Ubiquiti Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 The Company develops 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, webstores, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community. We target consumers through digital marketing, retail chains and, to a lesser extent, the Ubiquiti Community. The majority of our human capital resources consist of entrepreneurial and de-centralized research and development (“R&D”) personnel. 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 (“WISPs”), 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 WISPs 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. COVID-19 Update - The 2019 novel coronavirus (COVID-19), which the World Health Organization (“WHO”) characterized as a pandemic in March 2020, continues to disrupt global economies, and has spread to the major markets in which we operate, including the United States, Asia, Europe and South America. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on travel, stay-at-home orders or work remote or from home conditions in many of the locations where we have offices. We have taken and will continue to take precautionary measures intended to help minimize the risk of COVID-19 to our employees. While we have not yet experienced a significant disruption to the productivity of our employees as a result of the COVID-19 pandemic, if the stay-at-home orders or work remote or from home conditions in any of our facilities continue for an extended period of time, or if we have an outbreak in any of our facilities, we may, among other issues, experience delays in product development, a decreased ability to support our customers, disruptions in sales and an overall lack of productivity. We have experienced a disruption in our supply chain and production as a result of the COVID-19 related restrictions and the global shortage of components. The current environment has impacted our suppliers’ ability to manufacture or provide key components or services, and we have incurred, and continue to incur, additional cost to expedite deliveries of components and services. The extent to which the COVID-19 pandemic and the global availability of components impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including further disruptions to our supply chain, reductions in demand due to disruptions in the operations of our customers or their end customers, disruptions in local and global economies, volatility in the global financial markets, overall reductions in demand, restrictions on the export or shipment of our products or other COVID-19-related events. This uncertainty also affects management’s 21 Table of Contents accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions. Refer to Risk Factors (Part II, Item 1A of this Form 10-Q) for a discussion of these factors and other risks. 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 customer support (“PCS”) free of charge in many of our arrangements, we attribute a portion of our systems revenues to this implied PCS. We classify our revenues into two primary product categories: Service Provider Technology and Enterprise Technology. • Service Provider Technology includes the Company’s 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 the Company’s UniFi platforms, including UniFi enterprise Wi-Fi, UniFi Protect, UniFi Access, UniFi switching and routing solutions and the Company’s 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, through direct sales. Sales to distributors accounted for 85% of our revenues during the nine months ended March 31, 2021. Direct sales accounted for 15% of our revenue during the nine months ended March 31, 2021. For the nine months ended March 31, 2020, sales to distributors accounted for 95% of our revenues and direct sales accounted for 5% of our revenues. 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 includes labor and other costs which include salary, benefits and stock-based compensation in addition to costs associated with tooling, testing and quality assurance, warranty costs, logistics costs, tariffs and excess and obsolete inventory write-downs. We currently operate warehouses located in the U.S. and the Czech Republic. In addition, we outsource other logistics warehousing and order fulfillment functions located in China and to a lesser extent in other countries. 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 in U.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. In June 2018, the Office of the United States Trade Representative announced new proposed tariffs for certain products imported into the U.S. from China. The vast majority of our products that are imported into the U.S. from China are currently subject to tariffs that range between 7.5% and 25%. On January 22, 2020, the Office of the United States Trade Representative announced it will reduce Section 201 List 4A and 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 foreign policy responses” for additional information. Operating Expenses We classify our operating expenses as research and development and, 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, 22 Table of Contents 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 in the 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 the SEC on August 21, 2020, and there have been no material changes other than that have been disclosed in Note 2 to our consolidated financial statements herein. Additionally, as the COVID-19 pandemic continues to develop, many of our estimates could require increased judgement and carry a higher degree of variability and volatility. As events continue to evolve our estimates may change materially in future periods. We believe that the accounting policies discussed in our Annual Report, are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Results of Operations Comparison of Three and Nine Months Ended March 31, 2021 and 2020 23 Table of Contents Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (In thousands, except percentages) Revenues $ 467,237 100 % $ 337,417 100 % $ 1,420,206 100 % $ 968,978 100 % Cost of revenues (1) 244,499 52 % 177,782 53 % 738,678 52 % 512,866 53 % Gross profit 222,738 48 % 159,635 47 % 681,528 48 % 456,112 47 % Operating expenses: Research and development (1) 30,483 7 % 21,672 6 % 85,208 6 % 65,965 7 % Sales, general and administrative (1) 13,255 3 % 10,606 3 % 36,556 3 % 30,053 3 % Total operating expenses 43,738 10 % 32,278 10 % 121,764 9 % 96,018 10 % Income from operations 179,000 38 % 127,357 38 % 559,764 39 % 360,094 37 % Interest expense and other, net (4,890) (1 %) (6,618) (2 %) (12,420) (1 %) (23,356) (2 %) Income before income taxes 174,110 37 % 120,739 36 % 547,344 38 % 336,738 35 % Provisions for income taxes 28,035 6 % 17,017 5 % 85,092 6 % 49,059 5 % Net income $ 146,075 31 % $ 103,722 31 % $ 462,252 32 % $ 287,679 30 % (1) Includes stock-based compensation as follows: Cost of revenues 23 29 80 94 Research and development 538 499 1,560 1,507 Sales, general and administrative 214 197 625 543 Total stock-based compensation 775 725 2,265 2,144 Revenues Total revenues increased $129.8 million, or 38%, from $337.4 million in the three months ended March 31, 2020 to $467.2 million in the three months ended March 31, 2021. Total revenues increased $451.2 million, or 47%, from $969.0 million in the nine months ended March 31, 2020 to $1.4 billion in the nine months ended March 31, 2021. While the Company's revenue year over year increased, revenue for the three months ended March 31, 2021 declined compared to the three months ended December 31, 2020. This was primarily due to the disruption in our supply chain as a result of the COVID-19 pandemic and the global availability of components. The current environment has impacted our suppliers' ability to manufacture or provide key components and services and as a result the lack of available inventory limited our ability to meet customer orders. In addition, we continue to incur additional costs to expedite deliveries of components and services. During the three and nine months ended March 31, 2021, 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 March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (in thousands, except percentages) Service Provider Technology $ 152,362 33 % $ 106,439 32 % $ 459,699 32 % $ 320,081 33 % Enterprise Technology 314,875 67 % 230,978 68 % 960,507 68 % 648,897 67 % Total revenues $ 467,237 100 % $ 337,417 100 % $ 1,420,206 100 % $ 968,978 100 % Service Provider Technology revenue increased $45.9 million, or 43%, from $106.4 million in the three months ended March 31, 2020 to $152.4 million in the three months ended March 31, 2021 and increased $139.6 million, or 44%, from $320.1 million in the nine months ended March 31, 2020 to $459.7 million in the nine months ended March 31, 2021. The increase in Service Provider Technology revenue during the three and nine months ended March 31, 2021 as compared to the same periods in the prior year, was primarily due to increased revenue in all regions across all the platforms. Enterprise Technology revenue increased $83.9 million, or 36%, from $231.0 million in the three months ended March 31, 2020 to $314.9 million in the three months ended March 31, 2021 and increased $311.6 million, or 48%, from $648.9 million in the nine months ended March 31, 2020 to $960.5 million in the nine months ended March 31, 2021. The increase in Enterprise Technology revenue during the three months ended March 31, 2021 as compared to the same period in the 24 Table of Contents prior year, was primarily due to product expansion and further adoption of our UniFi technology platform across all regions. The increase in Enterprise Technology revenue during the nine months ended March 31, 2021 as compared to the same period in the prior year, was primarily due to product expansion and further adoption of our UniFi technology platform across all regions, except South America. 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 nine months ended March 31, 2021 and 2020 (in thousands, except percentages): Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (in thousands, except percentages) North America (1) $ 209,515 45 % $ 133,917 40 % $ 623,835 44 % $ 411,834 43 % Europe, the Middle East and Africa ("EMEA") 189,573 41 % 159,436 47 % 587,507 41 % 405,883 42 % Asia Pacific 36,145 8 % 26,232 8 % 115,464 8 % 88,753 9 % South America 32,004 7 % 17,832 5 % 93,400 7 % 62,508 6 % Total revenues $ 467,237 100 % $ 337,417 100 % $ 1,420,206 100 % $ 968,978 100 % (1) Revenue for the United States was $193.2 million and $125.4 million for the three months ended March 31, 2021 and 2020, respectively. Revenue for the United States was $582.1 million and $389.0 million for the nine months ended March 31, 2021 and 2020, respectively. North America Revenues in North America increased $75.6 million, or 56%, from $133.9 million in the three months ended March 31, 2020 to $209.5 million in the three months ended March 31, 2021 and increased $212.0 million, or 51%, from $411.8 million in the nine months ended March 31, 2020 to $623.8 million in the nine months ended March 31, 2021. The increase in North America revenues during the three and nine months ended March 31, 2021 as compared to the same periods in the prior year, was primarily due to increased revenues from both our Enterprise Technology products and Service Provider Technology products. Europe, the Middle East, and Africa (EMEA) Revenues in EMEA increased $30.1 million, or 19%, from $159.4 million in the three months ended March 31, 2020 to $189.6 million in the three months ended March 31, 2021 and increased $181.6 million, or 45% from $405.9 million in the nine months ended March 31, 2020 to $587.5 million in the nine months ended March 31, 2021. The increase in EMEA revenues during the three and nine months ended March 31, 2021 as compared to the same periods in the prior year, was primarily due to increased revenues from both our Enterprise Technology products and Service Provider Technology products. Asia Pacific Revenues in the Asia Pacific region increased $9.9 million, or 38%, from $26.2 million in the three months ended March 31, 2020 to $36.1 million in the three months ended March 31, 2021 and increased $26.7 million, or 30%, from $88.8 million in the nine months ended March 31, 2020 to $115.5 million in the nine months ended March 31, 2021. The increase in Asia Pacific revenues during the three and nine months ended March 31, 2021 as compared to the same periods in the prior year was primarily due to increased revenues from both our Enterprise Technology products and Service Provider Technology products. South America Revenues in South America increased $14.2 million, or 79%, from $17.8 million in the three months ended March 31, 2020 to $32.0 million in the three months ended March 31, 2021 and increased $30.9 million, or 49%, from $62.5 million in the nine months ended March 31, 2020 to $93.4 million in the nine months ended March 31, 2021. The increase in South America revenues during the three months ended March 31, 2021 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. The increase in the nine months ended March 31, 2021 as compared to the same periods in the prior year was primarily due to increased revenues from our Service Provider Technology products, partially offset by decreased revenues from our Enterprise Technology products. 25 Table of Contents Cost of Revenues and Gross Profit Cost of revenues increased $66.7 million, or 38%, from $177.8 million in the three months ended March 31, 2020 to $244.5 million in the three months ended March 31, 2021. The increase is primarily due to cost increase associated with an overall increase in revenue and higher shipping costs, partially offset by lower other indirect costs and lower tariffs. Cost of revenues increased $225.8 million, or 44%, from $512.9 million in the nine months ended March 31, 2020 to $738.7 million in the nine months ended March 31, 2021. The increase is primarily due to cost increases associated with an overall increase in revenue, higher tariff-related costs and shipping costs, partially offset by lower other indirect costs. Gross profit margin increased to 47.7% in the three months ended March 31, 2021 compared to 47.3% in the three months ended March 31, 2020. Gross profit margin increased to 48.0% in the nine months ended March 31, 2021 compared to 47.1% in the nine months ended March 31, 2020. The increase in gross profit margin during the three months ended March 31, 2021 was primarily driven by higher revenue and favorable changes in product mix, tariffs and other indirect cost being lower as a percentage of overall revenue partially offset by higher shipping costs as a percentage of revenue. The increase in gross profit margin during the nine months ended March 31, 2021 was primarily driven by higher revenue and favorable changes in product mix, and other indirect cost being lower as a percentage of overall revenue partially offset by higher shipping costs and higher tariff-related costs as a percentage of revenue. Operating Expenses Research and Development Research and development (“R&D”) expenses increased $8.8 million, or 41%, from $21.7 million in the three months ended March 31, 2020 to $30.5 million in the three months ended March 31, 2021. As a percentage of revenues, R&D expenses increased from 6% for the three months ended March 31, 2020 to 7% for the three months ended March 31, 2021. R&D expenses increased $19.2 million, or 29%, from $66.0 million in the nine months ended March 31, 2020 to $85.2 million in the nine months ended March 31, 2021. As a percentage of revenues, R&D expenses decreased from 7% for the nine months ended March 31, 2020 to 6% for the nine months ended March 31, 2021. The increase in R&D expenses in absolute dollars for both the three and nine months ended March 31, 2021 as compared to the same periods in the prior year was primarily due to higher employee related expenses and other costs to support the increase in development activities. Sales, General and Administrative Sales, general and administrative (“SG&A”) expenses increased $2.6 million, or 25%, from $10.6 million in the three months ended March 31, 2020 to $13.3 million in the three months ended March 31, 2021. As a percentage of revenues, SG&A expenses decreased from 3.1% for the three months ended March 31, 2020 to 2.8% for the three months ended March 31, 2021. SG&A expenses increased $6.5 million, or 22%, from $30.1 million in the nine months ended March 31, 2020 to $36.6 million for the nine months ended March 31, 2021. As a percentage of revenues, SG&A expenses decreased from 3.1% for the nine months ended March 31, 2020 to 2.6% for the nine months ended March 31, 2021. The increase in SG&A expenses in absolute dollars for three months ended March 31, 2021 as compared to the same period in the prior year was primarily due to higher professional and service fees and higher depreciation expense, partially offset by lower payroll expense and a business e-mail compromise recovery received in the third quarter fiscal 2021. The increase in SG&A expenses in absolute dollars for the nine months ended March 31, 2021 as compared to the same period in the prior year was primarily due to higher professional and service fees and higher depreciation expense offset, in part by legal settlement received in the second quarter fiscal 2021, a business e-mail compromise recovery received, lower employee related expenses and lower marketing expense. Provision for Income Taxes Our provision for income taxes increased $11.0 million, or 64.7%, from $17.0 million for the three months ended March 31, 2020 to $28.0 million for the three months ended March 31, 2021. Our effective tax rate increased to 16.1% for the three months ended March 31, 2021 as compared to 14.1% for the three months ended March 31, 2020. Our provisions for income taxes increased $36.0 million, or 73%, from $49.1 million for the nine months ended March 31, 2020 to $85.1 million for the nine months ended March 31, 2021. Our effective tax rate increased to 15.5% for the nine months ended March 31, 2021 as compared to 14.6% for the nine months ended March 31, 2020. The change in effective tax rates for the three and nine months ended March 31, 2021 as compared to the same periods in the prior year was primarily due to the increase in overall taxable income in jurisdictions with higher tax rates. Liquidity and Capital Resources 26 Table of Contents Sources and Uses of Cash Our principal source 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 $262.8 million and $142.6 million as of March 31, 2021 and June 30, 2020, respectively. Consolidated Cash Flow Data The following table sets forth the major components of our consolidated statements of cash flows data for the periods presented: Nine Months Ended March 31, 2021 2020 (In thousands) Net cash provided by operating activities $ 447,773 $ 335,330 Net cash provided by (used in) investing activities (15,080) 60,377 Net cash (used in) financing activities (312,519) (556,073) Net increase (decrease) in cash and cash equivalents $ 120,174 $ (160,366) Cash Flows from Operating Activities Net cash provided by operating activities in the nine months ended March 31, 2021 consisted primarily of net income of $462.3 million partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $36.2 million. This net change consisted primarily of a $60.8 million decrease in inventory offset by $3.6 million increase in vendor deposits, a $45.2 million increase in accounts receivable due to higher revenue for the period, a $3.8 million decrease in net accounts payable and accrued liabilities, a $26.2 million decrease in taxes payable due to the timing of federal tax payments and a $27.1 million increase in prepaid expense and other assets. Net cash provided by operating activities in the nine months ended March 31, 2020 consisted primarily of net income of $287.7 million, in addition to the changes in operating assets and liabilities that resulted in net cash inflows of $25.3 million. This net change consisted primarily of a $53.3 million decrease in inventory and $2.4 million decrease in vendor deposit, $8.4 million increase in net accounts payable and accrued liabilities, $3.4 million decrease in prepaid expense and other assets, a $17.8 million increase in accounts receivable and a $25.4 million decrease in taxes payable due to the timing of federal tax payments. Cash Flows from Investing Activities We used $15.1 million of cash in investing activities during the nine months ended March 31, 2021. Our investing activities consisted primarily of $16.0 million of capital expenditures and purchase of intangible assets, partially offset by maturities of investment securities of $0.9 million. Net cash provided by investing activities in the nine months ended March 31, 2020 was $60.4 million. Our investing activities consisted primarily of cash inflows of $89.2 million net proceeds from our available-for-sale securities offset, in part by cash outflows of $28.8 million of capital expenditures. Cash Flows from Financing Activities The Company used $312.5 million of cash in financing activities during the nine months ended March 31, 2021. During the nine months ended March 31, 2021, we used $80.0 million of net funds for repayments under the Facilities, $152.6 million related to the repurchase of our common stock, $75.7 million related to dividends paid on our common stock and $3.3 million of debt issuance costs related to the amended and restated credit agreement. 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 $556.1 million of cash in financing activities during the nine months ended March 31, 2020. During the nine months ended March 31, 2020, we generated $188.8 million of net funds from borrowing and repayments under the Company's credit facilities, which were more than offset by financing cash outflows of $681.2 million related to the repurchase of our common stock, $59.6 million related to dividends paid on our common stock and $3.1 million of debt issuance costs. Liquidity We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds, under our Facilities 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 or need to rely more heavily on our Facilities or other sources of liquidity to continue to meet our needs. 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, the availability of additional funds under our Facilities and overall economic conditions. The COVID-19 pandemic and resulting global disruptions have caused significant volatility in financial 27 Table of Contents markets and the domestic and global economy. This disruption can contribute to potential payment delays or defaults in our accounts receivable, affect asset valuations resulting in impairment charges, and affect the availability of financing credit as well as other segments of the credit markets. For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, refer to “Part II-Item 1A. Risk Factors – Risks Related to Our Business and Industry - Our contract manufacturers, logistics centers and certain administrative and research and development operations, as well as our customers and suppliers, are located in areas likely to be subject to natural disasters and public health problems, which could adversely affect our business, results of operations and financial condition” for additional information. We expect to continue to maintain financing flexibility in the current market conditions. However, due to the rapidly evolving global situation, it is not possible to predict whether unanticipated consequences of the pandemic are reasonably likely to materially affect our liquidity and capital resources in the future. Warranties and Indemnifications Our products are generally accompanied by a twelve to twenty- four-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 the Financial 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 of March 31, 2021. 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 of March 31, 2021. 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. The following table summarizes the Company’s contractual obligations as of March 31, 2021 for the remainder of fiscal 2021 and future fiscal years (in thousands): 2021 (remainder) 2022 2023 2024 2025 Thereafter Total Operating leases 2,466 9,343 8,258 7,820 7,265 8,020 43,172 Debt payment obligations 6,250 25,000 25,000 25,000 25,000 468,750 575,000 Interest and other payments on debt payment obligations 2,654 10,391 9,983 9,601 9,167 6,590 48,386 Transition tax — 9,004 9,004 16,882 22,509 28,136 85,535 Other obligations 6,212 20,000 20,000 6,667 — — 52,879 Total $ 17,582 $ 73,738 $ 72,245 $ 65,970 $ 63,941 $ 511,496 $ 804,972 Purchase Obligations We subcontract with third parties to manufacture our products and have purchase commitments with key component suppliers. During the normal course of business, our contract manufacturers procure components and manufacture products based upon orders placed by us. If we cancel all or part of the orders, we may still be liable to the contract manufacturers for the cost of the components purchased by the subcontractors to manufacture our products. We periodically review the potential liability, and as of March 31, 2021, we have recorded a purchase obligation liability of $8.3 million related to component purchase commitments. There have been no other 28 Table of Contents significant liabilities for cancellations recorded as of March 31, 2021. Our consolidated financial position and results of operations could be negatively impacted if we were required to compensate the contract manufacturers for any unrecorded liabilities incurred. We may be subject to additional purchase obligations for supply agreements and components ordered by our contract manufacturers based on manufacturing forecasts we provide them each month. We estimate the amount of these additional purchase obligations to range from $150.3 million to $756.5 million as of March 31, 2021, depending upon the timing of orders placed for these components by our contract manufacturers. Transition Tax The Company also had obligations of $85.5 million as of March 31, 2021, related to Transition Tax. These obligations are included within Income taxes payable and Long-term taxes payable on our Consolidated Balance Sheets. Other Obligations The Company had other obligations of $52.9 as of March 31, 2021, which consisted primarily of commitments related to raw materials and research and development projects. Unrecognized Tax Benefits As of March 31, 2021, we had $34.0 million and an additional $4.6 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 dividend, 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 and our reliance on our source 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 the Financial Accounting Standards Board and the impact of COVID-19 pandemic on our business. 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 of U.S. tariffs on results of operations, 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, the impact of COVID-19 pandemic on our business, results and liquidity, volatility in our short-term investments, 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.