Ubiquiti Networks ®
Ubiquiti Networks, Inc. (Form: 10-Q, Received: 02/07/2014 06:02:41)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2013
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 No. 001-35300
 
UBIQUITI NETWORKS, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
 
32-0097377
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2580 Orchard Parkway, San Jose, CA 95131
(Address of principal executive offices, Zip Code)
(408) 942-3085
(Registrant’s telephone number, including area code)
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   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
As of February 3, 2014 , 87,786,093 shares of Common Stock, par value $0.001, were issued and outstanding.


Table of Contents

UBIQUITI NETWORKS, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013
 
 
 
Page
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


2

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1.  Financial Statements
UBIQUITI NETWORKS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)  
 
December 31, 2013
 
June 30, 2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
305,553

 
$
227,826

Accounts receivable, net of allowance for doubtful accounts of $1,800 and $2,200, respectively
36,809

 
35,884

Inventories
32,323

 
15,880

Current deferred tax asset
733

 
733

Prepaid income taxes
2,799

 

Prepaid expenses and other current assets
4,425

 
3,151

Total current assets
382,642

 
283,474

Property and equipment, net
6,793

 
5,976

Long-term deferred tax asset
4

 
4

Other long–term assets
3,105

 
2,886

Total assets
$
392,544

 
$
292,340

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
49,688

 
$
36,187

Customer deposits
3,930

 
5,123

Deferred revenues
898

 
691

Income taxes payable

 
1,257

Debt - short-term
5,642

 
5,013

Other current liabilities
12,953

 
11,150

Total current liabilities
73,111

 
59,421

Long-term taxes payable
13,380

 
11,857

Debt - long-term
68,006

 
71,116

Deferred revenues - long-term
3,017

 
2,510

Total liabilities
157,514

 
144,904

Commitments and contingencies (Note 8)

 

Stockholders’ equity:
 
 
 
Preferred stock—$0.001 par value; 50,000,000 shares authorized; none issued

 

Common stock—$0.001 par value; 500,000,000 shares authorized:
 
 
 
87,739,935 and 87,213,803 outstanding at December 31, 2013 and June 30, 2013, respectively
88

 
87

Additional paid–in capital
140,255

 
134,982

Treasury stock—44,238,960 shares held in treasury at December 31, 2013 and June 30, 2013
(123,864
)
 
(123,864
)
Retained earnings
218,551

 
136,231

Total stockholders’ equity
235,030

 
147,436

Total liabilities and stockholders’ equity
$
392,544

 
$
292,340

See notes to condensed consolidated financial statements.

3


UBIQUITI NETWORKS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013
 
2012
 
2013
 
2012
Revenues
$
138,439

 
$
74,901

 
$
268,126

 
$
136,436

Cost of revenues
77,468

 
44,416

 
149,132

 
80,931

Gross profit
60,971

 
30,485

 
118,994

 
55,505

Operating expenses:
 
 
 
 
 
 
 
Research and development
8,077

 
5,052

 
14,394

 
9,763

Sales, general and administrative
5,774

 
5,314

 
11,584

 
9,848

Total operating expenses
13,851

 
10,366

 
25,978

 
19,611

Income from operations
47,120

 
20,119

 
93,016

 
35,894

Interest expense and other, net
(249
)
 
(197
)
 
(495
)
 
(283
)
Income before provision for income taxes
46,871

 
19,922

 
92,521

 
35,611

Provision for income taxes
5,079

 
2,119

 
10,201

 
4,629

Net income and comprehensive income
$
41,792

 
$
17,803

 
$
82,320

 
$
30,982

Net income per share of common stock:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.20

 
$
0.94

 
$
0.35

Diluted
$
0.47

 
$
0.20

 
$
0.92

 
$
0.34

Weighted average shares used in computing net income per share of common stock:
 
 
 
 
 
 
 
Basic
87,661

 
88,094

 
87,536

 
89,532

Diluted
89,653

 
90,056

 
89,593

 
91,493

Cash dividends declared per common share
$

 
$
0.18

 
$

 
$
0.18

See notes to condensed consolidated financial statements.


4


UBIQUITI NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)  
 
Six Months Ended December 31,
 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
Net income and comprehensive income
$
82,320

 
$
30,982

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,330

 
753

Provision for inventory obsolescence
925

 
875

Deferred taxes
1,523

 

Excess tax benefit from employee stock-based awards
(2,591
)
 
(61
)
Stock-based compensation
2,589

 
1,549

Write-off of intangible assets
74

 

Provision for doubtful accounts
(303
)
 
1,200

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(622
)
 
18,542

Inventories
(17,368
)
 
(7,764
)
Deferred cost of revenues
(246
)
 

Prepaid income taxes
(2,799
)
 

Prepaid expenses and other assets
(1,318
)
 
(1,621
)
Accounts payable
13,334

 
1,829

Taxes payable
1,334

 
4,407

Deferred revenues
714

 
10

Accrued liabilities and other
608

 
(176
)
Net cash provided by operating activities
79,504

 
50,525

Cash Flows from Investing Activities:
 
 
 
Purchase of property and equipment and other long-term assets
(1,962
)
 
(3,467
)
Net cash used in investing activities
(1,962
)
 
(3,467
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from term loan, net

 
50,833

Repayments on term loan balance
(2,500
)
 
(1,833
)
Repurchases of common stock

 
(54,354
)
Payment of special common stock dividend

 
(15,652
)
Proceeds from exercise of stock options
1,002

 
161

Excess tax benefit from employee stock-based awards
2,591

 
61

Tax withholdings related to net share settlements of restricted stock units
(908
)
 
(33
)
Net cash provided by (used in) financing activities
185

 
(20,817
)
Net increase in cash and cash equivalents
77,727

 
26,241

Cash and cash equivalents at beginning of period
227,826

 
122,060

Cash and cash equivalents at end of period
$
305,553

 
$
148,301

See notes to condensed consolidated financial statements.

5


UBIQUITI NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Business — Ubiquiti Networks, Inc. was incorporated in the State of California in 2003 as Pera Networks, Inc. In 2005 the Company changed its name to Ubiquiti Networks, Inc. and commenced its current operations. In June 2010, the Company was re-incorporated in Delaware.
Ubiquiti Networks, Inc. and its wholly owned subsidiaries (collectively, “Ubiquiti” or the “Company”) develops high performance networking technology for service providers and enterprises.
On October 13, 2011, the Company entered into an underwriting agreement for its initial public offering of common stock at $15.00 per share. The Company's initial public offering closed on October 19, 2011. Immediately prior to the closing of the initial public offering, all outstanding shares of the Company’s preferred stock converted to common stock on a one for one basis.
On June 18, 2013, the Company completed a secondary offering of 7,031,464 shares of common stock at an offering price of $16.00 per share, which included 531,464 shares sold in connection with the partial exercise of the option to purchase additional shares granted to the underwriters. All of the shares sold in the offering were sold by existing stockholders of the Company, including entities affiliated with Summit Partners, L.P., and the Company's chief executive officer, Robert J. Pera. No shares were sold by the Company in the offering, and as such, the Company did not receive any proceeds from the offering.
The Company operates on a fiscal year ending June 30. In this Quarterly Report, the fiscal year ending June 30, 2014 is referred to as “fiscal 2014 ” and the fiscal year ended June 30, 2013 is referred to as “fiscal 2013 .”
Basis of Presentation — The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) related to interim financial statements based on applicable Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. This information reflects all adjustments, which are, in the opinion of the Company, of a normal and recurring nature and necessary to state fairly the statements of financial position, results of operations and cash flows for the dates and periods presented. The June 30, 2013 balance sheet was derived from the audited financial statements as of that date. All significant intercompany transactions and balances have been eliminated.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended June 30, 2013 included in its Annual Report on Form 10-K, as filed on September 13, 2013 with the SEC (the “Annual Report”). The results of operations for the three and six months ended December 31, 2013 are not necessarily indicative of the results to be expected for any future periods.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are disclosed in its audited consolidated financial statements for the year ended June 30, 2013 included in the Annual Report.
Recent Accounting Pronouncements
In July 2013, the FASB issued a new accounting standard update on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a new operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance will become effective for the Company on July 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist as of the effective date with retrospective application permitted. The Company is currently assessing the impact of this new guidance.
NOTE 3—FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The accounting guidance establishes a three-tier fair value

6


hierarchy that requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The fair value hierarchy prioritizes the inputs into three levels that may be used in measuring fair value as follows:
Level 1 —observable inputs which include quoted prices in active markets for identical assets or liabilities.
Level 2 —inputs which include observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 —inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
The Company did not have any financial assets recorded at fair value at December 31, 2013 or June 30, 2013 . At December 31, 2013 and June 30, 2013 the Company had debt associated with its Loan and Security Agreement with East West Bank (see Note 7). The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with similar terms and remaining maturities and was determined to be a Level 2 measurement.
As of December 31, 2013 and June 30, 2013 , the fair value hierarchy for the Company’s financial liabilities was as follows (in thousands):
 
December 31, 2013
 
June 30, 2013
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Debt
$
73,648

 
$

 
$
73,648

 
$

 
$
76,129

 
$

 
$
76,129

 
$

NOTE 4—EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013

2012
 
2013
 
2012
Numerator:

 
 
Net income attributable to common stockholders
$
41,792

 
$
17,803

 
$
82,320

 
$
30,982

Denominator:

 
 
Weighted-average shares used in computing basic net income per share
87,661

 
88,094

 
87,536

 
89,532

Add—dilutive potential common shares:



 
 
 
 
Stock options
1,747


1,806

 
1,795

 
1,808

Restricted stock units
245


156

 
262

 
153

Weighted-average shares used in computing diluted net income per share
89,653


90,056

 
89,593

 
91,493

Net income per share of common stock:

 
 
Basic
$
0.48


$
0.20

 
$
0.94

 
$
0.35

Diluted
$
0.47


$
0.20

 
$
0.92

 
$
0.34


The Company excludes potentially dilutive securities from its diluted net income per share calculation when their effect would be antidilutive to net income per share amounts.  The following table summarizes the total potential shares of common stock that were excluded from the diluted per share calculation, because to include them would have been anti-dilutive for the period (in thousands):
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013
 
2012
 
2013
 
2012
Stock options

 
355

 
1

 
196

Restricted stock units
9

 
367

 
32

 
340

 
9

 
722

 
33

 
536


7


NOTE 5—BALANCE SHEET COMPONENTS
Inventories
Inventories consisted of the following (in thousands):
 
December 31, 2013

June 30, 2013
Finished goods
$
32,136

 
$
15,618

Raw materials
187

 
262

 
$
32,323

 
$
15,880


Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
December 31, 2013
 
June 30, 2013
Non-trade receivables
$
1,546

 
$
2,203

Other current assets
2,879

 
948

 
$
4,425

 
$
3,151


Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
December 31, 2013
 
June 30, 2013
Testing equipment
$
3,642

 
$
3,309

Computer and other equipment
946

 
841

Tooling equipment
2,633

 
1,737

Furniture and fixtures
727

 
652

Leasehold improvements
2,421

 
1,858

Software
245

 
245

 
10,614

 
8,642

Less: Accumulated depreciation and amortization
(3,821
)
 
(2,666
)
 
$
6,793

 
$
5,976


Other Long-term Assets
Other long-term assets consisted of the following (in thousands):
 
December 31, 2013
 
June 30, 2013
Intangible assets, net
$
958

 
$
1,029

Long-term deferred cost of revenues
1,431

 
1,185

Other long-term assets
716

 
672

 
$
3,105

 
$
2,886


The Company's intangible assets consist primarily of legal costs associated with the application for and registration of the Company’s patents and trademarks. The Company recorded  $25,000  and $175,000 of amortization of intangible assets during the three and six months ended December 31, 2013 , respectively. The Company did no t record any amortization of intangible assets during the three and six months ended December 31, 2012 . The balance of accumulated amortization was $375,000 and $200,000 at December 31, 2013 and June 30, 2013 , respectively . Estimated future amortization related to trademark registration fees is $56,000 , $237,000 , $237,000 , $216,000 , $54,000 and $3,000 for the remainder of fiscal 2014 and fiscal years 2015, 2016, 2017, 2018, and thereafter, respectively. T he Company commences amortization of patent registration fees upon approval of the related patent, the timing of which is determined by the regulating authority and is outside the control of the Company. Therefore, future amortization expense related to patent registration fees by year cannot be reasonably estimated; however, upon approval of each patent, the Company expects to amortize the related capitalized fees over the estimated useful life of the patent.



8


Other Current Liabilities
Accrued liabilities consisted of the following (in thousands):
 
December 31, 2013
 
June 30, 2013
Accrued compensation and benefits
$
3,258

 
$
2,712

Accrued accounts payable
479

 
323

Accrual for an export compliance matter
1,625

 
1,625

Warranty accrual
3,575

 
2,913

Other accruals
4,016

 
3,577

 
$
12,953

 
$
11,150

NOTE 6—ACCRUED WARRANTY
The Company offers warranties on certain products, generally for a period of one year, and records a liability for the estimated future costs associated with potential warranty claims. The warranty costs are reflected in the Company’s consolidated statement of operations within cost of revenues. The warranties are typically in effect for 12 months from the distributor’s purchase date of the product. The Company’s estimate of future warranty costs is largely based on historical experience factors including product failure rates, material usage, and service delivery cost incurred in correcting product failures. In certain circumstances, the Company may have recourse from its contract manufacturers for replacement cost of defective products, which it also factors into its warranty liability assessment.

Warranty obligations, included in other current liabilities, were as follows (in thousands):
 
Six Months Ended December 31,
 
2013
 
2012
Beginning balance
$
2,913

 
$
1,381

Accruals for warranties issued during the period
2,698

 
1,684

Warranty costs incurred during the period
(2,036
)
 
(1,115
)
 
$
3,575

 
$
1,950

NOTE 7—DEBT
On August 7, 2012, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with U.S. Bank, as syndication agent, and East West Bank, as administrative agent for the lenders party to the Loan Agreement. The Loan Agreement provides for (i) a $50.0 million revolving credit facility, with a $5.0 million sublimit for the issuance of letters of credit and a $5.0 million sublimit for the making of swingline loan advances (the “Revolving Credit Facility”), and (ii) a $50.0 million term loan facility (the “Term Loan Facility”). The Company may request borrowings under the Revolving Credit Facility until August 7, 2015. The Loan Agreement replaced a previous agreement whereby the Company had an existing term loan balance of $29.2 million as of the date the new Loan Agreement. On August 7, 2012, the Company borrowed $20.8 million under the Term Loan Facility, and no borrowings remain available for borrowing thereunder. On November 21, 2012, the Company borrowed $10.0 million under the Revolving Credit Facility. On December 20, 2012, the Company borrowed an additional $20.0 million under the Revolving Credit Facility, and $20.0 million remains available for borrowing thereunder.

The loans bear interest, at the Company’s option, at the base rate plus a spread of 1.25% to 1.75% or an adjusted LIBOR rate (at the Company’s election, for a period of 30 , 60 , or 90 days) plus a spread of 2.25% to 2.75% , in each case with such spread being determined based on the debt service coverage ratio for its most recently ended fiscal quarter. The base rate is the highest of (i) East West Bank’s prime rate, (ii) the federal funds rate plus a margin equal to 0.50% , or (iii) the LIBOR rate plus a margin equal to 1.00% . The Company is also obligated to pay other customary closing fees, arrangement fees, administration fees, commitment fees and letter of credit fees for a credit facility of this size and type.
Interest is due and payable monthly in arrears in the case of loans bearing interest at the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate. Principal payments under the Term Loan Facility will be made in quarterly installments on the first day of each calendar quarter, and each such quarterly installment shall be equal to $1.25 million through July 1, 2014, then equal to $1.875 million from October 1, 2014 through July 1, 2015, and then equal to $2.5 million from October 1, 2015 through July 1, 2017, with the remaining outstanding principal balance and all accrued and unpaid interest due on August 7, 2017. All outstanding loans under the Revolving Credit Facility, together with all accrued and unpaid interest, are due on August 7, 2015.

9


The Company may prepay the loans, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts and reimbursement of certain costs in the case of prepayments of LIBOR loans. In addition, the Company is required to prepay the loan under the Term Loan Facility with (i) the proceeds from certain financing transactions or asset sales (subject, in the case of asset sales, to reinvestment rights) and (ii) 25.0% of the Company’s excess cash flow in the U.S., as determined after each fiscal year and in accordance with the Loan Agreement, provided that the Company shall not be required to prepay the loan out of its excess cash flow if its leverage ratio is greater than 1.50 : 1.00 on the last day of such fiscal year.
All of the obligations of the Company under the Loan Agreement are collateralized by substantially all of the Company’s assets, including all of the capital stock of the Company’s future domestic subsidiaries and 65% of the capital stock of the Company’s existing and future foreign subsidiaries, but excluding the Company’s intellectual property, which is subject to a negative pledge agreement. All of the Company’s future domestic subsidiaries are required to guaranty the obligations under the Loan Agreement. Such guarantees by future subsidiaries will be collateralized by substantially all of the property of such subsidiaries, excluding intellectual property.
The Loan Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, pay dividends or make distributions, make investments, make acquisitions, prepay certain indebtedness, change the nature of its business, enter into certain transactions with affiliates, enter into restrictive agreements, and make capital expenditures, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also required to maintain a minimum debt service coverage ratio, a maximum leverage ratio, and a minimum liquidity ratio. As of December 31, 2013 , the Company was in compliance with all affirmative and negative covenants, debt service coverage ratio, leverage ratio and liquidity ratio requirements.
The Loan Agreement includes customary events of default that include, among other things, defaults for the failure to timely pay principal, interest, or other amounts due, defaults due to the inaccuracy of representations and warranties, covenant defaults, a cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, defaults due to the unenforceability of a guaranty, and defaults due to circumstances that have or could reasonably be expected to have a material adverse effect on the Company's business, operations or financial condition, its ability to pay or perform under the Loan Agreement, or on the lenders' security interests. The occurrence of an event of default could result in the acceleration of the obligations under the Loan Agreement. During the existence of an event of default, interest on the obligations under the Loan Agreement could be increased by 2.00% above the otherwise applicable interest rate.
During the three and six months ended December 31, 2013 , the Company made aggregate payments of $1.3 million and $2.5 million , respectively, against the loan balance. During the three and six months ended December 31, 2012 , the Company made aggregate payments of $1.3 million and $1.8 million , respectively, against the loan balance. As of December 31, 2013 , the Company has classified $5.6 million and $68.0 million in short-term and long-term debt, respectively, on its condensed consolidated balance sheet related to the Loan Agreement.

The following table summarizes our estimated debt and interest payment obligations as of December 31, 2013 for the remainder of fiscal 2014 and future fiscal years (in thousands):
 
2014 (remainder)
 
2015
 
2016
 
2017
 
2018
 
Total
Debt payment obligations
$
2,500

 
$
6,875

 
$
39,375

 
$
10,000

 
$
15,000

 
$
73,750

Interest payments on debt payment obligations
911

 
1,723

 
1,043

 
532

 
125

 
4,334

Total
$
3,411

 
$
8,598

 
$
40,418

 
$
10,532

 
$
15,125

 
$
78,084

NOTE 8—COMMITMENTS AND CONTINGENCIES
Operating Leases
Certain facilities and equipment are leased under non-cancelable operating leases. The Company generally pays taxes, insurance and maintenance costs on leased facilities and equipment. The Company leases office space in San Jose, California and other locations under various non-cancelable operating leases that expire at various dates through fiscal 2019 .



10


At December 31, 2013 , future minimum annual payments under operating leases for the remainder of fiscal 2014 and future fiscal years are as follows (in thousands):
 
2014
(remainder)
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Operating leases
$
1,184

 
$
2,494

 
$
2,497

 
$
1,537

 
$
297

 
$
53

 
$
8,062

Purchase Commitments
The Company subcontracts with other companies to manufacture its products. During the normal course of business, the Company’s contract manufacturers procure components based upon orders placed by the Company. If the Company cancels all or part of the orders, it may still be liable to the contract manufacturers for the cost of the components purchased by them to manufacture the Company’s products. The Company periodically reviews the potential liability and to date no significant accruals have been recorded.
Indemnification Obligations
The Company enters into standard indemnification agreements with many of its business partners in the ordinary course of business. These agreements include provisions for indemnifying the 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 potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable and the Company has not incurred any material costs to defend lawsuits or settle claims related to these indemnification agreements to date.
Legal Matters
The Company may be involved, from time to time, in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters and other litigation matters relating to various claims that arise in the normal course of business. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information. The Company develops its views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Taking all of the above factors into account, the Company records an amount where it is probable that the Company will incur a loss and where that loss can be reasonably estimated. However, the Company’s estimates may be incorrect and the Company could ultimately incur more or less than the amounts initially recorded. The Company may also incur significant legal fees, which are expensed as incurred, in defending against these claims.
Export Compliance Matters
In January 2011, the U.S. Commerce Department, Bureau of Industry and Security’s (“BIS”) Office of Export Enforcement (“OEE”) contacted the Company to request that the Company provide information related to its relationship with a logistics company in the United Arab Emirates (“UAE”) and with a company in Iran, as well as information on the export classification of its products. As a result of this inquiry the Company, assisted by outside counsel, conducted a review of the Company's export transactions from 2008 through March 2011 to not only gather information responsive to the OEE's request but also to review the Company's overall compliance with export control and sanctions laws. The Company believes its products have been sold into Iran by third parties. The Company does not believe that it directly sold, exported or shipped its products into Iran or any other country subject to a U.S. embargo. However, until early 2010, the Company did not prohibit its distributors from selling its products into Iran or any other country subject to a U.S. embargo. In the course of this review the Company identified that two distributors may have sold the Company's products into Iran. The Company's review also found that while it had obtained required Commodity Classification Rulings for its products in June 2010 and November 2010, the Company did not advise its shipping personnel to change the export authorizations used on its shipping documents until February 2011. During the course of the Company's export control review, the Company also determined that it had failed to maintain adequate records for the five year period required by the Export Administration Regulations (the "EAR") and the sanctions regulations due to its lack of infrastructure and because it was prior to its transition to its current system of record, NetSuite.

In May 2011, the Company filed a self-disclosure statement with the BIS and OEE. In June 2011, the Company filed a self-disclosure statement with the U.S. Department of the Treasury’s Office of Foreign Asset Control (“OFAC”) regarding the compliance issues noted above. The disclosures address the above described findings and the remedial actions the Company had taken to date. However, the findings also indicate that both distributors continued to sell, directly or indirectly, the Company’s products into Iran during the period from February 2010 through March 2011 and that the Company received

11


various communications from them indicating that they were continuing to do so. Since January 2011, the Company has cooperated with OEE and, prior to its disclosure filing, the Company informally shared with the OEE the substance of its findings with respect to both distributors. From May 2011 to August 2011, the Company provided additional information regarding its review and its findings to OEE to facilitate its investigation and OEE advised the Company in August 2011 that it had completed its investigation of the Company. In August 2011, the Company received a warning letter from OEE stating that OEE had not referred the findings of the Company’s review for criminal or administrative prosecution and closed the investigation of the Company without penalty.
OFAC is still reviewing the Company’s disclosure. In the Company’s submission, the Company provided OFAC with an explanation of the activities that led to the sales of its products in Iran and the failure to comply with the EAR and OFAC sanctions. Although the Company’s OFAC and OEE disclosures covered similar sets of facts, which led the OEE to resolve the case with the issuance of a warning letter, OFAC may conclude that the Company’s actions resulted in violations of U.S. export control and economic sanctions laws and warrant the imposition of penalties that could include fines, termination of the Company’s ability to export its products, and/or referral for criminal prosecution. The penalties may be imposed against the Company and/or its management. The maximum civil monetary penalty for the violations is up to $250,000 or twice the value of the transaction, whichever is greater, per violation. Any such fines or restrictions may be material to the Company’s financial results in the period in which they are imposed. The Company cannot predict when OFAC will complete its review or decide upon the imposition of possible penalties.

The Company has taken actions designed to ensure that export classification information is distributed to the appropriate personnel in a timely manner, and has adopted policies and procedures to promote its compliance with applicable export laws and regulations, including obtaining written distribution agreements with substantially all of its distributors that contain covenants requiring compliance with U.S. export control and economic sanctions law, notifying all of its distributors of their obligations and obtaining updated distribution agreements from distributors that accounted for approximately 99% of its revenue in fiscal 2013 . However the Company cannot be sure such actions will be effective. Additionally, the Company's failure to amend all its distribution agreements and to implement more robust compliance controls immediately after the discovery of Iran-related sales activity in early 2010 may be aggravating factors that could impact the imposition of penalties imposed on the Company or its management. Based on the facts known to the Company to date, the Company recorded an expense of $1.6 million for this export compliance matter in fiscal 2010, which represents management’s estimated exposure for fines in accordance with applicable accounting literature. This amount was calculated from information discovered through the Company’s internal review and this loss is deemed to be probable and reasonably estimable. However, the Company also believes that it is reasonably possible that the loss may be higher, but the Company cannot reasonably estimate the range of any further potential losses. Should additional facts be discovered in the future and/or should actual fines or other penalties substantially differ from the Company’s estimates, its business, financial condition, cash flows and results of operations may be materially negatively impacted.

Shareholder Class Action Lawsuits
Beginning on September 7, 2012, two shareholder class action complaints were filed against the Company, certain of its officers and directors and the underwriters of the Company's initial public offering in the United States District Court for the Northern District of California. On January 30, 2013, the plaintiffs filed an Amended Consolidated Complaint, which alleges claims under the Securities Act of 1933, the Securities Exchange Act of 1934 and SEC Rule 10b-5 on behalf of a purported class of those who purchased the Company's common stock between October 14, 2011 and August 9, 2012 and/or acquired the Company's stock pursuant to or traceable to the registration statement for the initial public offering. The Amended Consolidated Complaint alleges that the defendants violated the federal securities laws by issuing false or misleading statements regarding the sale of counterfeit Company products.  The consolidated complaint seeks, among other things, damages and interest, rescission, and attorneys' fees and costs. On March 26, 2013, the Company filed a motion to dismiss the complaint.  On August 27, 2013, the court held a hearing on the motion to dismiss, and its decision is pending.
The Company believes that the allegations in the consolidated complaint are without merit and intend to vigorously contest the litigation. However, there can be no assurance that the Company will be successful in its defense. Because the case is at a very early stage, the Company cannot say that a loss is probable and cannot currently reasonably estimate the loss or the range of possible losses that may be experienced in connection with this litigation.




12


NOTE 9—COMMON STOCK AND TREASURY STOCK
As of December 31, 2013 and June 30, 2013 , the authorized capital of the Company included 500,000,000 shares of common stock. As of December 31, 2013 , 131,978,895 shares of common stock were issued and 87,739,935 were outstanding. As of June 30, 2013 , 131,452,763 shares of common stock were issued and 87,213,803 were outstanding.
Common Stock Repurchases
On August 9, 2012, the Company announced that its Board of Directors authorized the Company to repurchase up to $100 million of its common stock. The share repurchase program commenced August 13, 2012 and expired on August 12, 2013. The share repurchase program was funded with proceeds from the Loan Agreement as discussed in Note 7 and from existing cash on hand.

Common stock repurchase activity under the share repurchase program was as follows (in thousands, except share and per share amounts):
Period
Total Number
of Shares
Purchased
 
Average Price
Paid per Share
 
Estimated remaining balance available for share repurchase
August 13, 2012 – August 31, 2012
2,179,900

 
$
8.88

 
$
80,599

September 1, 2012 – September 30, 2012
992,014

 
$
11.93

 
$
68,742

October 1, 2012 - October 31, 2012
371,665

 
$
11.72

 
$
64,377

November 1, 2012 - November 30, 2012
657,700

 
$
11.16

 
$
57,024

December 1, 2012 - December 31, 2012
957,771

 
$
11.86

 
$
45,646

Total
5,159,050

 
$
10.52

 
$
45,646

The Company did no t repurchase any of its common stock from January 1, 2013 through August 12, 2013, the date that the plan expired.
Special Dividend

On December 14, 2012, the Company announced that its Board of Directors had authorized a special cash dividend of $0.18 per share for each share of common stock outstanding on December 24, 2012. The aggregate dividend payment of $15.7 million was paid on December 28, 2012 to stockholders of record on December 24, 2012. The dividend payment was funded using proceeds from the Loan Agreement as discussed in Note 7.
NOTE 10—STOCK BASED COMPENSATION
Stock-Based Compensation Plans
The Company’s 2010 Equity Incentive Plan and 2005 Equity Incentive Plan are described in its Annual Report. As of December 31, 2013 , the Company had 5,620,284 authorized shares available for future issuance under all of its stock incentive plans.
Stock-based Compensation
The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2013 and 2012 (in thousands):
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013

2012
 
2013
 
2012
Cost of sales
$
148

 
$
104

 
$
292

 
$
185

Research and development
553

 
401

 
1,049

 
667

Sales, general and administrative
721

 
388

 
1,248

 
697

 
$
1,422


$
893

 
$
2,589

 
$
1,549


13


Stock Options
The following is a summary of option activity for the Company’s stock incentive plans for the six months ended December 31, 2013 :
 
Common Stock Options Outstanding
 
Number
of Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
(In thousands)
Balance, June 30, 2013
3,614,262

 
$
3.07

 
 
 
 
Exercised
(455,980
)
 
2.20

 
 
 
 
Forfeitures and cancellations
(107,318
)
 
10.55

 
 
 
 
Balance, December 31, 2013
3,050,964

 
$
2.93

 
5.65
 
$
131,270

Vested and expected to vest as of December 31, 2013
3,016,040

 
$
2.85

 
5.61
 
$
130,033

Vested and exercisable as of December 31, 2013
2,421,183

 
$
1.30

 
4.97
 
$
108,131

During the three months ended December 31, 2013 and 2012 , the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was $3.8 million and $185,000 , respectively, as determined as of the date of option exercise. During the six months ended December 31, 2013 and 2012 , the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was $13.7 million and $363,000 , respectively, as determined as of the date of option exercise.

As of December 31, 2013 , the Company had unrecognized compensation costs of $2.6 million related to stock options which the Company expects to recognize over a weighted-average period of 2.6 years. Future option grants will increase the amount of compensation expense to be recorded in these periods.
The Company estimates the fair value of employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The Company did not grant any employee stock options during the three and six months ended December 31, 2013 . For the three and six months ended December 31, 2012 , the fair value of employee stock options was estimated using the following weighted average assumptions:
 
Three And Six Months Ended December 31, 2012
Expected term
6.1 years

Expected volatility
52
%
Risk-free interest rate
0.8
%
Expected dividend yield

Weighted average grant date fair value
$
5.37


Restricted Stock Units (“RSUs”)
The following table summarizes the activity of the RSUs made by the Company:
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Non-vested RSUs, June 30, 2013
744,906

 
$
14.74

RSUs granted
77,033

 
32.48

RSUs vested
(100,431
)
 
16.09

RSUs canceled
(188,905
)
 
14.98

Non-vested RSUs, December 31, 2013
532,603

 
$
16.96

The intrinsic value of RSUs vested in the three months ended December 31, 2013 and 2012 was $1.5 million and $142,000 , respectively. The intrinsic value of RSUs vested in the six months ended December 31, 2013 and 2012 was $2.9 million and $233,000 , respectively.

14


As of December 31, 2013 , there was unrecognized compensation costs related to RSUs of $7.0 million which the Company expects to recognize over a weighted average period of 3.2 years.
NOTE 11—INCOME TAXES
As of December 31, 2013 , the Company had approximately $13.2 million of unrecognized tax benefits, substantially all of which would, if recognized, affect its tax expense. The Company has elected to include interest and penalties related to uncertain tax positions as a component of tax expense. At December 31, 2013 , an insignificant amount of interest and penalties are included in long-term income tax payable. The Company recorded an increase of its unrecognized tax benefits of $1.0 million for the three months ended December 31, 2013 . Th e Company does not expect any significant increases or decreases to its unrecognized tax benefits in the next twelve months.
The Company recorded income tax provisions of $5.1 million and $10.2 million for the three and six months ended December 31, 2013 , respectively. The Company’s estimated 2014 effective tax rate differs from the U.S. statutory rate primarily due to profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate.
The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company’s tax years from 2009 and onwards could be subject to examinations by tax authorities.
NOTE 12—SEGMENT INFORMATION, REVENUES BY GEOGRAPHY AND SIGNIFICANT CUSTOMERS

During the first quarter of fiscal 2014, the Company began presenting its revenues by product type in two primary categories, Service Provider Technology and Enterprise Technology. These categories better represent how the Company's business is managed and benchmarked internally, and better reflect the Company’s end user customer delineation.

Service Provider Technology includes the Company's airMAX, EdgeMAX and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and Customer Premise Equipment (“CPE”). Additionally, Service Provider Technology includes antennas and other products in the 2.0 to 6.0GHz spectrum and miscellaneous products such as mounting brackets, cables and power over Ethernet adapters.

Enterprise Technology includes the Company's UniFi, mFi and airVision platforms.

Revenues by product type for the three and six months ended December 31, 2013 and 2012 were as follows (in thousands, except percentages):
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013
 
2012
 
2013
 
2012
Service Provider Technology
$
111,454

 
81
%
 
$
68,170

 
91
%
 
$
205,671

 
77
%
 
$
119,787

 
88
%
Enterprise Technology
26,985

 
19
%
 
6,731

 
9
%
 
62,455

 
23
%
 
16,649

 
12
%
Total revenues
$
138,439

 
100
%
 
$
74,901

 
100
%
 
$
268,126

 
100
%
 
$
136,436

 
100
%
The Company generally forwards products directly from its manufacturers to its customers via logistics distribution hubs in Asia.  Beginning in the quarter ended December 31, 2012, the Company's products were predominantly routed through a third party logistics provider in China and prior to the quarter ended December 31, 2012, the Company's products were predominantly delivered to its customers through distribution hubs in Hong Kong.  The Company's logistics provider, in turn, ships to other locations throughout the world. The Company has determined the geographical distribution of product revenues based upon the customer's ship-to destinations.







15


Revenues by geography were as follows (in thousands, except percentages):
 
Three Months Ended December 31,

Six Months Ended December 31,
 
2013

2012

2013

2012
North America(1)
$
32,567


24
%

$
12,106


16
%

$
70,000


26
%

$
32,467


24
%
South America
27,992


20
%

17,081


23
%

48,768


18
%

27,324


20
%
Europe, the Middle East and Africa
58,842


42
%

35,929


48
%

111,708


42
%

59,073


43
%
Asia Pacific
19,038


14
%

9,785


13
%

37,650


14
%

17,572


13
%
Total revenues
$
138,439


100
%

$
74,901


100
%

$
268,126


100
%

$
136,436


100
%
 
(1)
Revenue for the United States was $31.1 million and $11.4 million for the three months ended December 31, 2013 and 2012 , respectively. Revenue for the United States was $67.3 million and $30.7 million for the six months ended December 31, 2013 and 2012 , respectively.
Customers with an accounts receivable balance of 10% or greater of total accounts receivable and customers with net revenues of 10% or greater of total revenues are presented below for the periods indicated:
 
Percentage of Revenues
 
Percentage of Accounts Receivable
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
December 31,
 
June 30,
 
2013

2012
 
2013
 
2012
 
2013
 
2013
Customer A
17
%
 
15
%
 
14
%
 
12
%
 
20
%
 
12
%
Customer B
*

 
14
%
 
*

 
*

 
11
%
 
11
%
Customer C
*

 
*

 
*

 
*

 
16
%
 
15
%
 * denotes less than 10%

NOTE 13—RELATED PARTY TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS

On November 13, 2013, the Company entered into an aircraft lease agreement (the "Aircraft Lease Agreement") with RJP Manageco LLC (the "Lessor"), a limited liability company owned by the Company’s CEO, Robert J. Pera. Pursuant to the Aircraft Lease Agreement, the Company may lease an aircraft owned by the Lessor for Company business purposes. Under the Aircraft Lease Agreement, the aircraft may be leased at a rate of $ 5,000 per flight hour. This hourly rate does not include the cost of flight crew or on-board services, which the Company will purchase from a third-party provider. Expenses incurred will be included in the Company's sales, general and administrative expenses under its Consolidated Statements of Operations.

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 Part II, Item 1, Legal Proceedings and 1A, Risk Factors, in this report.

Overview
Ubiquiti Networks develops high performance networking technology for service providers and enterprises. Our technology platforms focus on delivering highly-advanced and easily deployable solutions that appeal to a global customer base in underserved and underpenetrated markets. Our differentiated business model has enabled us to break down traditional barriers such as high product and network deployment costs and offer solutions with disruptive price-performance characteristics. This differentiated business model, combined with our innovative proprietary technologies, has resulted in an attractive alternative to traditional high touch, high-cost providers, allowing us to advance the market adoption of our platforms for ubiquitous connectivity.
We offer a broad and expanding portfolio of networking products and solutions for service providers and enterprises. Our service provider product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul

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Table of Contents

systems and routing. Our enterprise product platforms provide wireless LAN infrastructure, video surveillance products, and machine-to-machine communication components. We believe that our products are highly differentiated due to our proprietary software protocol innovation, firmware expertise, and hardware design capabilities. This differentiation allows our portfolio to meet the demanding performance requirements of video, voice and data applications at prices that are a fraction of those offered by our competitors.
As a core part of our strategy, we have developed a differentiated business model for marketing and selling high volumes of carrier and enterprise-class communications platforms. Our business model is driven by a large, growing and highly engaged community of service providers, distributors, value added resellers, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community. The Ubiquiti Community is a critical element of our business strategy as it enables us to drive:
 
Rapid customer and community driven product development. We have an active, loyal community built from our customers that we believe is a sustainable competitive advantage. Our solutions benefit from the active engagement between the Ubiquiti Community and our development engineers throughout the product development cycle, which eliminates long and expensive multistep internal processes and results in rapid introduction and adoption of our products. This approach significantly reduces our development costs and time to market.

Scalable sales and marketing model. We do not currently have, nor do we plan to hire, a direct sales force, but instead utilize the Ubiquiti Community to drive market awareness and demand for our products and solutions. This community-propagated viral marketing enables us to reach underserved and underpenetrated markets far more efficiently and cost-effectively than is possible through traditional sales models. Leveraging the information transparency of the Internet allows customers to research, evaluate and validate our solutions with the Ubiquiti Community and via third party web sites. This allows us to operate a scalable sales and marketing model and effectively create awareness of our brand and products. Word of mouth referrals from the Ubiquiti Community generate high quality leads for our distributors at relatively little cost.

Self-sustaining product support.  The engaged members of the Ubiquiti Community have enabled us to foster a large, cost efficient, highly-scalable and, we believe, self-sustaining mechanism for rapid product support and dissemination of information.
By reducing the cost of development, sales, marketing and support we are able to eliminate traditional business model inefficiencies and offer innovative solutions with disruptive price performance characteristics to our customers.
Our revenues increased 85% to $138.4 million in the three months ended December 31, 2013 from $74.9 million in the three months ended December 31, 2012 . Our revenues increased 97% to $268.1 million in the six months ended December 31, 2013 from $136.4 million in the six months ended December 31, 2012 . We believe the overall increase in revenues during the three and six months ended December 31, 2013 was driven by increased adoption of our service provider and enterprise technologies. Additionally, during three and six months ended December 31, 2012 , we believe we experienced lost sales due to the proliferation of counterfeit versions of our products, which also created customer uncertainty regarding the authenticity of their potential purchases. We believe these factors contributed to a buildup in channel inventory with our distributors, further impacting our revenues. We had net income of $41.8 million and $17.8 million in the three months ended December 31, 2013 and 2012 , respectively. We had net income of $82.3 million and $31.0 million in the six months ended December 31, 2013 and 2012 , respectively. The increase in net income in both the three and six months ended December 31, 2013 as compared to the same periods in the prior year was primarily due to the increase in revenues.
Key Components of Our Results of Operations and Financial Condition
Revenues
Our revenues are derived principally from the sale of networking hardware and management tools. In addition, while we do not sell maintenance and support separately, because we have historically included it free of charge in many of our arrangements, we attribute a portion of our systems revenues to this implied post-contract customer support (“PCS”).
We classify our revenues into two primary product categories, Service Provider Technology and Enterprise Technology.

Service Provider Technology includes our airMAX, EdgeMAX and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and Customer Premise Equipment (“CPE”). Additionally, Service Provider Technology includes antennas and other products in the

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Table of Contents

2.0 to 6.0GHz spectrum and miscellaneous products such as mounting brackets, cables and power over Ethernet adapters.

Enterprise Technology includes the Company's UniFi, mFi and airVision platforms.
We sell substantially all of our products through a limited number of distributors and other channel partners, such as resellers and OEMs. Sales to distributors accounted for 98% and 97% of our revenues in the three months ended December 31, 2013 and 2012 , respectively. Sales to distributors accounted for 98% and 97% of our revenues in the six months ended December 31, 2013 and 2012 , respectively. Other channel partners, such as resellers and OEMs, largely accounted for the balance of our revenues. We sell our products without any right of return.
Cost of Revenues
Our cost of revenues is comprised primarily of the costs of procuring finished goods from our contract manufacturers and chipsets that we consign to certain of our contract manufacturers. In addition, cost of revenues includes tooling, labor and other costs associated with engineering, testing and quality assurance, warranty costs, stock-based compensation, logistics related fees and excess and obsolete inventory.
In addition to utilizing contract manufacturers, we outsource our logistics warehousing and order fulfillment functions, which are located primarily in China, and to a lesser extent, Taiwan. 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, pricing due to competitive pressure, production costs, foreign exchange rates and global demand for electronic components. Although we procure and sell our products 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.
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, facilities and travel. Over time, we expect our research and development costs to increase as we continue making significant investments in developing new products and developing 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 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.
Deferred Revenues and Costs
In the event that collectability of a receivable from products we have shipped is not probable, we classify those amounts as deferred revenues on our balance sheet until such time as we receive payment of the accounts receivable. We classify the cost of products associated with these deferred revenues as deferred costs of revenues. At December 31, 2013 , $2.7 million of revenue was deferred for transactions where we lacked evidence that collectability of the receivables recorded was reasonably assured. At June 30, 2013 , $2.2 million of revenue was deferred for transactions where we lacked evidence that

18

Table of Contents

collectability of the receivables recorded was reasonably assured. The related deferred cost of revenues balance was $1.4 million and $1.2 million at December 31, 2013 and June 30, 2013 , respectively.
Also included in our deferred revenues is a portion related to PCS obligations that we estimate we will perform in the future. As of December 31, 2013 and June 30, 2013 , we had deferred revenues of $1.3 million and $1.0 million respectively, related to these obligations.
Critical Accounting Policies
We prepare our condensed 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 condensed 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 on Form 10-K for the fiscal year ended June 30, 2013 , as filed on September 13, 2013 with the SEC, or the Annual Report, and there have been no material changes.
Results of Operations
Comparison of Three and Six Months Ended December 31, 2013 and 2012
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013

2012
 
2013
 
2012
 
(In thousands, except percentages)
Revenues
$
138,439


100
%

$
74,901


100
%
 
$
268,126

 
100
%
 
$
136,436

 
100
%
Cost of revenues
77,468


56
%

44,416


59
%
 
149,132

 
56
%
 
80,931

 
59
%
Gross profit
60,971


44
%

30,485


41
%
 
118,994

 
44
%
 
55,505

 
41
%
Operating expenses:
 






 
 
 
 
 
 
 
 
Research and development
8,077


6
%

5,052


7
%
 
14,394

 
5
%
 
9,763

 
7
%
Sales, general and administrative
5,774


4
%

5,314


7
%
 
11,584

 
4
%
 
9,848

 
7
%
Total operating expenses
13,851


10
%

10,366


14
%
 
25,978

 
9
%
 
19,611

 
14
%
Income from operations
47,120


34
%

20,119


27
%
 
93,016

 
35
%
 
35,894

 
27
%
Interest expense and other, net
(249
)

*


(197
)

*

 
(495
)
 
*

 
(283
)
 
*

Income before provision for income taxes
46,871


34
%

19,922


27
%
 
92,521

 
35
%
 
35,611

 
26
%
Provision for income taxes
5,079


4
%

2,119


3
%
 
10,201

 
4
%
 
4,629

 
3
%
Net income and comprehensive income
$
41,792


30
%

$
17,803


24
%
 
$
82,320

 
31
%
 
$
30,982

 
23
%
*       Less than 1%







 
 
 
 
 
 
 
 
(1)    Includes stock-based compensation as follows:







 
 
 
 
 
 
 
 
Cost of revenues
$
148




$
104



 
$
292

 
 
 
$
185

 
 
Research and development
553




401



 
1,049

 
 
 
667

 
 
Sales, general and administrative
721




388



 
1,248

 
 
 
697

 
 
Total stock-based compensation
$
1,422




$
893



 
$
2,589

 
 
 
$
1,549

 
 
Revenues
Revenues increased $63.5 million , or 85% , from $74.9 million in the three months ended December 31, 2012 to $138.4 million in the three months ended December 31, 2013 . Revenues increased $131.7 million , or 97% , from $136.4 million in the six months ended December 31, 2012 to $268.1 million in the six months ended December 31, 2013 . We believe the overall

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increase in revenues during both the three and six months ended December 31, 2013 was driven by increased adoption of our service provider and enterprise technologies. Additionally, during the three and six months ended December 31, 2012 , we believe we experienced lost sales due to the proliferation of counterfeit versions of our products, which also created customer uncertainty regarding the authenticity of their potential purchases. We believe these factors contributed to a buildup in channel inventory with our distributors, further impacting our revenues.
In the three and six months ended months ended December 31, 2013 , revenues from Customer A represented 17% and 14% of our revenues, respectively. In the three months ended December 31, 2012 , revenues from Customer A and Customer B represented 15% and 14% , respectively. In the six months ended December 31, 2012 , revenues from Customer A represented 12% of our revenues.
Revenues by Product Type
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except percentages)
Service Provider Technology
$
111,454

 
81
%
 
$
68,170

 
91
%
 
$
205,671

 
77
%
 
$
119,787

 
88
%
Enterprise Technology
26,985

 
19
%
 
6,731

 
9
%
 
62,455

 
23
%
 
16,649

 
12
%
Total revenues
$
138,439

 
100
%
 
$
74,901

 
100
%
 
$
268,126

 
100
%
 
$
136,436

 
100
%

Revenues from Service Provider Technologies increased $43.3 million , or 63% , from $68.2 million in the three months ended December 31, 2012 to $111.5 million in the three months ended December 31, 2013 . Revenues from Service Provider Technologies increased $85.9 million , or 72% , from $119.8 million in the six months ended December 31, 2012 to $205.7 million in the six months ended December 31, 2013 . The increases in both periods were primarily due to continued expansion of core infrastructure build-outs in our wireless markets. Additionally, we believe we experienced significant lost sales during the three and six months ended December 31, 2012 due to the proliferation of counterfeit versions of our products as discussed above.
Enterprise Technology revenues increased $20.3 million , or 301% from $6.7 million in the three months ended December 31, 2012 to $27.0 million in the three months ended December 31, 2013 . Enterprise Technology revenues increased $45.8 million , or 275% from $16.6 million in the six months ended December 31, 2012 to $62.5 million in the six months ended December 31, 2013 . The increase in Enterprise Technology revenues during both the three and six months ended December 31, 2013 was due primarily to product expansion and further adoption of our UniFi technology platform.
Revenues by Geography

We generally forward products directly from our contract manufacturers to our customers via logistics distribution hubs in Asia.  Beginning in the quarter ended December 31, 2012, our products were predominantly routed through a third party logistics provider in China and prior to the quarter ended December 31, 2012, our products were predominantly delivered to our customers through distribution hubs in Hong Kong.  Our logistics provider, in turn, ships to other locations throughout the world. 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 in turn sell to resellers or directly to end customers. For the three and six months ended December 31, 2013 , revenues in all regions increased due to increased adoption of our Service Provider and Enterprise Technologies. Additionally, during the three and six months ended December 31, 2012 , we believe we experienced lost sales due to the proliferation of counterfeit versions of our products, which also created customer uncertainty regarding the authenticity of their potential purchases.


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The following are our revenues by geography for the three and six months ended December 31, 2013 and 2012 (in thousands, except percentages):
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013
 
2012
 
2013
 
2012
North America(1)
$
32,567

 
24
%
 
$
12,106

 
16
%
 
$
70,000

 
26
%
 
$
32,467

 
24
%
South America
27,992

 
20
%
 
17,081

 
23
%
 
48,768

 
18
%
 
27,324

 
20
%
Europe, the Middle East and Africa
58,842

 
42
%
 
35,929

 
48
%
 
111,708

 
42
%
 
59,073

 
43
%
Asia Pacific
19,038

 
14
%
 
9,785

 
13
%
 
37,650

 
14
%
 
17,572

 
13
%
Total revenues
$
138,439

 
100
%
 
$
74,901

 
100
%
 
$
268,126

 
100
%
 
$
136,436

 
100
%
 
(1)
Revenue for the United States was $31.1 million and $11.4 million for the three months ended December 31, 2013 and 2012 , respectively. Revenue for the United States was $67.3 million and $30.7 million for the six months ended December 31, 2013 and 2012 , respectively.
Cost of Revenues and Gross Profit
Cost of revenues increased $33.1 million , or 74% , from $44.4 million in the three months ended December 31, 2012 to $77.5 million in the three months ended December 31, 2013 . Cost of revenues increased $68.2 million , or 84% , from $80.9 million in the six months ended December 31, 2012 to $149.1 million in the three months ended December 31, 2013 . The increase in cost of revenues in both the three and six months ended December 31, 2013 was primarily due to increased revenues and to a lesser extent, changes in product mix.
Gross profit increased to 44% in the three months ended December 31, 2013 compared to 41% in the three months ended December 31, 2012 , and increased to 44% in the six months ended December 31, 2013 compared to 41% in the six months ended December 31, 2012 , reflecting a high level of revenue growth, increasing economies of scale and changes in product mix.
Operating Expenses
Research and Development
Research and development expenses increased $3.0 million , or 60% , from $5.1 million in the three months ended December 31, 2012 to $8.1 million in the three months ended December 31, 2013 . As a percentage of revenues, research and development expenses decreased from 7% in the three months ended December 31, 2012 to 6% in the three months ended December 31, 2013 . Research and development expenses increased $4.6 million , or 47% , from $9.8 million in the six months ended December 31, 2012 to $14.4 million in the six months ended December 31, 2013 . As a percentage of revenues, research and development expenses decreased from 7% in the six months ended December 31, 2012 to 5% in the six months ended December 31, 2013 . The increase in research and development expenses in absolute dollars in both periods was primarily due to increases in headcount as we broadened our research and development activities to new product areas. As a percentage of revenues, research and development expenses decreased primarily due to our overall increase in revenues. Over time, we expect our research and development costs to increase in absolute dollars as we continue making significant investments in developing new products and developing new versions of our existing products.
Sales, General and Administrative
Sales, general and administrative expenses increased $460,000 , or 9% , from $5.3 million in the three months ended December 31, 2012 to $5.8 million in the three months ended December 31, 2013 . As a percentage of revenues, sales, general and administrative expenses decreased from 7% in the three months ended December 31, 2012 to 4% in the three months ended December 31, 2013 . Sales, general and administrative expenses increased $1.7 million , or 18% , from $9.8 million in the six months ended December 31, 2012 to $11.6 million in the six months ended December 31, 2013 . As a percentage of revenues, sales, general and administrative expenses decreased from 7% in the six months ended December 31, 2012 to 4% in the six months ended December 31, 2013 . The slight increase in sales, general and administrative expenses in the three months ended December 31, 2013 compared to the same period in the prior year was primarily due to increased marketing activity and headcount to further expand our marketing and administrative functions and increased professional fees to support our revenue growth, partially offset by decreases in legal fees from reduced spending on anti-counterfeiting efforts and decreases to our allowance for doubtful accounts. Sales, general and administrative expenses increased in the six months ended December 31, 2013 compared to the same period in the prior year, primarily due to increased professional fees, primarily related to the ancillary support of certain management functions, increased marketing activity and overall increases in headcount to further

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expand our marketing and administrative functions to support our revenue growth, partially offset by decreases in legal fees from reduced spending on anti-counterfeiting efforts and decreases to our allowance for doubtful accounts. As a percentage of revenues, sales, general and administrative expenses decreased in both periods primarily due to our overall revenue increase. Over time, we expect our sales, general and administrative expenses to increase in absolute dollars due to continued efforts to protect our intellectual property and growth in headcount to support our business and operations.
Interest Expense and Other, Net
Interest expense and other, net was $249,000 for the three months ended December 31, 2013 , representing an increase of $52,000 from $197,000 for the three months ended December 31, 2012 . Interest expense and other, net was $495,000 for the six months ended December 31, 2013 , representing an increase of $212,000 from $283,000 for the six months ended December 31, 2012 . The increase in interest expense and other, net during the three and six months ended December 31, 2013 compared to the same period in the prior year was primarily due to additional interest expense resulting from our increased borrowings from East West Bank during both the three and six months ended December 31, 2012 .
Provision for Income Taxes
Our provision for income taxes increased $3.0 million , or 140% , from $2.1 million for the three months ended December 31, 2012 to $5.1 million for the three months ended December 31, 2013 . Our effective tax rate remained flat at 11% for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012 . Our provision for income taxes increased $5.6 million , or 120% , from $4.6 million for the six months ended December 31, 2012 to $10.2 million for the six months ended December 31, 2013 . Our effective tax rate decreased to 11% for the six months ended ended December 31, 2013 as compared to 13% in the six months ended December 31, 2012 . The lower effective tax rate in the six months ended December 31, 2013 was primarily due to a larger percentage of our overall profitability occurring in foreign jurisdictions with lower income tax rates.
Liquidity and Capital Resources
Sources and Uses of Cash
Since inception, our operations primarily have been funded through cash generated by operations. Cash and cash equivalents increased from $227.8 million at June 30, 2013 to $305.6 million at December 31, 2013 .

Consolidated Cash Flow Data
The following table sets forth the major components of our condensed consolidated statements of cash flows data for the periods presented:
 
Six Months Ended December 31,
 
2013
 
2012
 
(In thousands)
Net cash provided by operating activities
$
79,504

 
$
50,525

Net cash used in investing activities
(1,962
)
 
(3,467
)
Net cash provided by (used in) financing activities
185

 
(20,817
)
Net increase in cash and cash equivalents
$
77,727

 
$
26,241

Cash Flows from Operating Activities
Net cash provided by operating activities in the six months ended December 31, 2013 of $79.5 million consisted primarily of net income of $82.3 million partially offset by net changes in operating assets and liabilities that resulted in net cash outflows of $6.4 million . These changes consisted primarily of a $17.4 million increase in inventory due to our efforts to build warehouse stock levels and ultimately decrease lead times, a $13.9 million increase in accounts payable and accrued liabilities due primarily to our increase in cost of revenues, a $2.8 million increase in prepaid taxes due to the timing of federal tax payments, a $1.3 million increase in taxes payable and a and a $1.3 million increase in prepaid expenses and other current assets due to timing of deposit payments with our suppliers. Additionally, our net income included non-cash adjustments due to stock-based compensation, depreciation and amortization, increases to our provision for inventory obsolescence, decreases in our allowance for doubtful accounts, a write-off of our intangible assets and taxes. The net of these non-cash adjustments resulted in an increase of our net cash provided by operating activities of $3.5 million .


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Net cash provided by operating activities in the six months ended December 31, 2012 of $50.5 million consisted primarily of net income of $31.0 million and net changes in operating assets and liabilities that resulted in net cash inflows of $15.2 million. These changes consisted primarily of a $18.5 million decrease in accounts receivable due to decreased revenues and improved cash collections, a $1.7 million increase in accounts payable and accrued liabilities due to the timing of payments with our vendors, a $4.4 million increase in taxes payable due the timing of federal tax payments and a $1.6 million increase in prepaid expenses and other current assets due to an increase in overall business activity. Additionally, our net income included non-cash adjustments due to stock-based compensation, depreciation and amortization, increases to our provision for doubtful accounts and write-downs for inventory obsolescence and an excess tax benefit from stock-based awards. The net of these non-cash adjustments resulted in an increase of our net cash provided by operating activities of $4.3 million.
Cash Flows from Investing Activities
Our investing activities consist solely of capital expenditures and purchases of intangible assets. Capital expenditures for the six months ended December 31, 2013 and 2012 were $1.8 million and $2.6 million , respectively. Additionally, we had cash outflows related to the purchase of intangible assets of $153,000 and $814,000 during the six months ended December 31, 2013 and 2012 , respectively.
Cash Flows from Financing Activities
On August 7, 2012, we entered into a Loan and Security Agreement (the “Loan Agreement”) with U.S. Bank, as syndication agent, and East West Bank, as administrative agent for the lenders party to the Loan Agreement. The Loan Agreement replaced the EWB Loan Agreement discussed below. The Loan Agreement provides for (i) a $50.0 million revolving credit facility, with a $5.0 million sublimit for the issuance of letters of credit and a $5.0 million sublimit for the making of swingline loan advances (the “Revolving Credit Facility”), and (ii) a $50.0 million term loan facility (the “Term Loan Facility”). We may request borrowings under the Revolving Credit Facility until August 7, 2015. The Loan Agreement replaced a previous agreement whereby we had an existing term loan balance of $29.2 million as of the date of the new Loan Agreement. On August 7, 2012, we borrowed $20.8 million of term loans under the Term Loan Facility, and no borrowings remain available thereunder. On November 21, 2012, the Company borrowed $10.0 million under the Revolving Credit Facility. On December 20, 2012, the Company borrowed an additional $20.0 million under the Revolving Credit Facility, and $20.0 million remains available for borrowing thereunder.
On August 9, 2012, we announced that our Board of Directors authorized us to repurchase up to $100.0 million of our common stock. The share repurchase program commenced August 13, 2012 and expired on August 12, 2013. During the six months ended December 31, 2012 , we repurchased 5,159,050 shares for a total cost of $54.4 million.

On December 14, 2012, we announced that our Board of Directors had authorized a special cash dividend of $0.18 per share for each share of common stock outstanding on December 24, 2012. The aggregate dividend payment of $15.7 million was paid on December 28, 2012 to stockholders of record on December 24, 2012. We do not anticipate paying any cash dividends in the foreseeable future.
Liquidity
We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds under our loan agreements will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. 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. As of December 31, 2013 , we held $285.9 million of our $305.6 million of cash and cash equivalents in accounts of our subsidiaries outside of the United States and we will incur significant tax liabilities if we decide to repatriate those amounts.
Commitments and Contingencies
In January 2011, the U.S. Department of Commerce’s Bureau of Industry and Security’s Office of Export Enforcement (“OEE”) contacted us to request that we provide information related to our relationship with a logistics company in the United Arab Emirates (“UAE”) and with a company in Iran, as well as information on the export classification of our products. As a result of this inquiry we, assisted by outside counsel, conducted a review of our export transactions from 2008 through March 2011 to not only gather information responsive to the OEE’s request but also to review our overall compliance with export control and sanctions laws. We believe our products have been sold into Iran by third parties. We do not believe that we directly sold, exported or shipped our products into Iran or any other country subject to a U.S. embargo. However, until early 2010, we did not prohibit our distributors from selling our products into Iran or any other country subject to a U.S. embargo. In the course of this review we identified that two distributors may have sold Ubiquiti products into Iran. Our review also found that

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while we had obtained required Commodity Classification Rulings for our products in June 2010 and November 2010, we did not advise our shipping personnel to change the export authorizations used on our shipping documents until February 2011. During the course of our export control review, we also determined that we had failed to maintain adequate records for the five year period required by the EAR and the sanctions regulations due to our lack of infrastructure and because it was prior to our transition to our current system of record, NetSuite. See “ Risk Factors—We are subject to numerous U.S. export control and economic sanctions laws and a substantial majority of our sales are into countries outside of the United States. Although we did not intend to do so, we have violated certain of these laws in the past, and we cannot currently assess the nature and extent of any fines or other penalties, if any, that U.S. governmental agencies may impose against us or our employees for any such violations. Any fines, if materially different from our estimates, or other penalties, could have a material adverse effect on our business and financial results.
In May 2011, we filed a self-disclosure statement with the BIS and the OEE and, in June 2011, we filed a self-disclosure statement with the U.S. Department of the Treasury’s Office of Foreign Asset Control (“OFAC”), regarding the compliance issues noted above. The disclosures address the above described findings and the remedial actions we have taken to date. However, the findings also indicate that both distributors continued to sell, directly or indirectly, our products into Iran during the period from February 2010 through March 2011 and that we received various communications from them indicating that they were continuing to do so. Since January 2011, we have cooperated with OEE and, prior to our disclosure filing, we informally shared with the OEE the substance of our findings with respect to both distributors. From May 2011 to August 2011, we provided additional information regarding our review and our findings to OEE to facilitate its investigation and OEE advised us in August 2011 that it had completed its investigation of us. In August 2011, we received a warning letter from OEE stating that OEE had not referred the findings of our review for criminal or administrative prosecution of us and closed the investigation of us without penalty.
OFAC is still reviewing our disclosure. In our submission, we have provided OFAC with an explanation of the activities that led to the sales of our products in Iran and the failure to comply with the EAR and OFAC sanctions. Although our OFAC and OEE disclosures covered similar sets of facts, which led OEE to resolve the case with the issuance of a warning letter, OFAC may conclude that our actions resulted in violations of U.S. export control and economic sanctions laws and warrant the imposition of penalties that could include fines, termination of our ability to export our products and/or referral for criminal prosecution. The penalties may be imposed against us and/or our management. The maximum civil monetary penalty for the violations is up to $250,000 or twice the value of the transaction, whichever is greater, per violation. Any such fines or restrictions may be material to our financial results in the period in which they are imposed. Also, disclosure of our conduct and any fines or other action relating to this conduct could harm our reputation and have a material adverse effect on our business. We cannot predict when OFAC will complete its review or decide upon the imposition of possible penalties.

While we have taken actions designed to ensure that export classification information is distributed to the appropriate personnel in a timely manner and have adopted policies and procedures to promote our compliance with applicable export laws and regulations, including obtaining written distribution agreements with substantially all of our distributors that contain covenants requiring compliance with U.S. export control and economic sanctions law; notifying all of our distributors of their obligations and obtaining updated distribution agreements from distributors that account for approximately 99% of our distributor revenue in fiscal 2013 . However we cannot be sure such actions will be effective. Additionally, our failure to amend all our distribution agreements and to implement more robust compliance controls immediately after the discovery of Iran-related sales activity in early 2010 may be aggravating factors that could impact the imposition of penalties imposed on us or our management. Based on the facts known to us to date, we recorded an expense of $1.6 million for this export compliance matter in fiscal 2010, which represents management’s estimated exposure for fines in accordance with applicable accounting literature. This amount was calculated from information discovered through our internal review and we deem this loss to be probable and reasonably estimable. However, we believe that it is reasonably possible that the loss may be higher, but we cannot reasonably estimate the range of any further potential losses. Should additional facts be discovered in the future and/or should actual fines or other penalties substantially differ from our estimates, our business, financial condition, cash flows and results of operations may be materially negatively impacted.
Warranties and Indemnifications
Our products are generally accompanied by a 12 month warranty, 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”), 450-30, Loss Contingencies, we record an accrual when we believe it is 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.

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We may in the future enter into standard indemnification agreements with many of our distributors and OEMs, as well as certain 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 director and officer insurance policy that limits our potential exposure. We believe the fair value of these indemnification agreements is minimal. We had not recorded any liabilities for these agreements as of December 31, 2013 or June 30, 2013 .
Based upon our historical experience and information known as of the date of this report, we do not believe it is likely that we will have significant liability for the above indemnities at December 31, 2013 .
Contractual Obligations and Off-Balance Sheet Arrangements
We lease our headquarters in San Jose, California and other locations worldwide under non-cancelable operating leases that expire at various dates through fiscal 2019.
On August 7, 2012, we entered into the Loan Agreement with U.S. Bank, as syndication agent, and East West Bank, as administrative agent for the lenders party to the Loan Agreement. The Loan Agreement provides for (i) a $50.0 million revolving credit facility, with a $5.0 million sublimit for the issuance of letters of credit and a $5.0 million sublimit for the making of swingline loan advances, and (ii) a $50.0 million Term Loan Facility. We may request borrowings under the Revolving Credit Facility until August 7, 2015. The Loan Agreement replaced a previous agreement whereby we had an existing term loan balance of $29.2 million as of the date of the new Loan Agreement. On August 7, 2012, we borrowed $20.8 million of term loans under the Term Loan Facility bringing the total borrowed to $50.0 million, and no borrowings remain available thereunder. On November 21, 2012, we borrowed $10.0 million under the Revolving Credit Facility. On December 20, 2012 we borrowed an additional $20.0 million under the Revolving Credit Facility, and $20.0 million remains available for borrowing thereunder. As of December 31, 2013 we have made aggregate payments of $6.3 million against the Term Loan Facility.
The following table summarizes our contractual obligations as of December 31, 2013 for the remainder of fiscal 2014 and future fiscal years:
 
2014
(remainder)
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Operating leases
$
1,184

 
$
2,494

 
$
2,497

 
$
1,537

 
$
297

 
$
53

 
$
8,062

Debt payment obligations
2,500

 
6,875

 
39,375

 
10,000

 
15,000

 

 
73,750

Interest payments on debt payment obligations
911

 
1,723

 
1,043

 
532

 
125

 

 
4,334

Total
$
4,595

 
$
11,092

 
$
42,915

 
$
12,069

 
$
15,422

 
$
53

 
$
86,146

We subcontract with other companies to manufacture our products. During the normal course of business, our contract manufacturers procure components 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 to date no significant liabilities for cancellations have been recorded. 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.
As of December 31, 2013 , we had $13.2 million of unrecognized tax benefits, substantially all of which would, if recognized, affect our tax expense. We have elected to include interest and penalties related to uncertain tax positions as a component of tax expense. We do not expect any significant increases or decreases to our unrecognized tax benefits in the next twelve months.
Recent Accounting Pronouncements
In July 2013, the FASB issued a new accounting standard update on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of

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a deferred tax asset for a new operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance will become effective for the Company on July 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist as of the effective date with retrospective application permitted. The Company is currently assessing the impact of this new guidance.
Non-GAAP Financial Measures
Regulation G, conditions for use of Non-Generally Accepted Accounting Principles (“Non-GAAP”) financial measures, and other SEC regulations define and prescribe the conditions for use of certain Non-GAAP financial information. To supplement our condensed consolidated financial results presented in accordance with GAAP, we use Non-GAAP financial measures which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described below. Management believes that these Non-GAAP financial measures reflect an additional and useful way of viewing aspects of our operations that, when viewed in conjunction with our GAAP results, provide a more comprehensive understanding of the various factors and trends affecting our business and operations. Non-GAAP financial measures used by us include net income and diluted net income per share.
Our Non-GAAP measures primarily exclude stock-based compensation, net of taxes and other special charges and credits. Management believes these Non-GAAP financial measures provide meaningful supplemental information regarding our strategic and business decision making, internal budgeting, forecasting and resource allocation processes. In addition, these Non-GAAP financial measures facilitate management’s internal comparisons to our historical operating results and comparisons to competitors’ operating results.

We use each of these Non-GAAP financial measures for internal managerial purposes, when providing our financial results and business outlook to the public and to facilitate period-to-period comparisons. Management believes that these Non-GAAP measures provide meaningful supplemental information regarding our operational and financial performance of current and historical results. Management uses these Non-GAAP measures for strategic and business decision making, internal budgeting, forecasting and resource allocation processes. In addition, these Non-GAAP financial measures facilitate management’s internal comparisons to our historical operating results and comparisons to competitors’ operating results.

The following table shows our Non-GAAP financial measures:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share amounts)
Non-GAAP net income and comprehensive income
$
42,645

 
$
18,339

 
$
83,873

 
$
31,911

Non-GAAP diluted net income per share of common stock
$
0.48

 
$
0.20

 
$
0.94

 
$
0.35

We believe that providing these Non-GAAP financial measures, in addition to the GAAP financial results, are useful to investors because they allow investors to see our results “through the eyes” of management as these Non-GAAP financial measures reflect our internal measurement processes. Management believes that these Non-GAAP financial measures enable investors to better assess changes in each key element of our operating results across different reporting periods on a consistent basis and provides investors with another method for assessing our operating results in a manner that is focused on the performance of our ongoing operations.

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The following table shows a reconciliation of GAAP net income and comprehensive income to non-GAAP net income and comprehensive income:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per
share amounts)
Net income and comprehensive income
$
41,792

 
$
17,803

 
$
82,320

 
$
30,982

Stock-based compensation:
 
 
 
 
 
 
 
Cost of revenues
148

 
104

 
292

 
185

Research and development
553

 
401

 
1,049

 
667

Sales, general and administrative
721

 
388

 
1,248

 
697

Tax effect of non-GAAP adjustments
(569
)
 
(357
)
 
(1,036
)
 
(620
)
Non-GAAP net income and comprehensive income
$
42,645

 
$
18,339

 
$
83,873

 
$
31,911

Non-GAAP diluted net income per share of common stock
$
0.48

 
$
0.20

 
$
0.94

 
$
0.35

Weighted-average shares used in computing non-GAAP diluted net income per share of common stock
89,653

 
90,056

 
89,593

 
91,493


Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We have interest rate risk from the LIBOR index that is used to determine the interest rates on our Loan Agreement. Interest will accrue on the outstanding principal amount of the term loan at a rate per annum equal to an adjusted LIBOR rate (based on one, two or three month interest periods) plus a spread of either 2.50% or 3.00%, which spread shall be determined based on the debt service ratio for the preceding four fiscal quarter period. The loans bear interest, at our option, at the base rate plus a spread of 1.25% to 1.75% or an adjusted LIBOR rate (at our election for a period of 30, 60, or 90 days) plus a spread of 2.25% to 2.75%, in each case with such spread being determined based on our debt service coverage ratio for the most recently ended fiscal quarter. The base rate is the highest of (i) East West Bank’s prime rate, (ii) the federal funds rate plus a margin equal to 0.50%, or (iii) the LIBOR rate plus a margin equal to 1.00%. Based on a sensitivity analysis, as of December 31, 2013 , an instantaneous and sustained 200-basis-point increase in interest rates affecting our floating rate debt obligations, and assuming that we take no counteractive measures, would result in a charge to our net income before income taxes in excess of $1.0 million over the next 12 months.
We had cash and cash equivalents of $305.6 million and $227.8 million as of December 31, 2013 and June 30, 2013 , respectively. These amounts were held primarily in cash deposit accounts. The fair value of our cash and cash equivalents would not be significantly affected by either a 10% increase or decrease in interest rates due mainly to the short-term nature of these instruments.
Foreign Currency Risk
Most of our sales are denominated in U.S. dollars, and therefore, our revenues are not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Chinese Yuan, Lithuanian Lita and Taiwan Dollar. During the three months ended December 31, 2013 , a 10% appreciation or depreciation in the value of the U.S. dollar relative to the other currencies in which our expenses are denominated would not have had a material impact on our financial position or results of operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2013 . The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and

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reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2013 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.


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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Intellectual Property
We are subject to, and may in the future be subject to legal proceedings and claims in the ordinary course of business regarding the rights and use of our intellectual property. We have received, and may in the future receive, claims from third parties alleging infringement of their intellectual property rights and requests for indemnification from our business partners or purchasers of our products arising out of third-party infringement claims. Future litigation may be necessary to defend ourselves, our partners and customers and our wireless carriers by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights.
Anti-Counterfeiting Litigation
In May 2012, we filed a lawsuit in the U.S. federal court for the Northern District of California against Kozumi USA Corp. and its owner Shao Wei (William) Hsu. The lawsuit alleged that Kozumi and Mr. Hsu have engaged in intellectual property theft, and illegal manufacturing and sale of counterfeit Ubiquiti Networks products. In June 2012, the court granted our application for a temporary restraining order enjoining Kozumi and Mr. Hsu and anyone in active concert or participation with them from using our trademarks, destroying evidence of counterfeiting and infringement, or assisting, aiding or abetting any other person or business entity in engaging in or performing any of such activities. In September 2013, we entered into a settlement agreement with Mr. Hsu under which Mr. Hsu agreed to make certain payments to us, perform 500 hours of community service, attend a business ethics course, and issue a formal letter of apology. Pursuant to the settlement, in October 2013, the U.S. federal court for the Northern District of California entered a judgment in favor of Ubiquiti Networks against Kozumi USA Corporation and Mr. Hsu for infringement of Ubiquiti trademarks and copyrights, and issued a stipulated permanent injunction enjoining Kozumi USA Corp., Mr. Hsu and their affiliates from infringing Ubiquiti Networks trademarks or copyrights in the future.
Export Compliance
In January 2011, OEE contacted us to request that we provide information related to our relationship with a logistics company in the UAE and with a company in Iran, as well as information on the export classification of our products. As a result of this inquiry we, assisted by outside counsel, conducted a review of our export transactions from 2008 through March 2011 to not only gather information responsive to OEE’s request but also to review our overall compliance with export control and sanctions laws. We believe our products have been sold into Iran by third parties. We do not believe that we directly sold, exported or shipped our products into Iran or any other country subject to a U.S. embargo. However, until early 2010, we did not prohibit our distributors from selling our products into Iran or any other country subject to a U.S. embargo. It was in the course of this review that we identified the Iranian sales of Distributor 1 after February 2010 and the Iranian sales of Distributor 2. Our review also found that while we had obtained required Commodity Classification Rulings for our products in June 2010 and November 2010, we did not advise our shipping personnel to change the export authorizations used on our shipping documents until February 2011. During the course of our export control review, we also determined that we had failed to maintain adequate records for the five year period required by the EAR and the sanctions regulations due to our lack of infrastructure and because it was prior to our transition to our current system of record, NetSuite. See “Risk Factors—We are subject to numerous U.S. export control and economic sanctions laws and a substantial majority of our sales are into countries outside of the United States. Sales outside of the United States represented 75% and 77% of our revenues in the six months ended December 31, 2013 and 2012 , respectively. Although we did not intend to do so, we have violated certain of these laws in the past, and we cannot currently assess the nature and extent of any fines or other penalties, if any, that U.S. governmental agencies may impose against us or our employees for any such violations. Any fines, if materially different from our estimates, or other penalties, could have a material adverse effect on our business and financial results.”
In May 2011, we filed a self-disclosure statement with the BIS and OEE. In June 2011 we filed a self-disclosure statement with OFAC, regarding the compliance issues noted above. The disclosures address the above described findings and the remedial actions we have taken to date. However, the findings also indicate that both distributors continued to sell, directly or indirectly, our products into Iran during the period from February 2010 through March 2011 and that we received various communications from them indicating that they were continuing to do so. Since January 2011, we have cooperated with OEE and, prior to our disclosure filing, we informally shared with the OEE the substance of our findings with respect to both distributors. From May 2011 to August 2011, we provided additional information regarding our review and our findings to OEE to facilitate its investigation and OEE advised us in August 2011 that it had completed its investigation of us. In August 2011, we received a

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warning letter from OEE stating that OEE had not referred the findings of our review for criminal or administrative prosecution of us and closed the investigation without penalty.
OFAC is still reviewing our disclosure. In our submission, we have provided OFAC with an explanation of the activities that led to the sales of our products in Iran and the failure to comply with the EAR and OFAC sanctions. Although our OFAC and OEE disclosures covered similar sets of facts that led the OEE to resolve the case with the issuance of a warning letter, OFAC may conclude that our actions resulted in violations of U.S. export control and economic sanctions laws and warrant the imposition of penalties that could include fines, termination of our ability to export our products, and/or referral for criminal prosecution. The maximum civil monetary penalty for the violations is up to $250,000 or twice the value of the transaction, whichever is greater, per violation. The penalties may be imposed against us and/or our management. Any such fines or restrictions may be material to our financial results in the period in which they are imposed. Also, disclosure of our conduct and any fines or other action relating to this conduct could harm our reputation and have a material adverse effect on our business, operating results and financial condition. We cannot predict when OFAC will complete its review or decide upon the imposition of possible penalties.
We have taken actions designed to ensure that export classification information is distributed to the appropriate personnel in a timely manner and have adopted policies and procedures to promote our compliance with applicable export laws and regulations, including obtaining written distribution agreements with substantially all of our distributors that contain covenants requiring compliance with U.S. export control and economic sanctions law; notifying all of our distributors of their obligations and obtaining updated distribution agreements from distributors that account for approximately 99% of our distributor revenue in fiscal 2013. However we cannot be sure such actions will be effective. Additionally, our failure to amend all our distribution agreements and to implement more robust compliance controls immediately after the discovery of Iran-related sales activity in early 2010 may be aggravating factors that could impact the imposition of penalties imposed on us or our management. Further, should our efforts to ensure our compliance with applicable export laws and regulations not be sufficient in preventing our distributors from distributing our products into a country subject to a U.S. embargo or otherwise violating applicable export laws and regulations in the future, we could be subject to government investigations or penalties in the future. Any such penalties, if they occur, may be more severe in light of our prior violations discussed above. Based on the facts known to us to date, we recorded an expense of $1.6 million for this export compliance matter in fiscal 2010, which represents management’s estimated exposure for fines in accordance with applicable accounting literature. This amount was calculated from information discovered through our internal review and we deem this loss to be probable and reasonably estimable. However, we believe that it is reasonably possible that the loss may be higher, but we cannot reasonably estimate the range of any further potential losses. Should additional facts be discovered in the future and/or should actual fines or other penalties substantially differ from our estimates, our business, financial condition, cash flows and results of operations would be materially negatively impacted.
Shareholder Class Action Lawsuits
Beginning on September 7, 2012, two shareholder class action complaints were filed against us, certain of our officers and directors and the underwriters of our initial public offering in the United States District Court for the Northern District of California. On January 30, 2013, the plaintiffs filed an Amended Consolidated Complaint, which alleges claims under the Securities Act of 1933, the Securities Exchange Act of 1934 and SEC Rule 10b-5 on behalf of a purported class of those who purchased our common stock between October 14, 2011 and August 9, 2012 and/or acquired our stock pursuant to or traceable to the registration statement for the initial public offering. The Amended Consolidated Complaint alleges that the defendants violated the federal securities laws by issuing false or misleading statements regarding the sale of counterfeit versions of our products. The consolidated complaint seeks, among other things, damages and interest, rescission, and attorneys’ fees and costs. On March 26, 2013 we filed a motion to dismiss the complaint. On April 30, 2013, the plaintiffs filed an opposition to our motion to dismiss. On August 27, 2013, the court held a hearing on the motion to dismiss, and its decision is pending.
We believe that the allegations in the consolidated complaint are without merit and intend to vigorously contest the litigation. However, there can be no assurance that we will be successful in our defense. Because the case is at a very early stage, we cannot currently estimate the loss or the range of possible losses we may experience in connection with this litigation.
Other
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. Except as described above, we are not currently party to any litigation that we expect to be material; however, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims, or indemnify third parties, any of which could materially impact our business, financial condition and results of operations.


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Item 1A. Risk Factors
This Report contains forward-looking statements that 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 risk factors set forth below. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also affect our business. If any event related to these known or unknown risks or uncertainties actually occurs and has material adverse effects on our business, financial condition and results of operations could be seriously harmed.
We have limited visibility into future sales, which makes it difficult to forecast our future operating results.
Because of our limited visibility into demand and channel inventory levels, our ability to accurately forecast our future revenues is limited. We sell our products and solutions globally to network operators, service providers and others, primarily through our network of distributors, resellers and OEMs. We do not employ a direct sales force. Sales to distributors accounted for 98% , and 97% of our revenues in the six months ended December 31, 2013 and 2012 , respectively. Generally, our distributors are not obligated to promote our products and solutions and are free to promote and sell the products and solutions of our competitors. We sell our products to our distributors on a purchase order basis. Our distributors do not typically provide us with information about market demand for our products. While we have recently begun efforts to obtain inventory level and sales data from our distributors, this information has been difficult to obtain in a timely manner. Since we have only recently begun gathering this data, we cannot be certain that the information is reliable. Our operating expenses are relatively fixed in the short-term, and we may not be able to decrease our expenses to offset any shortfall in revenues. If we under forecast demand, our ability to fulfill sales orders will be compromised and sales may be deferred or lost altogether as potential purchasers seek alternative solutions.
We are subject to risks associated with our distributors’ inventory management practices. Should any of our distributors fail to resell our products in the period of time they anticipate or overstock inventories to address anticipated supply interruptions that do not occur, our revenues and operating results would suffer in future periods.
Our distributors purchase and maintain their own inventories of our products and have no right to return the products they have purchased. We receive limited information from the distributors regarding their inventory levels and their sales of our products. If our distributors are unable to sell an adequate amount of their inventories of our products, their financial condition may be adversely affected, which could result in a decline in our sales to these distributors. Distributors with whom we do business may face issues maintaining sufficient working capital and liquidity or obtaining credit, which could impair their ability to make timely payments to us. In addition, in the past we have experienced shortages of our products and our distributors have ordered quantities in excess of their anticipated near term demand to insulate themselves from supply interruptions. If, in the future, some distributors decide to purchase more of our products than are required to satisfy customer demand in any particular quarter, inventories at these distributors would grow. These distributors likely would reduce future orders until inventory levels realign with customer demand, which could adversely affect our revenues in a subsequent quarter.
We rely on a limited number of distributors, which we consider to be our customers, and the loss of existing distributors, or a need to add new distributors may cause disruptions in our shipments, which may materially adversely affect our ability to sell our products and achieve our revenue forecasts and we may be unable to sell inventory we have manufactured to meet expected demand in a timely manner, if at all.
Although we have a large number of distributors who sell our products, we sell a substantial majority of our products through a limited number of these distributors. In the three and six months ended months ended December 31, 2013 , revenues from Customer A represented 17% and 14% of our revenues, respectively. In the three months ended December 31, 2012 , revenues from Customer A and Customer B represented 15% and 14% , respectively. In the six months ended December 31, 2012 , revenues from Customer A represented 12% of our revenues. We anticipate that we will continue to be dependent upon a limited number of distributors for a significant portion of our revenues for the foreseeable future. The portion of our revenues attributable to a given distributor may also fluctuate in the future. Termination of a relationship with a major distributor, either by us or by the distributor, could result in a temporary or permanent loss of revenues. We may not be successful in finding other suitable distributors on satisfactory terms, or at all, and this could adversely affect our ability to sell in certain geographic markets or to certain network operators and service providers.


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We have experienced, and may in the future experience, reduced sales levels and damage to our brand due to production of counterfeit versions of our products.
In the past we have identified parties that are manufacturing and selling counterfeit products that we believe infringe our intellectual property rights. Sales of these counterfeit products were so substantial that our revenues were adversely affected while these products were in the market. Given the popularity of our products, we believe there is a high likelihood that counterfeit products or other products infringing on our intellectual property rights will continue to emerge. In order to combat counterfeit goods, we have and may continue to be required to spend significant resources to monitor and protect our intellectual property rights. Although we have taken steps to prevent further counterfeiting, we may not be able to detect or prevent all instances of infringement and may lose our competitive position in the market before we are able to do so. If the quality of counterfeit products is not representative of the quality of our products, further damage could be done to our brand. In addition, enforcing rights to our intellectual property may be difficult and expensive, and we may not be successful in combating counterfeit products and stopping infringement of our intellectual property rights, particularly in some foreign countries, where we could lose sales.
Our operating results will vary over time and such fluctuations could cause the market price of our common stock to decline.
Our quarterly operating results fluctuate significantly due to a variety of factors, many of which are outside of our control, and we expect them to continue to do so. Our revenues were $138.4 million , $129.7 million , $101.2 million , $83.2 million and $74.9 million and our net income was $41.8 million , $40.5 million , $28.8 million , $20.7 million and $17.8 million in the three months ended December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 and December 31, 2012 , respectively. Because revenues for any future period are not predictable with any significant degree of certainty, you should not rely on our past results as an indication of our future performance. If our revenues or operating results fall below the expectations of investors or securities analysts or below any estimates we may provide to the market, the price of our common shares would likely decline substantially, which could have a material adverse impact on investor confidence and employee retention. Our common stock has recently experienced substantial price volatility. For example, from our initial public offering through December 31, 2013 , the price of our common stock ranged from $7.80 to $46.88 per share. Additionally, the stock market as a whole has experienced extreme price and volume fluctuations that have affected the stock price of many technology companies in ways that may have been unrelated to these companies’ operating performance.
Factors that could cause our operating results and stock price to fluctuate include:
 
varying demand for our products due to the financial and operating condition of our distributors and their customers, distributor inventory management practices and general economic conditions;
shifts in our fulfillment practices including increasing inventory levels in attempt to decrease customer lead times;
inability of our contract manufacturers and suppliers to meet our demand;
success and timing of new product introductions by us and the performance of our products;
announcements by us or our competitors regarding products, promotions or other transactions;
lost sales due to the proliferation of counterfeit versions of our products;
costs related to the protection of our intellectual property rights, including defense against counterfeiting efforts;
costs related to responding to government inquiries related to regulatory compliance;
our ability to control and reduce product costs;
expenses of our entry into new markets, such as video surveillance microwave backhaul and machine-to-machine communications;
commencement of litigation or adverse results in litigation;
changes in the manner in which we sell products;
increased warranty costs;