UBIQUITI INC. The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this quarterly report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this quarterly report, particularly in Note 10 "Commitments and Contingencies" to our consolidated financial statements and Part II "Other Information", Item 1-Legal Proceedings and 1A-Risk Factors, in this report. Overview We develop technology platforms for high-capacity distributed Internet access, unified information technology, and consumer electronics for professional, home and personal use. We categorize our solutions in to three main categories: high performance networking technology for service providers, enterprises and consumers. We target the service provider and enterprise markets through our highly engaged community of service providers, distributors, value added resellers, systems integrators and corporate IT professionals, which we refer to as theUbiquiti Community . We target consumers through digital marketing, retail chains and, to a lesser extent, theUbiquiti Community . 24 -------------------------------------------------------------------------------- Table of Contents The majority of our resources consist of entrepreneurial and de-centralized research and development ("R&D"). We do not employ a traditional direct sales force, but instead drive brand awareness through online reviews and publications, our website, our distributors and the Company's user community where customers can interface directly with our R&D, marketing, and support teams. Our technology platforms were designed from the ground up with a focus on delivering highly-advanced and easily deployable solutions that appeal to a global customer base market. We offer a broad and expanding portfolio of networking products and solutions for operator-owners of wireless internet services ("WISP's"), enterprises and smart homes. Our operator-owner service provider-product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing and the related software for WISP's to easily control, track and bill their customers. Our enterprise product platforms provide wireless LAN ("WLAN") infrastructure, video surveillance products, switching and routing solutions, security gateways, and other complimentary WLAN products along with a unique software platform, which enables users to control their network from one simple, easy to use software interface. Our consumer products, sold under the Ubiquiti Labs brand name, are targeted to the smart home and highly connected consumers. We believe that our products are highly differentiated due to our proprietary software, firmware expertise, and hardware design capabilities. We distribute our products through a worldwide network of over 100 distributors and on-line retailers. The Company has a very broad installed base with over 101 million devices sold in over 200 countries and territories around the world, since inception. Key Components of Our Results of Operations and Financial Condition Revenues We operate our business as one reportable and operating segment. Further information, regarding Segments can be found in Note 15 to our Consolidated Financial Statements. Our revenues are derived principally from the sale of networking hardware. Because we have historically included implied post-contract support ("PCS") free of charge in many of our arrangements, we attribute a portion of our systems revenues to PCS. We classify our revenues into two primary product categories: Service Provider Technology and Enterprise Technology. •Service Provider Technology includes our airMAX, EdgeMAX, UFiber, and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and CPE. Additionally, Service Provider Technology includes antennas and other products primarily in the 0.9 to 6.0 GHz spectrum and miscellaneous products such as mounting brackets, cables and power over Ethernet adapters. •Enterprise Technology includes our UniFi platforms, including UniFi enterprise Wi-Fi, UniFi Protect, UniFi switching and routing solutions and our AmpliFi platform. We sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors, and, to a lesser extent, direct customers. Sales to distributors accounted for 96% of our revenues during the six months endedDecember 31, 2019 . Cost of Revenues Our cost of revenues is comprised primarily of the costs of procuring finished goods from our contract manufacturers and certain key components that we consign to certain of our contract manufacturers. In addition, cost of revenues include labor and other costs, which includes salary, benefits and stock-based compensation in addition to costs associated with tooling, testing and quality assurance, warranty costs, logistics fees, tariffs and excess and obsolete inventory costs. We currently operate warehouses located in theU.S. and theCzech Republic . In addition, we outsource other logistics warehousing and order fulfillment functions primarily located inChina . We also evaluate and utilize other vendors for various portions of our supply chain from time to time. Our operations organization consists of employees and consultants engaged in the management of our contract manufacturers, new product introduction activities, logistical support and engineering. Gross Profit Our gross profit has been, and may in the future be, influenced by several factors including changes in product mix, target end markets for our products, channel inventory levels, tariffs, pricing due to competitive pressure, production costs and global demand for electronic components. Although we procure and sell our products mostly inU.S. dollars, our contract manufacturers incur many costs, including labor costs, in other currencies. To the extent that the exchange rates move unfavorably for our contract manufacturers, they may try to pass these additional costs on to us, which could have a material impact on our future average selling prices and unit costs. InJune 2018 , theOffice of the United States Trade Representative announced new proposed tariffs for certain products imported into theU.S. fromChina . The vast majority of our products that are imported into theU.S. fromChina are currently subject to tariffs that range between 15% and 25%. OnJanuary 22, 2020 ,the United States of Trade Representative announced it will reduce Section 301 List 4A additional tariffs from 15% to 7.5% and the List 4B tariffs would not go into effect. These tariffs have already affected our operating results and margins. For so long as such tariffs are in effect, we expect it will continue to affect our operating results and margins. As a result, our historical and current gross profit margins may not be indicative of our gross profit margins for future periods. Refer to "Part II-Item 1A. Risk Factors-Risks Related to Our International Operations-Our business may be negatively affected by political events and 25 -------------------------------------------------------------------------------- Table of Contents foreign policy responses" for additional information. Operating Expenses We classify our operating expenses as research and development, sales, general and administrative expenses. •Research and development expenses consist primarily of salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in research, design and development activities, as well as costs for prototypes, licensed or purchased intellectual property, facilities and travel. Over time, we expect our research and development costs to increase as we continue making significant investments in developing new products in addition to new versions of our existing products. •Sales, general and administrative expenses include salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in sales, marketing and general and administrative activities, as well as the costs of legal expenses, trade shows, marketing programs, promotional materials, bad debt expense, professional services, facilities, general liability insurance and travel. As our product portfolio and targeted markets expand, we may need to employ different sales models, such as building a traditional direct sales force. These sales models would likely increase our costs. Over time, we expect our sales, general and administrative expenses to increase in absolute dollars due to continued growth in headcount, expansion of our efforts to register and defend trademarks and patents and to support our business and operations. Provisions for Income Taxes We use the asset and liability method to account for income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The Company must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss. To the extent that the Company establishes a reserve, its provision for income taxes would be increased. If the Company ultimately determines that payment of these amounts is unnecessary, it reverses the liability and recognizes a tax benefit during the period in which it determines that the liability is no longer necessary. The Company records an additional charge in its provision for taxes in the period in which it determines that tax liability is greater than its original estimate. The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations and comprehensive income. Refer to "Part II-Item 1A. Risk Factors-Risks Related to Regulatory, Legal and Tax Matters-Changes in applicable tax regulations could negatively affect our financial results" for additional information. Critical Accounting Policies We prepare our consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. In other cases, management's judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs and expenses and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies are discussed in our Annual Report, filed with theSEC onAugust 21, 2019 , and there have been no material changes other than that have been disclosed in Note 2 to our consolidated financial statements herein. Results of Operations Comparison of Three and Six Months EndedDecember 31, 2019 and 2018 26
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Table of Contents
Three Months Ended December 31, Six Months Ended December 31,
2019 2018 2019 2018
(In thousands, except percentages)
Revenues $ 308,284 100 % $ 307,276 100 % $ 631,561 100 % $ 590,181 100 %
Cost of revenues (1) 163,198 53 % 167,045 54 % 335,084 53 % 318,344 54 %
Gross profit 145,086 47 % 140,231 46 % 296,477 47 % 271,837 46 %
Operating expenses:
Research and development (1) 24,041 8 % 19,977 7 % 44,293 7 % 38,199 6 %
Sales, general and administrative (1) 8,997 3 % 10,597 3 % 19,447 3 % 24,363 4 %
Litigation settlement - - % 18,000 6 % - - % 18,000 3 %
Total operating expenses 33,038 11 % 48,574 16 % 63,740 10 % 80,562 14 %
Income from operations 112,048 36 % 91,657 30 % 232,737 37 % 191,275 32 %
Interest expense and other, net (12,085) (4 %) (3,212) (1 %) (16,738) (3 %) (5,739) (1 %)
Income before income taxes 99,963 32 % 88,445 29 % 215,999 34 % 185,536 31 %
Provisions for income taxes 14,152 5 % 10,649 3 % 32,042 5 % 22,037 4 %
Net income $ 85,811 28 % $ 77,796 25 % $ 183,957 29 % $ 163,499 28 %
(1) Includes stock-based
compensation as follows:
Cost of revenues 33 261 65 294
Research and development 527 497 1,008 964
Sales, general and administrative 170 21 346 296
Total stock-based compensation 730 779 1,419 1,554 Revenues Total revenues increased$1.0 million , or 0.3%, from$307.3 million in the three months endedDecember 31, 2018 to$308.3 million in the three months endedDecember 31, 2019 . Total revenues increased$41.4 million , or 7%, from$590.2 million in the six months endedDecember 31, 2018 to$631.6 million in the six months endedDecember 31, 2019 . During the three and six months endedDecember 31, 2019 , there were no material price changes in the Company's products sold. However, the Company continues to introduce new products which may have average selling prices and margins different than our legacy products. Revenues by Product Type Three Months Ended December 31, Six Months Ended December 31, 2019 2018 2019 2018 (in thousands, except percentages) Service Provider Technology$ 97,716 32 %$ 113,222 37 %$ 213,642 34 %$ 218,179 37 % Enterprise Technology 210,568 68 % 194,054 63 % 417,919 66 % 372,002 63 % Total revenues$ 308,284 100 %$ 307,276 100 %$ 631,561 100 %$ 590,181 100 % Service Provider Technology revenue decreased$15.5 million , or 14%, from$113.2 million in the three months endedDecember 31, 2018 to$97.7 million in the three months endedDecember 31, 2019 . Service Provider Technology revenue decreased$4.5 million , or 2%, from$218.2 million in the six months endedDecember 31, 2018 to$213.6 million in the six months endedDecember 31, 2019 . The decrease in Service Provider Technology revenue during the three months endedDecember 31, 2019 as compared to the same period in the prior year, was primarily due to decreased revenue inEurope ,Middle East andAfrica ("EMEA"),North America ,South America andAsia Pacific . The decrease in Service Provider Technology revenue during the six months endedDecember 31, 2019 as compared to the same period in the prior year, was primarily due to decreased revenue in EMEA, partially offset by an increase in revenue inNorth America . Enterprise Technology revenue increased$16.5 million , or 9%, from$194.1 million in the three months endedDecember 31, 2018 to$210.6 million in the three months endedDecember 31, 2019 . 27 -------------------------------------------------------------------------------- Table of Contents Enterprise Technology revenue increased$45.9 million , or 12%, from$372.0 million in the six months endedDecember 31, 2018 to$417.9 million in the six months endedDecember 31, 2019 . The increase in Enterprise Technology revenue during the three and six months endedDecember 31, 2019 as compared to the same periods in the prior year, was primarily due to product expansion and further adoption of our UniFi technology platform across all regions other than EMEA. Revenues by Geography We have determined the geographical distribution of our product revenues based on our customers' ship-to destinations. A majority of our sales are to distributors who either sell to resellers or directly to end customers, who may be located in different countries than the initial ship-to destination. The following are our revenues by geography for the three and six months endedDecember 31, 2019 and 2018 (in thousands, except percentages): Three Months Ended December 31, Six Months Ended December 31, 2019 2018 2019 2018 (in thousands, except percentages) North America(1)$ 129,966 42 %$ 121,234 39 %$ 277,917 44 %$ 240,605 41 % Europe, the Middle East and 120,607 39 % 134,392 44 % 246,447 39 % 259,323 44 %Africa ("EMEA") Asia Pacific 32,804 11 % 30,743 10 % 62,521 10 % 55,170 9 % South America 24,907 8 % 20,907 7 % 44,676 7 % 35,083 6 % Total revenues$ 308,284 100 %$ 307,276 100 %$ 631,561 100 %$ 590,181 100 % (1) Revenue forthe United States was$121.7 million and$114.5 million for the three months endedDecember 31, 2019 and 2018, respectively. Revenue forthe United States was$263.6 and$226.8 for the six months endedDecember 31, 2019 and 2018, respectively. North America Revenues inNorth America increased$8.7 million , or 7%, from$121.2 million in the three months endedDecember 31, 2018 to$130.0 million in the three months endedDecember 31, 2019 . Revenues inNorth America increased$37.3 million , or 16%, from$240.6 million in the six months endedDecember 31, 2018 to$277.9 million in the six months endedDecember 31, 2019 . The increase inNorth America revenues during the three months endedDecember 31, 2019 as compared to the same period in the prior year, was primarily due to increased revenues from our Enterprise Technology products, partially offset by decreased revenues in Service Provider Technology products. The increase inNorth America revenues during the six months endedDecember 31, 2019 as compared to the same period in the prior year, was primarily due to increased revenues from both our Enterprise Technology products and Service Provider Technology products.Europe , theMiddle East , andAfrica (EMEA) Revenues in EMEA decreased$13.8 million , or 10%, from$134.4 million in the three months endedDecember 31, 2018 to$120.6 million in the three months endedDecember 31, 2019 . Revenues in EMEA decreased$12.9 million , or 5% from$259.3 million in the six months endedDecember 31, 2018 to$246.4 million in the six months endedDecember 31, 2019 . The decrease in EMEA revenues during the three and six months endedDecember 31, 2019 as compared to the same periods in the prior year was primarily due to decreased revenues from both our Enterprise Technology products and Service Provider Technology products. Asia Pacific Revenues in theAsia Pacific region increased$2.1 million , or 7%, from$30.7 million in the three months endedDecember 31, 2018 to$32.8 million in the three months endedDecember 31, 2019 . Revenues in theAsia Pacific region increased$7.4 million , or 13%, from$55.2 million in the six months endedDecember 31, 2018 to$62.5 million in the six months endedDecember 31, 2019 . The increase inAsia Pacific revenues during the three months endedDecember 31, 2019 as compared to the same period in the prior year was primarily due to increased revenues from our Enterprise Technology, partially offset by decreased revenues in Service Provider Technology products. 28 -------------------------------------------------------------------------------- Table of Contents The increase inAsia Pacific revenues during the six months endedDecember 31, 2019 as compared to the same period in the prior year was primarily due to increased revenues from our Enterprise Technology products, partially offset by decreased revenues in Service Provider Technology products.South America Revenues inSouth America increased$4.0 million , or 19%, from$20.9 million in the three months endedDecember 31, 2018 to$24.9 million in the three months endedDecember 31, 2019 . Revenues inSouth America increased$9.6 million , or 27%, from$35.1 million in the six months endedDecember 31, 2018 to$44.7 million in the six months endedDecember 31, 2019 . The increase inSouth America revenues during the three months endedDecember 31, 2019 as compared to the same period in the prior year was primarily due to increased revenues from our Enterprise Technology, partially offset by decreased revenues in Service Provider Technology products. The increase inSouth America revenues during the six months endedDecember 31, 2019 as compared to the same period in the prior year was primarily due to increased revenues from both our Enterprise Technology products and Service Provider Technology products. Cost of Revenues and Gross Profit Cost of revenues decreased$3.8 million , or 2%, from$167.0 million in the three months endedDecember 31, 2018 to$163.2 million in the three months endedDecember 31, 2019 . The decrease is primarily due to lower direct costs, partially offset by higher tariffs and increased inventory reserves. Cost of revenues increased$16.7 million , or 5%, from$318.3 million in the six months endedDecember 31, 2018 to$335.1 million in the six months endedDecember 31, 2019 . The increase is primarily due to cost increases associated with an overall increase in revenue, higher tariffs, higher indirect costs, and increased inventory reserves. Gross profit margin increased to 47% during both the three and six months endedDecember 31, 2019 as compared to 46% during both the three and six months endedDecember 31, 2018 . The increase in gross profit margin during the three months endedDecember 31, 2019 was primarily driven by favorable changes in product mix, in part offset by an increase in tariffs, higher indirect costs and increase in inventory reserves. The increase in gross profit margin during the six months endedDecember 31, 2019 was primarily driven by favorable changes in product mix, partially offset by an increase in tariffs, higher indirect costs and increase in inventory reserves. Operating Expenses Research and Development Research and development ("R&D") expenses increased$4.1 million , or 20%, from$20.0 million in the three months endedDecember 31, 2018 to$24.0 million in the three months endedDecember 31, 2019 . As a percentage of revenues, R&D expenses increased from 7% for the three months endedDecember 31, 2018 to 8% for the three months endedDecember 31, 2019 . R&D expenses increased$6.1 million , or 16%, from$38.2 million in the six months endedDecember 31, 2018 to$44.3 million in the six months endedDecember 31, 2019 . As a percentage of revenues, R&D expenses increased from 6% for the six months endedDecember 31, 2018 to 7% for the six months endedDecember 31, 2019 The increase in R&D expenses in absolute dollars for both the three and six months endedDecember 31, 2019 as compared to the same periods in the prior year was primarily due to higher employee related expenses and other development activities. Sales, General and Administrative Sales, general and administrative ("SG&A) expenses decreased$1.6 million , or 15%, from$10.6 million in the three months endedDecember 31, 2018 to$9.0 million in the three months endedDecember 31, 2019 . As a percentage of revenues, SG&A expenses remained flat at 3% for the three months endedDecember 31, 2019 and 2018. SG&A expenses decreased$4.9 million , or 20%, from$24.4 million in the six months endedDecember 31, 2018 to$19.4 million for the six months endedDecember 31, 2019 . As a percentage of revenues, SG&A expenses decreased from 4% for the six months endedDecember 31, 2018 to 3% for the six months endedDecember 31, 2019 . The decrease in SG&A expenses in absolute dollars for both the three and six months endedDecember 31, 2019 as compared to the same periods in the prior year was primarily due to lower professional fees offset, in part, by higher marketing expenses. Litigation Settlement OnFebruary 3, 2017 , Synopsys, Inc. ("Synopsys") filed a complaint against the Company, one of our subsidiaries and an employee in theUnited States District Court for the Northern District of California , alleging claims under the Digital Millennium Copyright Act. During fiscal year 2019, the Company and Synopsys entered into a settlement pursuant to which the 29 -------------------------------------------------------------------------------- Table of Contents Company paid$18 million to Synopsys and agreed to a permanent injunction to prevent any unlicensed use of Synopsys's software. As a result of the settlement, the litigation with Synopsys was dismissed. The settlement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties. Interest expense and other, net In second quarter fiscal 2020, the Company recorded a$5.0 million unrealized loss related to an impairment charge on a cost-based investment. Provision for Income Taxes Our provision for income taxes increased$3.5 million , or 33%, from$10.6 million for the three months endedDecember 31, 2018 to$14.2 million for the three months endedDecember 31, 2019 . Our effective tax rate increased to 14.2% for the three months endedDecember 31, 2019 as compared to 12.0% for the three months endedDecember 31, 2018 . Our provisions for income taxes increased$10.0 million , or 45%, from$22.0 million for the six months endedDecember 31, 2018 to$32.0 million for the six months endedDecember 31, 2019 . Our effective tax rate increased to 15% for the six months endedDecember 31, 2019 as compared to 12% for the six months endedDecember 31, 2018 . The change in effective tax rates for the three and six months endedDecember 31, 2019 as compared to the same periods in the prior year, was primarily driven by an increase in estimated GILTI inclusion under section 951A. Liquidity and Capital Resources Sources and Uses of Cash Our principal sources of liquidity are cash and cash equivalents, cash generated by operations, the availability of additional funds under the Facilities and short-term and long-term investments. We had cash and cash equivalents of$100.0 million and$238.1 million as ofDecember 31, 2019 andJune 30, 2019 , respectively. In fiscal year 2019, the Company began investing cash in various fixed income available-for-sale securities. As ofDecember 31, 2019 andJune 30, 2019 , we held$27.6 million and$101.5 million , respectively, in available-for-sale securities. Our securities investment portfolio consists of high quality investment grade securities from diverse issuers. Consolidated Cash Flow Data The following table sets forth the major components of our consolidated statements of cash flows data for the periods presented:
Six Months Ended
2019 2018
(In thousands)
Net cash provided by operating activities $ 243,338 $ 144,583
Net cash provided by (used in) investing activities 55,313 (156,113)
Net cash (used in) financing activities (436,794) (361,817)
Net (decrease) in cash and cash equivalents $
(138,143)
Cash Flows from Operating Activities Net cash provided by operating activities in the six months endedDecember 31, 2019 consisted primarily of net income of$184.0 million , in addition to the changes in operating assets and liabilities that resulted in net cash inflows of$40.5 million . This net change consisted primarily of a$11.3 million decrease in inventory and$4.4 million decrease in vendor deposits, a$8.7 million decrease in accounts receivable due to increased collection for the period, a$36.4 million increase in net accounts payable and accrued liabilities, a$24.4 million decrease in taxes payable due to the timing of federal tax payments and a$3.2 million decrease in prepaid expense and other assets. Net cash provided by operating activities in the six months endedDecember 31, 2018 consisted primarily of net income of$163.5 million partially offset by changes in operating assets and liabilities that results in net cash outflows of$24.6 million . This net change was primarily driven by outflows arising from a$154.5 million increase in inventory, partially offset by$15.4 million decrease in vendor deposit, and$4.6 million decrease in taxes payable due to the timing of federal tax payments. These outflows were partly offset by$108.3 million increase in net accounts payable and accrued liabilities. Cash Flows from Investing Activities Net cash provided by investing activities in the six months endedDecember 31, 2019 was$55.3 million . Our investing activities consisted primarily of cash inflows of$75.5 million net proceeds from our available-for-sale securities offset, in part by cash outflows of$15.0 million related to deposits on an aircraft and$5.2 million of capital expenditures. The Company used$156.1 million of cash in investing activities during the six months endedDecember 31, 2018 . For the six months endedDecember 31, 2018 , our investing activities consisted of net purchases of available-for-sale securities of$145.5 30 -------------------------------------------------------------------------------- Table of Contents million, purchase of private equity investment of$5.0 million , and capital expenditures and purchase of intangible assets of$5.6 million . Cash Flows from Financing Activities The Company used$436.8 million of cash in financing activities during the six months endedDecember 31, 2019 . During the six months endedDecember 31, 2019 , we generated$145.0 million of net funds from borrowing and repayments under the Facilities, which were more than offset by financing cash outflows of$538.0 million related to the repurchase of our common stock,$40.1 million related to dividends paid on our common stock and$3.1 million of debt issuance costs related to the Third Amendment. See Note 8- Debt of the Notes to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the Facilities. The Company used$361.8 million of cash in financing activities during the six months endedDecember 31, 2018 . During the six months endedDecember 31, 2018 , we had financing cash outflows of$313.1 million related to the repurchase of our common stock,$36.1 million related to dividends paid on our common stock and$12.5 million repayment on our term loan under the Facilities. Liquidity We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds, under the Facilities and short-term and long-term investments will be sufficient to meet our working capital, future stock repurchases, dividends, and capital expenditure needs for the next twelve months. However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development efforts, the timing of new product introductions, market acceptance of our products and overall economic conditions. Warranties and Indemnifications Our products are generally accompanied by a twelve-month warranty from date of purchase, which covers both parts and labor. Generally, the distributor is responsible for the freight costs associated with warranty returns, and we absorb the freight costs of replacing items under warranty. In accordance with theFinancial Accounting Standards Board's ("FASB's"), Accounting Standards Codification ("ASC"), 450-20, Loss Contingencies, we record an accrual when we believe it is reasonably estimable and probable based upon historical experience. We record a provision for estimated future warranty work in cost of goods sold upon recognition of revenues, and we review the resulting accrual regularly and periodically adjust it to reflect changes in warranty estimates. We have entered and may in the future enter into standard indemnification agreements with certain distributors as well as other business partners in the ordinary course of business. These agreements may include provisions for indemnifying the distributor, OEM or other business partner against any claim brought by a third-party to the extent any such claim alleges that a Ubiquiti product infringes a patent, copyright or trademark or violates any other proprietary rights of that third-party. The maximum amount of potential future indemnification is unlimited. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not estimable. We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited. We have a Directors and Officers insurance policy that limits our potential exposure for our indemnification obligations to our directors, officers and certain other employees. We believe the fair value of these indemnification agreements is minimal. We have not recorded any liabilities for these agreements as ofDecember 31, 2019 . Based upon our historical experience and information known as of the date of this report, we do not believe it is likely that we have a material liability for the above indemnities as ofDecember 31, 2019 . Contractual Obligations and Off-Balance Sheet Arrangements Our contractual obligations represent material expected or contractually committed future payment obligations. We believe that we will be able to fund these obligations through our existing cash and cash equivalents, cash generated from operations and the availability of additional funds, under the Facilities and short-term and long-term investments. As ofDecember 31, 2019 , our principal commitments consist primarily of obligations under leases for various real estate spaces, purchase commitments with our contract manufacturers and suppliers, and debt and interest obligations. See Note 8- Debt, Note 9- Leases and Note 10- Commitments and Contingencies of the Notes to our Consolidated Financial Statements, included in Part I, Item 1, of this Quarterly Report on Form 10-Q for future payment commitments under leases, purchase commitments and debt obligations as ofDecember 31, 2019 , respectively. 31 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the Company's other contractual obligations as ofDecember 31, 2019 for the remainder of fiscal 2020 and future fiscal years (in thousands): 2020 (remainder) 2021 2022 2023 2024 Thereafter Total Transition Tax - 9,004 9,004 9,004 16,882 50,645 94,539 Other obligations 15,186 - - - - - 15,186 Total$ 15,186 $ 9,004 $ 9,004 $ 9,004 $ 16,882 $ 50,645 $ 109,725 Transition Tax The Company has obligations of$94.5 million as ofDecember 31, 2019 , related to Transition Tax. These obligations are included within Income taxes payable and Long-term taxes payable on our Consolidated Balance Sheets. Other Obligations As ofDecember 31, 2019 , the Company has other obligations of$7.7 million which consisted primarily of commitments related to raw materials and research and development projects. As ofDecember 31, 2019 , the Company has an outstanding payment due on an aircraft of$7.5 million . See Note 6- Balance Sheet Components of the Notes to our Consolidated Financial Statements, included in Part I, Item 1, of this Quarterly Report on Form 10-Q. Unrecognized Tax Benefits As ofDecember 31, 2019 , we had$31.2 million and an additional$4.4 million for accrued interest, classified as non-current liabilities. At this time, we are unable to make a reasonably reliable estimate of timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, refer to Note 2 to the Consolidated Financial Statements. Note About Forward-Looking Statements When used in this Report, the words "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans" "potential," "predicts," "projects," "should," "will," "would" or similar expressions and negatives of those terms are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about our future results, sources of revenue, our continued growth, our gross margins, market trends, our product development, our introduction of new products, technological developments, the features, benefits and performance of our current and future products, the ability of our products to address a variety of markets, the anticipated growth of demand for connectivity worldwide, our growth strategies, future price reductions, our competitive status, our dependence on our senior management and our ability to attract and retain key personnel, dependency on and concentration of our distributors, our employee relations, current and potential litigation, current or potential indemnification liabilities, the effects of government regulations, the impact of tariffs, the expected impact of taxes on our liquidity and results of operations, our compliance with laws and regulations, our expected future operating costs and expenses and expenditure levels for research and development, selling, general and administrative expenses, fluctuations in operating results, fluctuations in our stock price, our payment of dividends, our future liquidity and cash needs, and the adequacy of our sources of liquidity to meet such needs, our Facilities, future acquisitions of and investments in complimentary businesses and the expected impact of various accounting policies and rules adopted by theFinancial Accounting Standards Board . Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the impact ofU.S. tariffs on results, factors affecting our quarterly results, our ability to manage our growth, our ability to sustain or increase profitability, demand for our products, our ability to compete, our ability to rapidly develop new technology and introduce new products, our ability to safeguard our intellectual property, trends in the networking industry and fluctuations in general economic conditions, and the risks set forth throughout this Report, including under Part II: "Other Information", Item 1, "Legal Proceedings" and under Item 1A, "Risk Factors." These forward-looking statements speak only as of the date hereof. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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