a $20.0 million letter of credit subfacility (the “LC Capacity” and together with the Revolving Facility, the “Credit Facility”). Borrowings under the Credit Facility were available for working capital and general corporate purposes. The Credit Facility had a maturity date of December 20, 2024.
At our option, we were to specify whether the loans made under the Revolving Facility were an Alternate Base Rate (“ABR”) borrowing or a Eurodollar borrowing, which then determined the annual interest rate. ABR borrowings bore interest at the ABR plus 0.50%. Eurodollar borrowings bore interest at the adjusted LIBO Rate plus 1.50%.
The ABR equaled the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, and (iii) the sum of the adjusted one-month LIBO Rate for a Eurodollar borrowing plus 1.00%. The ABR was subject to a floor of 1.00%.
For ABR borrowings, interest was payable on the last day of March, June, September, and December of each year. For Eurodollar borrowings, interest was payable on the last day of each interest period for the applicable borrowing, and if such interest period extended over three months, each day prior to the last day of each three-month interval during such interest period.
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Commitments under the Revolving Facility were subject to a commitment fee of 0.25% on the difference between the total committed amount of the Revolving Facility on the one hand, and the amount drawn thereunder plus the aggregate amount of LC Capacity used on the other. An annual letter of credit fee of 1.50% of the average daily undrawn amount of the letters of credit issued thereunder was also payable quarterly. Letters of credit issued under the letter of credit subfacility were subject to a fronting fee of 0.125% on the average daily undrawn amount on such letters of credit.
In March 2020, we borrowed the full $125.0 million amount as a Eurodollar borrowing under the Revolving Facility. In September 2020, we repaid the $125.0 million of indebtedness under the Credit Facility using a portion of the net proceeds we received from our initial public offering ("IPO").
In connection with this borrowing, we recognized $0.6 million and $0.8 million in expense primarily related to the interest cost associated with this borrowing, commitment fees on the undrawn portion and amortization of debt issuance costs during the six months ended June 30, 2021 and 2020, respectively. This amount is reported within “Interest expense” on our condensed consolidated statements of operations and comprehensive loss.
Under the Credit Agreement, we were to maintain a minimum liquidity balance of $75.0 million as of the last day of the most recently completed four consecutive fiscal quarters, which commenced on June 30, 2020. The Credit Agreement contained customary conditions to borrowing, representations and warranties, events of default and covenants, including covenants that restrict our ability to incur indebtedness, grant liens, make investments, undergo corporate changes, make dispositions, prepay other indebtedness, pay dividends or other distributions and engage in transactions with our affiliates. The obligations under the Credit Agreement were secured by a perfected security interest in (i) all of our tangible and intangible assets, except for certain customary excluded assets, and (ii) all of our ownership in capital stock of restricted subsidiaries (limited, in the case of the stock of non-U.S. subsidiaries and U.S. subsidiaries that have no material assets other than equity interests and/or indebtedness in foreign subsidiaries that are controlled foreign corporations, to 65% of the capital stock of such subsidiaries). The obligations under the Credit Agreement were also guaranteed by our existing and subsequently acquired or formed material domestic subsidiaries.
In April 2021, we terminated without penalty our Credit Agreement. There was no outstanding indebtedness under the Credit Facility, and we determined that the Credit Facility was no longer necessary. We were in compliance in all material respects with the covenants in the Credit Agreement through April 2021, when the Credit Agreement was terminated.
11. Commitments and Contingencies
The following table summarizes our non-cancelable contractual commitments as of June 30, 2021 (in thousands):
Total | Remainder of 2021 | 2022‑2023 | 2024‑2025 | ||||||||||||||||||||
Purchase commitments (1) | $ | 119,294 | $ | 15,036 | $ | 88,633 | $ | 15,625 | |||||||||||||||
(1) The substantial majority of our purchase commitments are related to agreements with our data center hosting providers.
Data Center Hosting Commitments
In March 2018, we entered into a cloud service agreement with a total term of six years. Under the agreement, we were granted access to use certain cloud services. Minimum annual commitments increase annually over the term of the agreement. The aggregate value of all annual minimum commitments over the contract term is $210.5 million. Total spend under the agreement for the three months ended June 30, 2021 and 2020 was approximately $28.2 million and $16.3 million, respectively. Total spend under the agreement for the six months ended June 30, 2021 and 2020 was approximately $53.8 million and $28.1 million, respectively. We expect to meet our remaining commitment.
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Legal Matters
In the normal course of business, we are subject to various legal matters. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Legal costs related to such potential losses are expensed as incurred. In addition, recoveries are shown as a reduction in legal costs in the period in which they are realized. With respect to our outstanding matters, based on our current knowledge, we believe that the resolution of such matters will not, either individually or in aggregate, have a material adverse effect on our business or our consolidated financial statements. However, litigation is inherently uncertain, and the outcome of these matters cannot be predicted with certainty. Accordingly, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these matters.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third-party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. As of June 30, 2021, there were no known events or circumstances that have resulted in a material indemnification liability to us and we did not incur material costs to defend lawsuits or settle claims related to these indemnifications.
Letters of Credit
We had $10.8 million and $21.4 million of secured letters of credit outstanding as of June 30, 2021 and December 31, 2020, respectively. These primarily relate to our office space leases and are fully collateralized by certificates of deposit which we record in restricted cash on our condensed consolidated balance sheets based on the term of the remaining restriction.
12. Stockholders’ Equity and Employee Compensation Plans
Common Stock
In January 2020, we sold 4.5 million shares of our common stock. The total transaction price of the common stock issued was $100.0 million.
2020 Equity Incentive Plan
In succession to and continuation of our 2019 Stock Plan, our board of directors approved our 2020 Equity Incentive Plan (“2020 Plan”) in August 2020, and our stockholders approved in September 2020. No grants were made under our 2020 Plan prior to its effectiveness on September 17, 2020. As our 2020 Plan has become effective, no further grants will be made under our 2019 Stock Plan. In addition, shares subject to outstanding stock awards granted under our 2009 Stock Plan and 2019 Stock Plan that expire, or are forfeited, cancelled, withheld, or reacquired become available for grant pursuant to the 2020 Plan.
The 2020 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other forms of awards to employees, directors, and consultants, including employees and consultants of our affiliates.
The exercise price of stock options granted under the 2020 Plan must be at least equal to the fair market value of a share of our common stock on grant date and the exercise price of incentive stock options granted to any participant, who owns more than 10% of the total voting power of all classes of our outstanding stock, must be at least 110% of the fair market value on the grant date.
The term of a stock option and stock appreciation right may not exceed 10 years, except with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock, the term of an incentive stock option may not exceed five years.
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As of June 30, 2021, we had reserved a total of 84.0 million shares of common stock under the 2020 Plan, of which 37.8 million were available for grant.
2020 Employee Stock Purchase Plan
Our board of directors also adopted our 2020 Employee Stock Purchase Plan ("2020 ESPP") in August 2020, and our stockholders approved our 2020 ESPP in September 2020.
The maximum number of shares of our common stock that may be issued under our 2020 ESPP is 8,023,463 shares, all of which were available for issuance as of June 30, 2021. Our 2020 ESPP permits participants to purchase shares of our common stock through payroll deductions of up to 15% of their earnings. Unless otherwise determined by the administrator, the purchase price of the shares will be 85% of the lower of the fair market value of our common stock on the first day of an offering or on the date of purchase. Participants may end their participation at any time during an offering and will be paid their accrued contributions that have not yet been used to purchase shares. Participation ends automatically upon termination of employment with us. As of June 30, 2021, we had not yet launched our 2020 ESPP and were under no obligation to do so.
13. Stock‑Based Compensation
We recorded stock-based compensation expense related to grants to employees, including those in connection with modified awards, on our condensed consolidated statements of operations as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Cost of revenue | $ | 5,340 | $ | 690 | $ | 10,457 | $ | 1,247 | |||||||||||||||
Research and development | 33,227 | 5,990 | 64,877 | 10,779 | |||||||||||||||||||
Sales and marketing | 14,523 | 2,277 | 26,560 | 4,124 | |||||||||||||||||||
General and administrative | 32,310 | 3,006 | 50,067 | 5,504 | |||||||||||||||||||
Total stock-based compensation expense | $ | 85,400 | $ | 11,963 | $ | 151,961 | $ | 21,654 |
As of June 30, 2021, there was unrecognized compensation expense related to outstanding stock options of $128.5 million to be recognized over the weighted-average remaining vesting period of 2.07 years. As of June 30, 2021, there was unrecognized compensation expense related to unvested restricted stock units of $710.1 million to be recognized over the weighted-average remaining vesting period of 3.14 years. In future periods, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain employees.
In March 2021, we entered into a separation agreement with our former Chief Financial Officer. The agreement provided for payment of a one-time lump-sum severance benefit of $0.3 million, payment for coverage under COBRA or applicable state law until November 30, 2021, a standard release of claims against us and a partial acceleration and extension of the exercise period of her outstanding equity awards. The stock-based compensation expense totaled $12.6 million in connection with the modified equity awards, of which $2.1 million, along with the one-time lump-sum severance benefit of $0.3 million, were recorded in general and administrative expense in the three months ended March 31, 2021. The remaining $10.5 million of stock-based compensation expense was recorded in general and administrative expense in the three months ended June 30, 2021.
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Stock Options
A summary of our stock option activity under the 2009 Stock Plan, 2019 Stock Plan, and 2020 Plan is as follows:
Options Outstanding | |||||||||||||||||
Stock Options Outstanding | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (In Years) | |||||||||||||||
Balance as of December 31, 2020 | 40,457,875 | $ | 8.03 | 6.87 | |||||||||||||
Granted | 1,196,458 | $ | 104.32 | ||||||||||||||
Exercised | (6,831,982) | $ | 5.59 | ||||||||||||||
Forfeited, cancelled, or expired | (547,439) | $ | 11.75 | ||||||||||||||
Balance as of June 30, 2021 | 34,274,912 | $ | 11.82 | 6.57 | |||||||||||||
The calculated grant-date fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following assumptions:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Expected dividend yield | — | — | — | — | |||||||||||||||||||
Risk-free interest rate | 1.1% - 1.2% | 0.4% - 0.5% | 0.9% - 1.2% | 0.4% - 0.6% | |||||||||||||||||||
Expected volatility | 36.1% - 36.2% | 35.7% - 36.3% | 36.0% - 36.2% | 33.8% - 36.3% | |||||||||||||||||||
Expected term (in years) | 6.25 | 6.00 | 6.25 | 6.00 | |||||||||||||||||||
Fair value of underlying common stock | $100.60 - $103.86 | $25.72 | $100.60 - $108.10 | $22.00 - $25.72 |
For stock options granted prior to our IPO, the expected term is based on the vesting terms, estimated exercise behavior, post-vesting cancellations and contractual terms of the awards. For stock options granted after our IPO, we estimate the expected term using the simplified method as specified under Staff Accounting Bulletin Topic 14, which utilizes the midpoint between the stock options' vesting date and the end of the contractual term. We do not plan to pay cash dividends in the foreseeable future; therefore, we used an expected dividend yield of zero. The risk-free interest rate is based on U.S. Treasury rates in effect at the time of grant with maturities equal to the grant’s expected term. The expected volatility is based on historical volatility of peer companies. The fair value of common stock is estimated based on observable transactions in the secondary market for stock options granted prior to our IPO and based on the grant-date closing price of our common stock for stock options granted after our IPO.
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Restricted Stock Units (“RSUs”)
A summary of our RSU activity under the 2019 Stock Plan and 2020 Plan is as follows:
Unvested Restricted Stock Units | |||||||||||
Number of Shares | Weighted-Average Grant-Date Fair Value | ||||||||||
Unvested as of December 31, 2020 | 9,561,791 | $ | 53.79 | ||||||||
Granted | 3,657,958 | $ | 105.57 | ||||||||
Vested | (1,003,807) | $ | 41.17 | ||||||||
Forfeited | (272,700) | $ | 66.37 | ||||||||
Unvested as of June 30, 2021 | 11,943,242 | $ | 70.42 |
The RSUs granted prior to our IPO are subject to both a service-based vesting condition, which is satisfied over to four years, and a liquidity event vesting condition, which was satisfied upon the completion of our IPO. The RSUs granted subsequent to our IPO only have a service-based vesting condition, which is satisfied over approximately one year to four years.
14. Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate is subject to volatility due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in how we do business, and tax law developments.
Our effective tax rate for the three and six months ended June 30, 2021 differs from the U.S. federal statutory tax rate of 21% primarily due to foreign earnings being taxed at different tax rates, credits and losses that cannot be benefited due to the valuation allowance on United States and Denmark entities, the tax benefit from stock-based compensation activities during the period, and the tax impact related to the United Kingdom corporate tax rate change, effective April 1, 2023, that was enacted during the period. Our effective tax rate for the three and six months ended June 30, 2020 differs from the U.S. federal statutory tax rate of 21% primarily due to foreign earnings being taxed at different tax rates, credits and losses that cannot be benefited due to the valuation allowance on United States and Denmark entities, and reversal of unrecognized tax benefits due to statute of limitation expiration.
The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We regularly assess the ability to realize our deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including our history of losses, we believe that it is more likely than not that our U.S. federal, certain state, Denmark, and certain non-U.S. jurisdictions deferred tax assets will not be realized as of June 30, 2021 and December 31, 2020, and as such, we have maintained a full valuation allowance against such deferred tax assets.
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As of June 30, 2021, we had $86.7 million of gross unrecognized tax benefits, of which $10.2 million would impact the effective tax rate, if recognized. It is reasonably possible that the amount of unrecognized tax benefits as of June 30, 2021 could increase or decrease significantly due to the lapse of statutes of limitations within the next 12 months. As a result, the amount of unrecognized tax benefits may decrease by as much as $2.3 million. We believe that we have adequately provided for any reasonably foreseeable outcome related to our tax audits and that any settlement will not have a material impact on our financial condition and operating results at this time.
15. Net Loss per Share of Common Stock
Basic net loss per share attributable to our common stockholders is computed using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase. Diluted net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were antidilutive given our net loss in each period presented. Potentially dilutive common shares result from the assumed exercise of outstanding stock options and assumed vesting of outstanding RSUs, both using the treasury stock method.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Basic and diluted net loss per share | |||||||||||||||||||||||
Numerator: | |||||||||||||||||||||||
Net loss attributable to our common stockholders | $ | (148,342) | $ | (27,351) | $ | (255,802) | $ | (54,087) | |||||||||||||||
Denominator: | |||||||||||||||||||||||
Weighted-average common shares used in per share computation, basic and diluted | 280,374 | 129,826 | 278,233 | 128,804 | |||||||||||||||||||
Net loss per share, basic and diluted | $ | (0.53) | $ | (0.21) | $ | (0.92) | $ | (0.42) |
The following table presents the forms of antidilutive potential common shares excluded from the computation of diluted net loss per share for the following periods (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Convertible preferred stock | — | 102,717 | — | 102,717 | |||||||||||||||||||
Stock options | 34,275 | 46,217 | 34,275 | 46,217 | |||||||||||||||||||
RSUs | 11,943 | — | 11,943 | — |
16. Subsequent Events
In July 2021, we completed the acquisition of a company that provides tools for artists to create complex, realistic 3D vegetation assets for purchase consideration of approximately $20.0 million.
In July 2021, we signed an agreement to purchase a company that designs and develops remote access streaming technology for purchase consideration of $320.0 million. The acquisition is expected to close in the third quarter of the year ending December 31, 2021 subject to closing conditions.
In August 2021, we completed the acquisition of a company that provides an application that allows consumers to create and share their own experiences for purchase consideration of approximately $20.0 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. 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 are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the section titled “Note Regarding Forward-Looking Statements” in this report. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.
Overview
Unity is the world’s leading platform for creating and operating interactive, real-time 3D ("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. 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 June 30, 2021, we built upon our history of innovation by achieving a number of milestones that secured our position as the leading platform for creating and operating interactive, real-time 3D content including those identified below.
•Unity continues to increase momentum in non-gaming industries. In the second quarter 2021, Unity added three new automotive manufacturers and also began to work with several consumer product brands, including an eyewear manufacturer and retailer, and an appliance manufacturer known for their advanced designs. Additionally, Unity is getting traction in new markets, including a new contract with The Nature Conservancy to utilize RT3D digital technologies to convey information about water usage in New York state. The Nature Conservancy is a global environment nonprofit with over 1 million members and a diverse staff of over 400 scientists, making them one of the most effective and wide-reaching environmental organizations in the world.
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•Unity introduces first-ever sustainability grant. Early in the quarter Unity announced its Unity for Humanity Environment and Sustainability Grant, a first-of-its-kind grant program created to help creators who leverage RT3D for positive environmental change. The grant program, created in collaboration with the United Nations Environment Programme and Project Drawdown, will have its first set of awardees in fall 2021.
•Unity acquires PIXYZ and SpeedTree. In Q2, Unity acquired long-time partner Metaverse Technologies, Inc., providers of PIXYZ, the 3D data preparation and optimization software. The acquisition means professional creators can more easily and quickly import 3D data into Unity and optimize models for real-time development. Additionally, in July 2021, Unity acquired Interactive Data Visualization, Inc., the creator of the popular SpeedTree environment creation suite. The acquisition enables a deeper integration of SpeedTree into the Unity ecosystem, enhancing artist authoring workflows and environment creation capabilities.
•Unity released synthetic datasets for reduced AI training time and budgets. Unity announced the Unity Computer Vision Datasets in April 2021, aimed at reducing the cost of developing computer vision applications, and more quickly training Artificial Intelligence (AI) for the manufacturing, retail and security industries.
We continue to invest in research and development and to pursue selective acquisitions and partnerships in order to enhance and expand our platform.
Impact of COVID-19
While our total revenue, cash flows, and overall financial condition have not been adversely impacted to date, the COVID-19 pandemic has caused general business disruption worldwide beginning in January 2020. The full extent to which the COVID-19 pandemic, including any new strains or mutations such as the delta variant, 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 may continue to experience a modest adverse impact on our sales of Create Solutions, our pipeline of customer opportunities for our Create Solutions was largely back to normal levels by the end of 2020, as well as our Strategic Partnerships. Additionally, we have seen an increase in demand for our portfolio of products and services within Operate Solutions following the implementation of shelter-in-place orders to mitigate the outbreak of COVID-19, which has 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. However, this increased demand for our Operate Solutions and expense reduction will likely moderate over time, particularly as vaccines are becoming widely available, and as shelter-in-place orders and other related measures and community practices evolve. Further, as certain of our customers or partners experience downturns or uncertainty in their own business operations or revenue resulting from the COVID-19 pandemic, they may decrease or delay their spending, request pricing concessions, or seek renegotiations of their contracts, any of which may result in decreased revenue for us. In addition, we may experience customer losses, due to factors including bankruptcy or our customers ceasing operations, which may result in an inability to collect receivables from these customers. 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 our employees to return to in-person offices later this year, however our plans may change if the number of COVID-19 cases rises where our offices are located or if there is an increase in new strains such as the delta variant, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners.
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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 rollout of vaccines and the reduction of COVID-19 cases globally could affect the seasonality of our business or boost global GDP growth, which could positively impact our business. However, 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 Metrics
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.
Customers Contributing More Than $100,000 of Revenue
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 888 and 716 of such customers in the trailing 12 months as of June 30, 2021 and 2020, 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 six months ended June 30, 2021 and 2020, 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.
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 | |||||||||||
June 30, 2021 | June 30, 2020 | ||||||||||
Dollar-based net expansion rate | 142 | % | 142 | % |
Our dollar-based net expansion rate as of June 30, 2021 and 2020, was driven primarily by the sales of additional subscriptions and services to our existing Create Solutions customers, expanded usage 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.
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, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenue | $ | 273,562 | $ | 184,331 | $ | 508,334 | $ | 351,325 | |||||||||||||||
Cost of revenue | 57,725 | 40,432 | 116,459 | 72,300 | |||||||||||||||||||
Gross profit | 215,837 | 143,899 | 391,875 | 279,025 | |||||||||||||||||||
Operating expenses | |||||||||||||||||||||||
Research and development | 154,216 | 85,108 | 308,231 | 166,859 | |||||||||||||||||||
Sales and marketing | 74,888 | 43,716 | 144,681 | 86,975 | |||||||||||||||||||
General and administrative | 135,917 | 39,920 | 199,049 | 77,473 | |||||||||||||||||||
Total operating expenses | 365,021 | 168,744 | 651,961 | 331,307 | |||||||||||||||||||
Loss from operations | (149,184) | (24,845) | (260,086) | (52,282) | |||||||||||||||||||
Interest expense | (485) | (656) | (600) | (788) | |||||||||||||||||||
Interest income and other expense, net | 70 | (662) | 1,635 | 1,194 | |||||||||||||||||||
Loss before provision for income taxes | (149,599) | (26,163) | (259,051) | (51,876) | |||||||||||||||||||
Provision for income taxes | (1,257) | 1,188 | (3,249) | 2,211 | |||||||||||||||||||
Net loss | $ | (148,342) | $ | (27,351) | $ | (255,802) | $ | (54,087) |
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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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenue | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
Cost of revenue | 21 | 22 | 23 | 21 | |||||||||||||||||||
Gross margin | 79 | 78 | 77 | 79 | |||||||||||||||||||
Operating expenses | |||||||||||||||||||||||
Research and development | 56 | 46 | 61 | 47 | |||||||||||||||||||
Sales and marketing | 27 | 24 | 28 | 25 | |||||||||||||||||||
General and administrative | 50 | 22 | 39 | 22 | |||||||||||||||||||
Total operating expenses | 133 | 92 | 128 | 94 | |||||||||||||||||||
Loss from operations | (55) | (13) | (51) | (15) | |||||||||||||||||||
Interest expense | — | — | — | — | |||||||||||||||||||
Interest income and other expense, net | — | — | — | — | |||||||||||||||||||
Loss before provision for income taxes | (55) | (13) | (51) | (15) | |||||||||||||||||||
Provision for income taxes | — | 1 | (1) | 1 | |||||||||||||||||||
Net loss | (55) | % | (14) | % | (50) | % | (16) | % |
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 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 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.
Operate Solutions
We generate Operate Solutions revenue through a combination of revenue-share and usage-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 primarily when an end user installs an application after seeing an advertisement (contracted on a cost-per-install basis), and to a lesser extent when an advertisement starts (contracted on a cost-per-impression basis). Our revenue represents the amount we retain from the transaction we are facilitating through our Unified Auction. Actions by operating system platform providers or application stores such as Apple or Google may affect the manner in which we or our customers collect, use and share data from end-user devices. For example, Apple recently implemented a requirement for applications using its mobile operating system, iOS, to affirmatively (on an opt-in basis) obtain an end user’s permission to “track them across apps or websites owned by other companies” or access their device’s advertising identifier for advertising and advertising measurement purposes, as well as other restrictions. If end-users do not opt-in to participate in such tracking as defined by Apple, our ability to monetize through advertising could suffer. The exact effect and implementation of Apple's changes are not yet clear, but we expect these changes to adversely affect our revenue from our monetization products and potentially other Operate Solutions, and such impact could be material.
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 usage and billed monthly in arrears. Some of our usage-based contracts include a minimum fixed-fee usage amount. We expect that our Operate Solutions beyond monetization, including cloud operations and hosting services, such as Multiplay, which we introduced in 2018, will grow as a percentage of our revenue in the long term as we further scale newer products and services and as we launch additional solutions for gaming customers as well as customers in other industries.
Strategic 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. 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 | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | Amount | % | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
Create Solutions | $ | 72,364 | $ | 55,091 | $ | 17,273 | 31 | % | $ | 142,751 | $ | 101,787 | $ | 40,964 | 40 | % | |||||||||||||||||||||||||||||||
Operate Solutions | 182,916 | 112,513 | 70,403 | 63 | % | 329,494 | 216,881 | 112,613 | 52 | % | |||||||||||||||||||||||||||||||||||||
Strategic Partnerships and Other | 18,282 | 16,727 | 1,555 | 9 | % | 36,089 | 32,657 | 3,432 | 11 | % | |||||||||||||||||||||||||||||||||||||
Total revenue | $ | 273,562 | $ | 184,331 | $ | 89,231 | 48 | % | $ | 508,334 | $ | 351,325 | $ | 157,009 | 45 | % |
The increase in revenue in the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 was substantially due to revenue growth among existing customers. Create Solutions revenue growth was largely attributable to an increase of 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 usage across our Operate portfolio of products and services, due in part to the higher levels of end-user engagement as a result of strong product and sales execution. We also saw an increase of new customers within Operate Solutions.
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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 revenue, gross profit, and gross margin are summarized as follows (in thousands, except percentages):
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | Amount | % | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
Cost of revenue | $ | 57,725 | $ | 40,432 | $ | 17,293 | 43 | % | $ | 116,459 | $ | 72,300 | $ | 44,159 | 61 | % | |||||||||||||||||||||||||||||||
Gross profit | $ | 215,837 | $ | 143,899 | $ | 71,938 | 50 | % | $ | 391,875 | $ | 279,025 | $ | 112,850 | 40 | % | |||||||||||||||||||||||||||||||
Gross margin | 79 | % | 78 | % | 1 | % | 77 | % | 79 | % | (2) | % |
Cost of revenue for the three months ended June 30, 2021 increased primarily due to an increase of $11.3 million in personnel-related expense driven by a $4.7 million increase in stock-based compensation expense primarily related to the satisfaction of the performance vesting condition on outstanding RSUs upon completion of our IPO, and an increase in headcount to support our Create Solutions and Strategic Partnerships. IT hosting expense also increased by $3.6 million to support growth in our Create and Operate Solutions.
Cost of revenue for the six months ended June 30, 2021 increased primarily due to an increase of $26.8 million in personnel-related expense driven by a $9.2 million increase in stock-based compensation expense primarily related to the satisfaction of the performance vesting condition on outstanding RSUs upon completion of our IPO, and an increase in headcount to support our Create Solutions and Strategic Partnerships. IT hosting expense also increased by $10.5 million to support growth in our Create and Operate Solutions. The year-over-year decline in gross margin decreased primarily due to higher personnel-related costs to support our Create Solutions and Strategic Partnerships, and product mix of revenues.
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):
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Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | Amount | % | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
Research and development | $ | 154,216 | $ | 85,108 | $ | 69,108 | 81 | % | $ | 308,231 | $ | 166,859 | $ | 141,372 | 85 | % |
Research and development expense for the three months ended June 30, 2021 increased primarily due to an increase of $58.2 million in personnel-related expenses driven by a $27.2 million increase in stock-based compensation expense primarily related to the satisfaction of the performance vesting condition on outstanding RSUs upon completion of our IPO and an increase in headcount to support continued product innovation. In addition, IT hosting expense increased by $7.3 million due to growing data and compute needs.
Research and development expense for the six months ended June 30, 2021 increased primarily due to an increase of $122.1 million in personnel-related expenses driven by a $54.1 million increase in stock-based compensation expense primarily related to the satisfaction of the performance vesting condition on outstanding RSUs upon completion of our IPO and an increase in headcount to support continued product innovation. In addition, IT hosting expense increased by $14.0 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 | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | Amount | % | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
Sales and marketing | $ | 74,888 | $ | 43,716 | $ | 31,172 | 71 | % | $ | 144,681 | $ | 86,975 | $ | 57,706 | 66 | % |
Sales and marketing expense for the three months ended June 30, 2021 increased primarily due to an increase of $23.2 million in personnel-related expenses driven by a $12.2 million increase in stock-based compensation expense primarily related to the satisfaction of the performance vesting condition on outstanding RSUs upon completion of our IPO and an increase in headcount to support the growth of our sales and marketing teams. Advertisement expenditures on various social media platforms also increased $4.5 million.
Sales and marketing expense for the six months ended June 30, 2021 increased primarily due to an increase of $45.9 million in personnel-related expenses driven by a $22.4 million increase in stock-based compensation expense primarily related to the satisfaction of the performance vesting condition on outstanding RSUs upon completion of our IPO and an increase in headcount to support the growth of our sales and marketing teams. Advertisement expenditures on various social media platforms also increased $9.0 million.
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General and Administrative
Our general and administrative expenses primarily consist of personnel-related costs for finance, legal, human resources, IT, and administrative employees; professional fees for external legal, accounting, and other professional services; and allocated overhead. We expect that our general and administrative expenses will increase in absolute dollars and may fluctuate as a percentage of revenue from period to period as we scale to support the growth of our business.
General and administrative expense is summarized as follows (in thousands, except percentages):
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | Amount | % | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
General and administrative | $ | 135,917 | $ | 39,920 | $ | 95,997 | 240 | % | $ | 199,049 | $ | 77,473 | $ | 121,576 | 157 | % |
General and administrative expense for the three months ended June 30, 2021 increased primarily due to a one-time charge of $49.8 million for the termination of a future lease contract, including associated construction in progress write-offs. Personnel-related costs also increased $39.5 million driven by a $29.3 million increase in stock-based compensation expense primarily related to the satisfaction of the performance vesting condition on outstanding RSUs upon completion of our IPO, the incremental equity award modification expense associated with the separation of our former Chief Financial Officer and an increase in headcount to support the growth of our finance, accounting, human resources, IT, and legal functions. In addition, professional and insurance expense increased $7.8 million due to increased administrative costs as part of being a public company.
General and administrative expense for the six months ended June 30, 2021 increased primarily due to a one-time charge of $49.8 million for the termination of a future lease contract, including associated construction in progress write-offs. Personnel-related costs also increased $60.1 million driven by a $44.6 million increase in stock-based compensation expense primarily related to the satisfaction of the performance vesting condition on outstanding RSUs upon completion of our IPO, the incremental equity award modification expense associated with the separation of our former Chief Financial Officer, and an increase in headcount to support the growth of our finance, accounting, human resources, IT, and legal functions. In addition, professional and insurance expense increased $10.0 million due to increased administrative costs as part of being a public company.
Interest Expense
Interest expense consists primarily of interest expense associated with our Credit Agreement. Interest expense is summarized as follows (in thousands, except percentages):
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | Amount | % | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
Interest expense | $ | (485) | $ | (656) | $ | 171 | (26) | % | $ | (600) | $ | (788) | $ | 188 | * |
* | Not meaningful |
Interest expense and fees related to our undrawn credit facility were recognized in the three and six months ended June 30, 2021 on our undrawn credit facility.
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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, is summarized as follows (in thousands, except percentages):
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | Amount | % | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
Interest income and other expense, net | $ | 70 | $ | (662) | $ | 732 | (111) | % | $ | 1,635 | $ | 1,194 | $ | 441 | 37 | % |
Interest income and other expense, net, for the three and six months ended June 30, 2021 increased primarily due to foreign currency remeasurement gains.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business. As we have expanded our global operations, we have incurred increased foreign tax expense, and we expect this to continue. 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 14, “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 | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | Amount | % | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
Provision for income taxes | $ | (1,257) | $ | 1,188 | $ | (2,445) | (206) | % | $ | (3,249) | $ | 2,211 | $ | (5,460) | (247) | % |
Provision for income taxes decreased primarily due to the tax benefit from stock-based compensation activity in the three months ended June 30, 2021.
Provision for income taxes for the six months ended June 30, 2021 decreased primarily due to the tax benefit from stock-based compensation activity and the tax rate change in the United Kingdom that was enacted in the six 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.
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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 Loss from Operations
We define non-GAAP gross profit as gross profit excluding stock-based compensation expense and employer tax related to employee stock transactions. We define non-GAAP loss from operations as loss from operations excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense.
We use non-GAAP gross profit and non-GAAP loss from operations in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that non-GAAP gross profit and non-GAAP loss from operations provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as these metrics exclude stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, and a one-time expense for the termination of a future lease agreement, which 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 loss from operations excludes the expense of amortization of acquired intangible assets, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and non-GAAP loss from operations does not reflect cash expenditure for such replacements; 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.
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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, | |||||||||||
2021 | 2020 | ||||||||||
GAAP gross profit | $ | 215,837 | $ | 143,899 | |||||||
Add: | |||||||||||
Stock-based compensation expense | 5,340 | 690 | |||||||||
Employer tax related to employee stock transactions | 511 | 2 | |||||||||
Non-GAAP gross profit | $ | 221,688 | $ | 144,591 | |||||||
GAAP gross margin | 79 | % | 78 | % | |||||||
Non-GAAP gross margin | 81 | % | 78 | % |
The year-over-year increase in non-GAAP gross margin was primarily due to strong product optimizations and lower unit costs in Operate Solutions as well as lower platform costs to support Strategic Partnerships.
The following table presents a reconciliation of our non-GAAP loss from operations to our GAAP loss from operations, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):
Three Months Ended | |||||||||||
June 30, | |||||||||||
2021 | 2020 | ||||||||||
GAAP loss from operations | $ | (149,184) | $ | (24,845) | |||||||
Add: | |||||||||||
Stock-based compensation expense | 85,400 | 11,963 | |||||||||
Employer tax related to employee stock transactions | 6,126 | 75 | |||||||||
Amortization of intangible assets expense | 4,709 | 4,150 | |||||||||
Lease termination expense | 49,795 | — | |||||||||
Non-GAAP loss from operations | $ | (3,154) | $ | (8,657) |
The year-over-year decrease in non-GAAP loss from operations was primarily due to strong revenue growth in Operate Solutions, non-GAAP gross margin improvements, and gaining operating expense leverage across sales and marketing and general and administrative.
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 a one-time expense for the termination of a future lease agreement, as well as the related tax effects of these items. Non-GAAP net loss per share also adds back expense relating to deemed dividends representing excess paid over initial issuance price to repurchase convertible preferred stock. We use non-GAAP net loss and non-GAAP net loss per share in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that these non-GAAP measures provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations.
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Table of Contents | Unity Software Inc. |
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;
•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 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, 2020, the non-GAAP tax rate was (17%). For the year ending December 31, 2021, we have determined the projected non-GAAP tax rate to be (22)%. 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.
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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, | |||||||||||
2021 | 2020 | ||||||||||
GAAP net loss | $ | (148,342) | $ | (27,351) | |||||||
Add: | |||||||||||
Stock-based compensation expense | 85,400 | 11,963 | |||||||||
Employer tax related to employee stock transactions | 6,126 | 75 | |||||||||
Amortization of intangible assets expense | 4,709 | 4,150 | |||||||||
Lease termination expense | 49,795 | — | |||||||||
Income tax effect of non-GAAP adjustments | (2,042) | (657) | |||||||||
Non-GAAP net loss | $ | (4,354) | $ | (11,820) | |||||||
GAAP net loss per share attributable to our common stockholders, basic and diluted | $ | (0.53) | $ | (0.21) | |||||||
Total impact on net loss per share, basic and diluted, from non-GAAP adjustments | 0.51 | 0.12 | |||||||||
Non-GAAP net loss per share attributable to our common stockholders, basic and diluted | $ | (0.02) | $ | (0.09) | |||||||
Weighted-average common shares used in GAAP net loss per share computation, basic and diluted | 280,374 | 129,826 | |||||||||
Weighted-average common shares used in non-GAAP net loss per share computation, basic and diluted | 280,374 | 129,826 |
Free Cash Flow
We define free cash flow as net cash 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 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 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, | |||||||||||
2021 | 2020 | ||||||||||
Net cash used in operating activities | $ | (115,563) | $ | (15,419) | |||||||
Less: | |||||||||||
Purchase of property and equipment | (18,551) | (19,275) | |||||||||
Free cash flow | $ | (134,114) | $ | (34,694) | |||||||
Net cash used in investing activities | $ | (203,765) | $ | (43,363) | |||||||
Net cash provided by financing activities | $ | 38,059 | $ | 387,405 |
The year-over-year decrease in free cash flow was primarily due to the payment of the bonus for our fiscal year ended December 31, 2020, our net loss, higher payroll taxes on stock-based compensation, prepayments of software licenses, an increase in working capital as our business grows, and a one-time payment related to our real estate.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the net proceeds we have received from the sales of our convertible preferred stock and common stock and through payments received from customers using our platform. As of June 30, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1.6 billion, which were primarily held for working capital purposes.
Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of $1.1 billion as of June 30, 2021. We expect to continue to incur operating losses for the foreseeable future due to the investments we will continue to make in research and development, sales and marketing, and general and administrative. As a result, we may require additional capital to execute our strategic initiatives to grow our business.
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. 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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Our changes in cash flows were as follows (in thousands):
Six Months Ended June 30, | |||||||||||
2021 | 2020 | ||||||||||
Net cash used in operating activities | $ | (115,563) | $ | (15,419) | |||||||
Net cash used in investing activities | (203,765) | (43,363) | |||||||||
Net cash provided by financing activities | 38,059 | 387,405 | |||||||||
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash | 89 | (52) | |||||||||
Net change in cash, cash equivalents, and restricted cash | $ | (281,180) | $ | 328,571 |
Cash Used in Operating Activities
During the six months ended June 30, 2021, net cash used in operating activities was $115.6 million and was primarily due to the payment of the bonus for our fiscal year ended December 31, 2020, our net loss, higher payroll taxes on stock-based compensation, prepayments of software licenses, an increase in working capital as our business grows, and a one-time payment related to our real estate . A substantial portion of our accounts receivable balance comes from advertising partners and is offset by an accounts payable amount due to our publishers (Operate Solutions customers). However, the payment terms that we offer our advertising partners are generally shorter than the payment terms with our publishers (Operate Solutions customers). As such, our cash flows fluctuate from period to period due to revenue seasonality, timing of billings, collections, and publisher payments. Historical cash flows are not necessarily indicative of our results in any future period.
Cash Used in Investing Activities
During the six months ended June 30, 2021, net cash used in investing activities was $203.8 million, consisting of the purchase of marketable securities of $290.8 million, cash used in acquisitions of $69.4 million, and capital expenditures of $18.6 million partially offset by proceeds of $179.6 million from marketable security principal repayments and maturities.
Cash Provided by Financing Activities
During the six months ended June 30, 2021, net cash provided by financing activities was $38.1 million and consisted solely of proceeds from the exercise of stock options.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2021 (in thousands):
Payments Due by Period | |||||||||||||||||||||||||||||
Total | Less than 1 Year | 1–3 Years | 3–5 Years | More than 5 Years | |||||||||||||||||||||||||
Operating leases (1) | $ | 149,299 | $ | 15,503 | $ | 75,631 | $ | 16,290 | $ | 41,875 | |||||||||||||||||||
Purchase commitments (2) | 119,294 | 15,036 | 88,633 | 15,625 | — | ||||||||||||||||||||||||
Total (3) | $ | 268,593 | $ | 30,539 | $ | 164,264 | $ | 31,915 | $ | 41,875 |
(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) This table generally 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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Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and did not have any material holdings in variable interest entities as of June 30, 2021.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.
There have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2021, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 5, 2021.
Recent Accounting Pronouncements
See Note 2, “Summary of Accounting Pronouncements,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign currency exchange risk
Our assessment of our exposures to market risk has not changed materially since the presentation set forth in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 5, 2021.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
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Unity Software Inc. |
(b) Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, despite the fact that the majority of our employees are continuing to work remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to understand the potential impact on their design and operating effectiveness.
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Unity Software Inc. |
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material pending legal proceedings. From time to time, we may be subject to legal proceedings and claims arising in the ordinary course of business.
Item 1A. Risk Factors
Risks Related to Our Business, Operations and Industry
We have a history of losses and may not achieve or sustain profitability in the future.
We have experienced net losses in each period since inception. We incurred net losses of $255.8 million and $54.1 million for the six months ended June 30, 2021 and 2020, respectively, which included $152.0 million and $21.7 million, respectively, of stock-based compensation expense. As of June 30, 2021, we had an accumulated deficit of $1.1 billion. While we have experienced significant revenue growth in recent periods, this growth rate may decline in future periods, and you should not rely on the revenue growth of any given prior period as an indication of our future performance. We are not certain whether we will be able to sustain or increase our revenue or whether or when we will attain sufficient revenue to achieve or maintain profitability in the future. We also expect our costs and expenses to increase in future periods, which could negatively affect our future results of operations if our revenue does not increase by amounts sufficient to offset such costs and expenses. In particular, we intend to continue to make significant investments to grow our business in such areas as:
•research and development, including investments in our engineering teams and in further differentiating our platform and solutions with improvements to our Create and Operate Solutions, as well as the development of new products and features;
•our sales and marketing organizations to engage our existing and prospective customers, increase brand awareness and drive adoption and expansion of our platform and solutions;
•research and development and sales and marketing initiatives to grow our presence in new industries and use cases beyond the gaming industry;
•our technology infrastructure, including systems architecture, scalability, availability, performance, and security;
•acquisitions or strategic investments;
•global expansion; and
•our general and administration organization, including increased facilities expense as well as legal, IT, and accounting expenses associated with being a public company.
Our efforts to grow our business may be costlier than we expect and may not result in increased revenue. Even if such investments increase our revenue, any such increase may not be enough to offset our increased operating expenses. We may continue to incur significant losses in the future for a number of reasons, including the other risks described herein. If we are unable to maintain or increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position and results of operations will be harmed, and we may not be able to achieve or maintain profitability, which could cause the value of our business and common stock to significantly decrease.
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Unity Software Inc. |
We have a limited history operating our business at its current scale, and as a result, our past results may not be indicative of future operating performance.
In recent years, we have significantly grown the scale of our business. For example, we launched the first of our Operate Solutions in 2014, we expanded into augmented and virtual reality platforms in 2016 and industries beyond gaming in 2018 and we have acquired more than ten companies since the beginning of 2019. Accordingly, we have a limited history operating our business at its current scale and scope. You should not rely on our past results of operations as indicators of future performance. You should consider and evaluate our prospects in light of the risks and uncertainties frequently encountered by growing companies in rapidly evolving markets. These risks and uncertainties include challenges in accurate financial planning as a result of limited historical data relevant to the current scale and scope of our business and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to companies with longer operating histories.
Our core value of putting our users first may cause us to forgo short-term gains and may not lead to the long-term benefits we expect.
One of our core values is that our users come first in everything we do, which we believe is essential to our success in increasing our growth and engagement and in serving the best, long-term interests of our company and our stockholders. Therefore, we may forgo certain expansion or short-term revenue or cost-saving opportunities that we do not believe will enhance the experience of our users, even if our decision negatively impacts our operating results. We cannot assure you that our decisions will lead to the long-term benefits that we expect, in which case our business and operating results could be harmed.
Our business and operations have experienced recent rapid growth, which may not be indicative of our future growth. Our rapid growth also makes it difficult to evaluate our future prospects.
Our revenue was $508.3 million and $351.3 million for the six months ended June 30, 2021 and 2020, respectively. In addition, our employee headcount was 4,613 full-time employees as of June 30, 2021, an increase from 4,001 full-time employees as of December 31, 2020, and our number of customers contributing more than $100,000 of trailing 12-month revenue was 888 as of June 30, 2021, an increase from 716 as of June 30, 2020. You should not rely on our growth in any prior period as an indication of our future performance, as we may not be able to sustain our growth rate in the future. For example, even if our revenue continues to increase, we expect that our revenue growth rate may decline in the future as a result of a variety of factors, including the maturation of our business. Overall growth of our revenue depends on our ability to execute on our growth strategies.
We may not successfully accomplish any of our objectives, and as a result, it is difficult for us to forecast our future results of operations. If the assumptions that we use to plan our business are incorrect or change in reaction to changes in our market, or if we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability. You should not rely on our results or growth for any prior quarterly or annual periods as any indication of our future results or growth.
In addition, we expect to continue to expend substantial financial and other resources to grow our business, and we may fail to allocate our resources in a manner that results in increased revenue or other growth in our business. If we are unable to maintain or increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position, and results of operations will be harmed, and we may not be able to achieve or maintain profitability over the long term. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If our growth does not meet our expectations in future periods, our business, financial position and results of operations may be harmed, and we may not achieve or maintain profitability in the future.
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Unity Software Inc. |
Our business depends on our ability to retain our existing customers and expand their use of our platform.
Our future success depends on our ability to retain our existing customers and expand their use of our platform. An important component of our strategy is to broaden our relationships with existing customers. However, our customers have no obligation to renew their subscriptions for our Create Solutions, which are primarily one to three years in length, after they expire, and have no obligation to continue using our Operate Solutions, which are primarily sold under revenue-share or usage-based models.
For us to maintain or improve our results of operations, it is important that our Create Solutions customers renew and expand their subscriptions with us and that our Operate Solutions customers continue using and expanding their use of our products. We invest in targeted sales and account-based marketing efforts to identify opportunities to grow use of our solutions within and across multiple studios within a single customer. However, our efforts may not be successful despite the resources we devote to them. Even if one or several studios within a customer adopts our Create or Operate Solutions, other studios within that customer may choose to adopt different solutions or to continue to employ internally-developed solutions.
It is also important for us to cross-sell more Create Solutions to our Operate Solutions customers, as well as Operate Solutions to our Create Solutions customers. While we believe there are significant cross-selling opportunities between our Create and Operate Solutions, and that our Create and Operate Solutions work together synergistically, we have only recently focused our sales efforts on targeting cross-selling opportunities, and we cannot be sure that our efforts will be successful.
Whether our customers renew or expand their subscriptions with us or continue using our platform depends on a number of factors, including the cost, performance and perceived value associated with our platform, including their perception of our continued development of features important to them, the business strength or weakness of our customers, the success of our customers’ games and their ability to monetize, the effects of global economic conditions, the entry and success of competitive products and the other risk factors included in this Quarterly Report on Form 10‑Q.
If we do not retain our existing customers or if our existing customers do not expand their use of our platform and purchase additional products or services from us, our revenue may not increase or may decline and our business, financial condition and results of operations may be harmed.
If we are unable to attract new customers, our business, financial condition and results of operations will be adversely affected.
Our ability to increase our revenue will depend in part on our success in attracting new customers. Our success will depend to a substantial extent on the widespread adoption of our platform as an alternative to existing platforms, including internally developed products developed by large gaming companies. As our market matures, our platform evolves and competitors introduce free, lower cost or differentiated products that compete with our platform, our ability to market our platform and solutions could be impaired. Similarly, our sales efforts could be adversely impacted if customers and their end users perceive that features incorporated into competitive platforms or their own technologies reduce the relevance or attractiveness of our platform. Gaming companies that have invested significant development efforts in their own internally-generated technologies may be reluctant to replace their technologies with our platform unless they perceive our platform as offering significant incremental long-term benefits. Any decrease in user satisfaction with our platform or customer support would also harm our brand and word-of-mouth referrals, which in turn would hamper our ability to attract new customers.
As a result of these and other factors, we may be unable to attract new customers, which may have an adverse effect on our business, financial condition and results of operations.
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Unity Software Inc. |
We derive a significant portion of our revenue from our Operate Solutions. If we fail to attract and retain Operate Solutions customers, our business and results of operations would be adversely affected.
We derived 65% and 62% of our revenue in the six months ended June 30, 2021 and 2020, respectively, from our Operate Solutions. A majority of our Operate Solutions revenue is currently generated under a revenue-share model. The remainder of our Operate Solutions revenue is generated primarily as usage-based revenue for various cloud-based products. We must continually add new features and functionality to our Operate Solutions to remain competitive and respond to our customers’ needs. If we are not successful in retaining and attracting new customers to our Operate Solutions, our business and results of operations would be adversely affected.
Revenue-share based usage from our monetization products currently accounts for a majority of our Operate Solutions revenue. Our customers depend on us as a source of their own revenue, which in some cases may represent a significant portion of their revenue. Should customers lose confidence in the value or effectiveness of our monetization products, their usage could decline. Revenue growth from these products depends on our ability to continue to develop and offer effective features and functionality to help our customers drive value, which will require us to incur additional costs to implement. Developing and implementing these features will require us to incur additional costs.
In addition, our customers rely on us to attract a broad range of advertisers to our platform to generate demand for their impressions through our Unified Auction. If we are unable to also serve the needs of advertisers, they may reduce their usage of our solutions and, because the advertising market is competitive, they may shift their business to other advertising solutions which could adversely affect our revenue. The usage-based revenue for our Operate Solutions comes from our deltaDNA, Multiplay and Vivox products. Our revenue from these products varies depending on the number of end users of these products or a customer’s hosting needs. A significant portion of the revenue generated from certain of these products in a given period can be driven by usage by customers with large numbers of end users or high volume hosting requirements. If our customers experience a decline in the rate at which end users play their games, or if we are not able to replace customers who decrease or cease their usage of our solution with new customers with similar usage, our business may suffer.
Operating system platform providers or application stores may change terms of service, policies or technical requirements to require us or our customers to change data collection and privacy practices, business models, operations, practices, advertising activities or application content, which could adversely impact our business.
We and our customers are subject to the standard policies and terms of service of the operating system platforms on which we create, run and monetize applications and content, as well as policies and terms of service of the various application stores that make applications and content available to end users. These policies and terms of service govern the promotion, distribution, content, technical requirements, and operation generally of applications and content on such platforms and stores. Each of these platforms and stores has broad discretion to change and interpret its terms of service and policies with respect to us, our customers and other creators, and those changes may be unfavorable to us or our customers’ use of our platform. An operating system platform or application store may also change its fee structure, add fees associated with access to and use of its platform, alter how customers are able to advertise on their platform, change how the personal or other information of its users is made available to application developers on their platform, limit the use of personal information for advertising purposes or restrict how end users can share information on their platform or across other platforms.
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Unity Software Inc. |
In particular, operating system platform providers or application stores such as Apple or Google may change their technical requirements or policies in a manner that adversely impacts the way in which we or our customers collect, use and share data from end-user devices. Restrictions on our ability to collect and use data as desired could negatively impact our Operate Solutions as well as our resource planning and feature development planning for our software. 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 has 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. The timing and manner in which Apple's plans will continue to be implemented and their effect on our revenue are not yet clear, but we expect these changes to adversely affect our revenue from our monetization products and potentially other Operate Solutions, and such impact could be material. In addition, if customers have applications removed from these third-party platforms because of a change in platform guidelines that impact our code or practices, we could be exposed to legal risk and lose customers. In addition, these platforms could change their business models and could, for example, increase application store fees to our customers, which could have an adverse impact on our business.
If we or our customers were to violate, or an operating system platform provider or application store believes that we or our customers have violated, its terms of service or policies, that operating system platform provider or application store could limit or discontinue our or our customers’ access to its platform or store. In some cases these requirements may not be clear and our interpretation of the requirements may not align with the interpretation of the operating system platform provider or application store, which could lead to inconsistent enforcement of these terms of service or policies against us or our customers, and could also result in the operating system platform provider or application store limiting or discontinuing access to its platform or store. An operating system platform provider or application store could also limit or discontinue our access to its platform or store if it establishes more favorable relationships with one or more of our competitors or it determines that it is in their business interests to do so. Any limitation on or discontinuation of our or our customers’ access to any third-party platform or application store could adversely affect our business, financial condition or results of operations.
If we are unable to further expand into new industries, or if our solutions for any new industry fail to achieve market acceptance, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
Our growth strategy is based, in part, on expanding into new industries beyond gaming, including architecture, engineering, construction, automotive, transportation, manufacturing, film, television and retail, and across use cases, including automobile and building design, online and augmented reality product configurators, autonomous driving simulation and augmented reality workplace safety training, among others. The market for interactive real-time 3D and 2D content in industries beyond gaming is in an early stage of development, and it is uncertain whether this market will develop as we expect, how rapidly it will develop and how much it will grow. In addition, we have limited experience in addressing these markets and the investments that we are continuing to make to expand further into these markets may be ineffective.
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Unity Software Inc. |
Our success in these markets will depend, to a substantial extent, on the widespread adoption of our platform as an alternative to existing solutions, such as traditional 2D and 3D modeling and rendering tools, or adoption by customers that are not currently using any software solutions. Market acceptance of our platform in industries beyond gaming may not grow as we expect as a result of a number of factors, including the cost, performance and perceived value associated with our platform, our ability to adapt to the differing sales and marketing requirements appropriate to most effectively address these markets and our ability to develop or maintain integrations with strategic partners. In addition, our ability to achieve widespread adoption of our platform in these markets may be affected by the entry and success of competitive products, including from larger competitors with greater resources that have historically addressed these markets with legacy products, and accordingly have more brand recognition in these markets. If our platform does not achieve widespread adoption in these other markets, our ability to grow our revenue may suffer.
In addition, the investments we make to grow our business by expanding into new industries will continue to increase our costs and operating expenses on an absolute basis. We expect to invest significant research and development resources to develop and expand the functionality of our Create and Operate Solutions to meet the needs of customers in these industries, and we will need to increase our sales and marketing, legal and compliance and other efforts as we seek to expand into new industries that require a different go-to-market strategy than the gaming industry. These investments will occur in advance of our realization of significant revenue from such industries, particularly given that customers in these industries are typically enterprise customers with long contracting cycles, which will make it difficult to determine if we are allocating our resources effectively and efficiently. If the revenue we derive from these investments is not sufficient to achieve a return on investment, our business and results of operations would suffer.
Our business relies on strategic relationships with hardware, operating system, device, game console and other technology providers. If we are unable to maintain favorable terms and conditions and business relations with respect to our strategic relationships, our business could be harmed.
We rely on strategic partnerships and other strategic relationships with hardware, operating system, device, game console and other technology providers in order to be able to offer our customers the ability to deploy their content on a variety of third-party platforms. Strategic Partnerships and Other accounted for approximately 7% and 9% for the six months ended June 30, 2021 and 2020, respectively. If any of these third parties were to suspend, limit or cease their operations or otherwise terminate their relationships with us, our results of operations could be adversely affected. We have entered into separate agreements with each of our strategic partners. Our agreements with our strategic partners are non-exclusive and typically have multi-year terms. Our strategic partners could decide to stop working with us, ask to modify their agreement terms in a cost prohibitive manner when their agreement is up for renewal or enter into exclusive or more favorable relationships with our competitors. Any loss of a strategic partnership or other strategic relationship could negatively affect the attractiveness of our platform to customers. In addition, we may have disagreements or disputes with these parties that could negatively impact or threaten our relationship with them. We cannot assure you that we will be successful in sourcing additional strategic partnerships or relationships or in retaining or extending our existing relationships with the parties with whom we currently have relationships. If we are unable to source additional strategic relationships or the parties with whom we currently have strategic relationships were to terminate their relationship with us, our revenue could decline and our business could be adversely affected.
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Unity Software Inc. |
In addition, acquisitions by our competitors of parties with whom we have strategic relationships could result in a decrease in the number of our current and potential customers, as these parties may no longer facilitate the adoption of our solutions by potential customers. Further, some of the parties with whom we have strategic relationships compete or may compete with certain of our solutions and may elect to no longer integrate with our platform. If we fail to maintain relationships with such parties, fail to develop new strategic relationships in new markets or expand the number of strategic relationships in existing markets, our ability to compete in the marketplace or to grow our revenue could be impaired, and our results of operations may suffer. Even if we are successful in maintaining these relationships, we cannot assure you that these relationships will result in increased customer usage or adoption of our solutions or increased revenue.
The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition, and results of operations could be harmed.
The markets in which we operate are highly competitive. A significant number of companies have developed or are developing solutions that currently, or in the future may, compete with some or all of our offerings. As we look to market and sell our platform to potential customers with existing solutions, we must convince their internal stakeholders that our platform is superior and/or more cost-effective to their current solutions.
With respect to our Create Solutions, we primarily compete against proprietary game engines built in-house by large game studios, as well as Cocos2d-x (Chukong Technologies) and Unreal Engine (Epic Games), which offer game development tools primarily serving the PC games and mobile games sectors, and, in the case of Unreal Engine (Epic Games), industries beyond gaming. Outside of gaming, we also compete with other development platforms that offer 2D and 3D design products.
With respect to our Operate Solutions, we compete in a fragmented ecosystem composed of select divisions of large, well-established companies as well as privately held companies. The large companies in our ecosystem may play multiple roles given the breadth of their business. Examples of these large companies are Amazon, Facebook, Google, Microsoft and Tencent. Most of these companies are also our partners and customers.
With the introduction of new technologies and market entrants, we expect that the competitive environment will remain intense or become even more intense in the future. Some of our actual and potential competitors have been acquired by other larger enterprises and have made or may make acquisitions or may enter into partnerships or other strategic relationships that may provide more comprehensive offerings than they individually had offered or achieve greater economies of scale than us.
Our competitors vary in size and in the breadth and scope of the solutions offered. Some of our competitors and potential competitors have greater name recognition, longer operating histories, more established customer relationships, larger marketing budgets and greater financial and operational resources than we do. Further, other potential competitors not currently offering competing products or services may expand their offerings to compete with our platform or enter the market through acquisitions, partnerships or strategic relationships. In particular, as we seek to invest in the expansion of our Create Solutions and Operate Solutions in new industries outside of gaming, we may encounter competition from large companies that offer 2D and 3D design products in those industries that may seek to introduce new products or new functionality to existing products that compete with our solutions. Those competitors have greater brand recognition in those industries where they already have a presence. In addition, our current and potential competitors may have or establish cooperative relationships among themselves or with our customers or other third parties that may further enhance their resources and offerings in our addressable market. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, and customer requirements. An existing competitor or new entrant could introduce new technology that is perceived to be easier to use or otherwise favorable to ours, which could reduce demand for our platform.
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In addition to platform and technology competition, we face pricing competition. Some of our competitors offer their solutions, such as their game engines, at a lower price or for free, which has resulted in, and may continue to result in, pricing pressures. In addition, with respect to our monetization solutions, some of our competitors offer more favorable payment terms to publishers. We cannot assure you that we will not be forced to engage in price-cutting or revenue limiting initiatives, change payment terms or increase our advertising and other expenses to attract and retain customers in response to competitive pressures.
For all of these reasons, we may not be able to compete successfully against our current or future competitors, which could result in the failure of our platform to continue to achieve or maintain market acceptance, which would harm our business, results of operations and financial condition.
We may not be able to successfully manage our growth, and if we are not able to grow efficiently, our business, financial condition, and results of operations could be harmed.
The growth and expansion of our business places a continuous significant strain on our management, operational and financial resources. As usage of our platform grows, we will need to devote additional resources to improving its capabilities, features and functionality. In addition, we will need to appropriately scale our internal business, IT, and financial, operating and administrative systems to serve our growing customer base, and continue to manage headcount, capital and operating and reporting processes in an efficient manner. Any failure of or delay in these efforts could result in impaired performance and reduced customer satisfaction, resulting in decreased sales to new customers or lower dollar-based net expansion rates, which would hurt our revenue growth and our reputation. Further, any failure in optimizing the costs associated with our third-party cloud services as we scale could negatively impact our gross margins. Even if we are successful in our expansion efforts, they will be expensive and complex, and require the dedication of significant management time and attention. We may also suffer inefficiencies or service disruptions as a result of our efforts to scale our internal infrastructure. We cannot be sure that the expansion of and improvements to our internal infrastructure will be effectively implemented on a timely basis, if at all, and such failures could harm our business, financial condition and results of operations.
We are dependent on the success of our customers in the gaming market. Adverse events relating to our customers or their games could have a negative impact on our business.
Our gaming customers are not the end users of our solutions, but rather they use our platform and solutions to create and/or operate their games, which are ultimately sold or distributed to an end user. As a result, our success depends in part on the ability of our customers to market and sell games that are created or operated with our solutions. If our customers’ marketing efforts are unsuccessful or if our customers experience a decrease in demand for their games, sales of our Create Solutions and our Operate Solutions could be reduced. The gaming market is characterized by intense competition, rapid technological change, increased focus by regulators, and economic uncertainty and, as such, there is no guarantee that any of our customers’ games will gain any meaningful traction with end users. In addition, some of our newer products, like Multiplay and Vivox, are more reliant on certain customers. While our large and diverse customer portfolio has helped to reduce the fluctuations in our Operate Solutions revenue as a whole resulting from the success of customers’ games and the timing of game releases, we cannot assure you that the size and diversification of our customer portfolio will sufficiently mitigate this risk. If our customers fail to create or operate popular games using our platform, and we are not able to maintain a diversified portfolio of “winners and losers,” our results of operations may be adversely affected.
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Unity Software Inc. |
We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price, and the value of your investment could decline.
Our results of operations have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance. In addition to the other risks described herein, factors that may affect our results of operations include the following:
•fluctuations in demand for or pricing of our platform;
•fluctuations in usage of our platform;
•our ability to retain and expand the use of our platform by existing customers;
•our ability to attract new customers and convert free creators to customers;
•changes in mix of solutions purchased by our customers;
•demand for our gaming customers’ products and their ability to monetize those products, which in turn can have a significant impact on our revenue-share and usage-based solutions;
•timing and amount of our investments to expand the capacity of our third-party cloud hosting providers;
•seasonality, especially with respect to our Operate Solutions, which tend to generate higher revenue during periods of increased time spent on entertainment, such as holidays, though such seasonal impacts may be reduced or changed as a result of the COVID-19 pandemic;
•investments in new features and functionality of the solutions offered on our platform;
•timing of customer purchases and usage of our platform;
•timing of updates and new features on our platform;
•fluctuations or delays in purchasing decisions in anticipation of new solutions or enhancements by us or our competitors;
•changes in customers’ budgets and in the timing of their budget cycles and purchasing decisions;
•our ability to price our offerings effectively;
•amount and timing of payment for operating expenses, particularly research and development and sales and marketing expenses, including commissions, many of which occur in advance of the anticipated benefits resulting from such expenses;
•amount and timing of non-cash expenses, including stock-based compensation, amortization of acquired intangibles and acquisition-related expenses;
•amount and timing of costs associated with recruiting, training and integrating new employees and retaining and motivating existing employees;
•timing of acquisitions and costs associated with integrating acquired companies;
•general economic, social and public health conditions, both domestically and globally, as well as conditions specifically affecting industries in which our customers operate;
•impact of new accounting pronouncements or changes in accounting principles;
•costs that we incur in order to comply with changing regulatory or legal requirements, especially with respect to privacy and security matters;
•changes in tax laws or regulations that are adverse to us or our customers;
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Unity Software Inc. |
•changes in the competitive dynamics of our market, including consolidation among competitors or customers; and
•significant security breaches of, technical difficulties with or interruptions to the delivery and use of our platform.
Any of these and other factors, or the cumulative effect of some of these factors, may cause our results of operations to vary significantly. If our quarterly results of operations fall below the expectations of investors and securities analysts who follow our stock, the price of our common stock could decline substantially, and we could face costly lawsuits, including securities class action suits.
Seasonality may cause fluctuations in our sales and results of operations.
Our quarterly results of operations may vary significantly as a result of seasonal fluctuations during periods such as holidays, during which end users spend increased time on entertainment, including games, and mobile applications, which generally increases our customers’ usage of our Operate Solutions, and may impact our revenue derived from Operate Solutions. We may also experience fluctuations due to factors that may be outside of our control that drive usage up or down. While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date.
Downturns or upturns in our sales may not be immediately reflected in our financial position and results of operations.
Our enterprise customers typically purchase one- to three-year subscriptions to our Create Solutions, while independent creators and smaller studios typically purchase subscriptions with one-year terms. Because we generally recognize revenue from our Create Solutions ratably over the term of the subscription, any decreases in new subscriptions or renewals from these customers in any one period will not be immediately reflected as a decrease in revenue for that period but would negatively affect our revenue in future quarters. This also makes it difficult for us to rapidly increase our revenue in any particular period through the sale of additional subscriptions to our Create Solutions. If our quarterly results of operations fall below the expectations of investors and securities analysts who follow our stock, the price of our common stock would decline substantially, and we could face costly lawsuits, including securities class actions.
Third parties with whom we do business may be unable to honor their obligations to us or their actions may put us at risk.
We rely on third parties, including our strategic partners, for various aspects of our business, including deep technology collaborations, co-marketing, advertising partners, development services agreements and revenue share arrangements. Their actions may put our business, reputation and brand at risk. In many cases, third parties may be given access to sensitive and proprietary information or personal data in order to provide services and support to our teams or customers, and they may misappropriate and engage in unauthorized use of our information, technology or customers’ data. In addition, the failure of these third parties to provide adequate services and technologies, or the failure of the third parties to adequately maintain or update their services and technologies, could result in a disruption to our business operations. Further, disruptions in the mobile application industry, financial markets, economic downturns, poor business decisions, or reputational harm may adversely affect our partners and may increase their propensity to engage in fraud or otherwise illegal activity which could harm our business reputation, and they may not be able to continue honoring their obligations to us, or we may cease our arrangements with them. Alternative arrangements and services may not be available to us on commercially reasonable terms or at all and we may experience business interruptions upon a transition to an alternative partner or vendor. If we lose one or more business relationships, or experience a degradation of services, our business could be harmed and our financial results could be adversely affected.
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Unity Software Inc. |
We use resellers and other third parties to sell, market, and deploy our solutions to a variety of customers, and our failure to effectively develop, manage, and maintain our indirect sales channels would harm our business.
We use and plan to use resellers and other third parties to sell, market, and deploy our Create Solutions to a variety of customers, particularly in industries beyond gaming. For example, we currently leverage an indirect value-added reseller network to cost effectively service our mid-sized, small and independent Create Solutions customers and we engage in cooperative marketing efforts with strategic partners. Loss of or reduction in sales through these third parties could reduce our revenue. Identifying and retaining resellers and strategic partners, training them in our technology and product offerings, and negotiating and documenting relationships with them, requires significant time and resources. We cannot assure you that we will be able to maintain our relationships with our resellers or strategic partners on favorable terms or at all.
Our resellers may cease marketing or reselling our platform with limited or no notice and without penalty. Further, a substantial number of our agreements with resellers are non-exclusive such that those resellers may offer customers the solutions of several different companies, including solutions that compete with ours. Our resellers may favor our competitors’ solutions or services over ours, including due to incentives that our competitors provide to resellers. One or more of our resellers could be acquired by one of our competitors, which could adversely affect our ability to sell through that reseller. If our resellers do not effectively sell, market or deploy our solutions, choose to promote our competitors’ solutions, or otherwise fail to meet the needs of our customers, our ability to sell our solutions could be adversely affected.
Our direct sales force targets larger customers, and sales to these customers involve risks that may not be present or that are present to a lesser extent with respect to sales to smaller customers.
One of the factors affecting our growth and financial performance is the adoption of our platform and solutions by enterprise customers over legacy and proprietary technologies. To increase adoption within larger enterprise customers and to expand into new industries, such as automotive, where potential customers are typically larger organizations, we utilize a direct sales organization. We have relatively limited experience selling our platform and solutions in industries outside gaming. To increase sales of our platform and solutions outside gaming, we are expanding our sales organization with personnel who have experience in enterprise software sales in the specific industries outside gaming on which we are focusing. If we do not effectively expand our direct sales capabilities to address these industries effectively and develop effective sales and marketing strategies for those industries, our ability to increase sales of our platform and solutions to industries and for use cases outside gaming will be adversely affected.
Sales to larger customers involve risks that may not be present or that are present to a lesser extent with sales to smaller customers, such as longer sales cycles, more complex customer requirements, substantial upfront sales costs, and less predictability in completing some of our sales. For example, larger customers may require considerable time to evaluate and test our platform and those of our competitors prior to making a purchase decision or may have specific compliance and product requirements we may not meet. A number of factors influence the length and variability of our sales cycle, including the need to educate potential customers about the uses and benefits of our platform, the discretionary nature of purchasing and budget cycles, and the competitive nature of evaluation and purchasing approval processes. As a result, the length of our sales cycle, from identification of the opportunity to deal closure, may vary significantly from customer to customer, with sales to larger customers typically taking longer to complete. Moreover, larger customers often begin to deploy our platform on a limited basis, but nevertheless demand configuration, integration services and pricing negotiations, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our platform widely enough across their organization to justify our substantial upfront investment. If we fail to increase adoption of our platform and solutions by larger enterprise customers, our growth could be impaired.
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Unity Software Inc. |
Our business is subject to risks generally associated with the gaming industry.
The substantial majority of our revenue is currently derived from customers in the gaming industry, and we rely to a significant extent on the health of the gaming industry and the success of our customers’ games to maintain and increase our revenue. Accordingly, we are especially susceptible to market conditions and risks associated with the gaming industry, including the popularity, price and timing of release of games, changes in consumer demographics, the availability and popularity of other forms of entertainment, public tastes and preferences, and the increased focus of regulators, all of which are difficult to predict and are beyond our control.
In addition, end users may view games as a discretionary purchase. Although in periods of economic downturn time spent on gaming typically increases, if we experience a prolonged downturn as a result of the effects of COVID-19 or otherwise, end users may reduce their discretionary spending on games and our customers, in turn, may not renew their subscriptions or may otherwise reduce their usage of our platform, which would adversely impact our revenue and financial condition. Economic conditions that negatively impact discretionary consumer spending, including inflation, slower growth, unemployment levels, tax rates, interest rates, energy prices, declining consumer confidence, recession and other macroeconomic conditions, including those resulting from COVID-19 and from geopolitical issues and uncertainty, could have a material adverse impact on our business and results of operations.
We provide service-level agreement commitments related to certain of our Create and Operate Solutions. If we fail to meet these contractual commitments, we could be obligated to provide refunds of prepaid amounts or other credits, which would lower our revenue and harm our business, financial condition and results of operations.
Certain of our Create and Operate Solutions include service-level agreements commitments. If we are unable to meet the stated service-level commitments, including failure to meet the uptime and response time requirements under our customer agreements, we could face terminations with refunds of prepaid amounts or other credits, which could significantly affect both our current and future revenue. Any service-level failures could also damage our reputation, which could also adversely affect our business, financial condition and results of operations.
Indemnity provisions in various agreements to which we are a party potentially expose us to substantial liability for infringement, misappropriation or other violation of intellectual property rights, data protection and other losses.
Our agreements with our customers and other third parties may include indemnification provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of infringement, misappropriation or other violation of intellectual property rights, data protection or other data rights, damages caused by us to property or persons, or other liabilities relating to or arising from our software, services, platform, our acts or omissions under such agreements or other contractual obligations. Some of our historical indemnity agreements, and renewals of such agreements, provide for uncapped liability and some indemnity provisions survive termination or expiration of the applicable agreement. Large indemnity payments would harm our business, financial condition and results of operations. Although we attempt to contractually limit our liability with respect to such indemnity obligations in our more recent customer agreements, in some cases, the liability is not limited given other strategic facets of the relationship and we may still incur substantial liability related to such agreements, and we may be required to cease providing certain functions or features on our platform as a result of any such claims. Even if we succeed in contractually limiting our liability, such limitations may not always be enforceable. Any dispute with a customer or other third party with respect to such obligations could have adverse effects on our relationship with such customer or other third party and other existing or prospective customers, reduce demand for our platform and adversely affect our business, financial conditions and results of operations. In addition, although we carry general liability insurance, our insurance may not be adequate to indemnify us for all liability that may be imposed on us or otherwise protect us from liabilities or damages with respect to claims, including clams on such matters as alleged compromises of customer data, which may be substantial. Any such coverage may not continue to be available to us on acceptable terms or at all.
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Unity Software Inc. |
If we fail to offer high-quality support, our ability to retain and attract customers could suffer.
Our customers rely on our sales, customer success and customer support personnel and tools to resolve issues and realize the full benefits that our platform provides. High-quality support is important for the retention of our existing customers and expanding their use of our platform. The importance of these functions will increase as we expand our business, pursue new customers and seek to expand the use of our platform and solutions by enterprise customers in new industries outside of gaming. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to maintain and expand our solution to existing and new customers could suffer, and our reputation with existing or potential customers could suffer.
Acquisitions, strategic investments, partnerships, and alliances could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our business, financial condition and results of operations.
We have in the past and may in the future seek to acquire or invest in businesses, joint ventures, platform, or technologies that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. Although the significant majority of our revenue growth has been organic, we have completed over a dozen acquisitions since 2011, including deltaDNA, Multiplay and Vivox, to further our goal of providing a complete set of solutions for all creator needs. Any such acquisition or investment may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable opportunities, whether or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, data, platform, personnel or operations of any acquired companies, particularly if the key personnel of an acquired company choose not to work for us or face cultural challenges integrating with our company, or if their software or technology is not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management, or otherwise. In addition, we have invested and may in the future invest in private companies and may not realize a return on our investments.
We could also face risks related to liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities, and litigation or other claims in connection with the acquired company, including claims from terminated employees, users, former stockholders