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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2014
OR
(cid:1) 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
(State or other jurisdiction of
incorporation or organization)
32-0097377
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.001 par value per share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1)
No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1)
No (cid:3)
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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 (cid:3) No (cid:1)
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 (cid:3) No (cid:1)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to Form 10-K. (cid:1)
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(cid:1) (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
(cid:1)
(cid:1)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:1)
No (cid:3)
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $1,380,368,000
based upon the closing price of $45.96 of such common stock on the NASDAQ Global Select Market on December 31, 2013 (the last business
day of the registrant’s most recently completed second quarter). Shares of common stock held as of December 31, 2013 by each director and
executive officer of the registrant, as well as shares held by each holder of 5% of the common stock known to the registrant, have been excluded
for purposes of the foregoing calculation. This determination of affiliate status is not a conclusive determination for other purposes.
As of August 18, 2014 , 88,234,896 shares of Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the
registrant’s 2014 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the
extent stated herein.
Table of Contents
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Signatures
Exhibits, Financial Statement Schedules
PART IV
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4
13
25
25
26
26
27
29
30
45
45
45
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Note About Forward-Looking Statements
UBIQUITI NETWORKS, INC.
PART I
When used in this Report, the words “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans”
“potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and negatives of those terms are intended to identify
forward-looking statements. These are statements that relate to future periods and include statements about our future results, sources of
revenue, our continued growth, our gross margins, market trends, our product development, technological developments, the features, benefits
and performance of our current and future products, the ability of our products to address a variety of markets, the anticipated growth of
demand for connectivity worldwide, our growth strategies, future price reductions, our competitive status, our dependence on our senior
management and our ability to attract and retain key personnel, dependency on and concentration of our distributors, our employee relations,
current and potential litigation, the effects of government regulations, our compliance with laws and regulations, our expected future operating
costs and expenses and expenditure levels for research and development, selling, general and administrative expenses, fluctuations in operating
results, fluctuations in our stock price, our payment of dividends, our future liquidity and cash needs, our credit facility, future acquisitions of
and investments in complimentary businesses and the expected impact of various accounting policies and rules adopted by the Financial
Accounting Standards Board. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are not limited to, factors affecting our quarterly results, our ability
to manage our growth, our ability to sustain or increase profitability, demand for our products, our ability to compete, our ability to rapidly
develop new technology and introduce new products, our ability to safeguard our intellectual property, trends in the networking industry and
fluctuations in general economic conditions, and the risks set forth throughout this Report, including under Item 1, “Business” and under
Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
This Report also contains estimates and other information concerning our industry, including market size and growth rates, which are based on
industry publications, surveys and forecasts, including those generated by Gartner and Cisco Systems, Inc. This information involves a number
of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. These industry publications, surveys and
forecasts generally indicate that their information has been obtained from sources believed to be reliable. The industry in which we operate is
subject to a high degree of uncertainty and risk due to a variety of factors, including those described under Item 1A. "Risk Factors."
The Gartner Report described herein, or the "Gartner Report," represent data, research opinion or viewpoints published, as part of a syndicated
subscription service, by Gartner and are not representations of fact. The Gartner Report speaks as of its original publication date (and not as of
the date of this Annual Report on Form 10-K) and the opinions expressed in the Gartner Report are subject to change without notice.
Item 1. Business
Business Overview
Ubiquiti Networks develops high performance networking technology for service providers and enterprises. Our technology platforms deliver
highly-advanced and easily deployable solutions that appeal to a global customer base, particularly in under-networked markets. Our
differentiated business model, combined with our innovative proprietary technologies, enables us to break down traditional barriers such as high
product and network deployment costs to offer solutions with disruptive price-performance characteristics. We have become an attractive
alternative to traditional high touch, high-cost providers, resulting in the progressive adoption of our technology platforms.
Our technology platforms for service providers enable carrier-class network infrastructure for fixed wireless broadband, wireless backhaul
systems and routing. Our technology platforms for enterprises enable wireless local area network (WLAN) infrastructure, video surveillance
products, and machine-to-machine communications. We believe that our products are highly differentiated due to our proprietary software
protocol innovation, firmware expertise, and hardware design capabilities. This allows our portfolio to meet the demanding
performance requirements of video, voice and data applications at prices that are often a fraction of those offered by our competitors.
As a core part of our strategy, we have developed a model for marketing and selling high product volumes to service providers and enterprises.
This model is driven by a large, growing and highly engaged community of service providers, distributors, value added resellers, systems
integrators and corporate information technology ("IT") professionals who we refer to as the
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Ubiquiti Community or our 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 were $572.5 million , $320.8 million and $353.5 million in the fiscal years ended June 30, 2014 , 2013 and 2012 , respectively. We
had net income of $176.9 million , $80.5 million and $102.6 million in the fiscal years ended June 30, 2014 , 2013 and 2012 , respectively. In
this Annual Report on Form 10-K, we refer to the fiscal years ended June 30, 2014 , 2013 and 2012 as fiscal 2014 , fiscal 2013 and fiscal 2012 ,
respectively.
Industry Overview
Internet traffic worldwide has grown rapidly in recent years, driven by an increase in the number of users, increasing mobility of those users and
high bandwidth applications, such as video, audio, cloud-based applications, online gaming and social networking. According to Cisco Visual
Networking Index, global Internet protocol, or IP, traffic is expected to increase from 30,734 petabytes, or PB, per month in 2011 to 110,282 PB
per month in 2016, representing a 29% compound annual growth rate, or CAGR, over that period. Wired networking solutions have traditionally
been used to address increasing consumer and enterprise bandwidth needs. However, the high initial capital requirements and ongoing operating
costs and long market lead times associated with building and installing infrastructure for wired networks has severely limited the widespread
deployment of these networks in underserved and underpenetrated markets. Wireless networks are emerging as an attractive alternative for
addressing both the broadband access needs of underserved and underpenetrated markets in both emerging and developed countries.
Underserved and underpenetrated markets . There exists a significant market opportunity in both emerging and developed economies. In
“unconnected” emerging markets, the lack of an established network infrastructure and the high initial deployment costs associated with
traditional wired network infrastructure build-outs have encouraged adoption of wireless networking infrastructure. In “under-connected”
markets, bandwidth demand exceeds either the available capacity from existing infrastructure or the affordable supply of new infrastructure,
resulting in an attractive market opportunity for wireless systems to bolster connectivity. Additionally, we believe there is a large market
opportunity in connected markets serving customers that want to deploy reliable, scalable and customizable wireless networks and whose
primary buying criterion is based on price-performance characteristics.
Increasing use of the unlicensed spectrum . In the absence of affordable broadband access in the licensed spectrum, the number of users of the
unlicensed RF spectrum has increased for communications equipment, as well as consumer devices such as cordless phones, baby monitors and
microwave ovens. This increasing use of unlicensed RF spectrum has made providing high quality wireless networking more challenging due to
increasing congestion in the unlicensed spectrum.
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Government incentives for broadband access . Governments around the world are increasingly taking both regulatory and financial steps to
expand access to broadband networks and increase availability of advanced broadband services to consumers and businesses.
To provide robust wireless networks that meet the price-performance needs of service providers and enterprises, vendors of wireless networking
solutions must address the problems facing incumbent solutions:
• Poor performance . To deliver high performance, wireless networking solutions need to satisfy diverse performance requirements for
video, voice and data. The challenges of operating in the unlicensed RF spectrum, including spectrum noise and interference resulting
from the proliferation of devices, often result in difficulty establishing network connections and unreliable or poor performance.
Additionally, the performance and reliability of existing wireless networking solutions decline rapidly as the number of subscribers and
range of service delivery increases. Lack of hardware and software integration between products, technologies and vendor devices can
diminish network performance significantly and increase the complexity of network management, integration and expansion.
• High cost of ownership . Existing alternative solutions, such as fiber-to-the-premises, cable, digital subscriber line, or DSL, worldwide
interoperability for microwave access, or WiMAX, LTE and traditional backhaul, provide high capacity, high performance broadband
access; however, these solutions can be extremely costly, and often do not meet the demanding price-performance requirements of
underserved markets.
• Complexity . Existing alternative solutions are often difficult to deploy and manage and require skilled employees or high cost
consultants to install and operate. In addition, existing enterprise solutions often offer a large variety of features and functionalities that
enterprise customers may find overwhelming or unnecessary.
• Lack of product support and customer-driven features. Product support and feedback for alternative suppliers’ wireless networking
solutions is often costly and ineffective. Existing wireless solutions are not accompanied by dynamic product support to assist customers
in efficiently setting up and troubleshooting their networks. Additionally, alternative suppliers generally lack an effective mechanism to
communicate with their end-users and incorporate feedback from usage into product roadmaps.
Limitation of existing solutions . Existing service provider wireless networking technologies have been developed to satisfy the increasing
demand for broadband access, support mobility and provide the performance and reliability demanded by customers. According to Gartner,
aggregate end-user spending on wireless networking equipment for Enterprise WLAN, wireless broadband access and long-term evolution, or
LTE, solutions, is expected to grow from $10.4 billion in 2012 to $41.3 billion in 2017, representing a CAGR of 32%. However, these existing
solutions based upon wired, satellite or cellular technologies, often fail to meet the price-performance requirements of fixed wireless networking
in emerging markets, rural markets, or price-sensitive markets, which in turn has led to low penetration of wireless broadband access and large
populations of unaddressed users in these areas. Within the enterprise, existing WLAN deployments are often relatively complex and costly,
providing customers with a large number of non-critical features and functionalities at a high cost. Given the growth in Internet connected
devices, and the consumer’s desire for constant connectivity, there exists growing demand for WLAN solutions that provide critical features at
significantly lower cost than existing solutions.
Our Solutions
Our products and solutions enable both service providers and enterprises to deploy the infrastructure for high performance, scalable and reliable
wireless networks cost effectively. Our wireless networking solutions offer the following key benefits:
• High performance proprietary technology solutions. Our proprietary products and solutions include high performance radios, antennas,
software, communications protocols and management tools that have been designed to deliver carrier and enterprise class wireless
broadband access and other services primarily in the unlicensed RF spectrum. Our radios and antennas, which incorporate our innovative
proprietary technologies and firmware, are designed and field tested to deliver carrier-class network speeds, throughput, range and
coverage, while simultaneously meeting the varying performance requirements of video, voice and data traffic. Our products and
solutions overcome significant performance challenges such as dynamic spectrum noise, device interference, outdoor obstacles and
unpredictable levels of video, voice and data performance. Importantly, we are able to utilize the Ubiquiti Community to validate the
effectiveness of our end user experience and focus our development efforts on those features and functionality that are critical to their
requirements.
• Price disruptive offering . Our products and solutions have been designed to enable service providers and enterprises to deliver high
performance to their users at highly disruptive price points. The deployment and operation of our solutions
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require a fraction of the capital expenditures, implementation expenses and network maintenance costs of those associated with existing
solutions.
•
Integrated and easy to deploy and manage . Our integrated products and solutions reduce the complexity associated with the installation,
management and expansion of wireless networks. Within each of our product families, products are based on firmware that is built on a
common codebase. This allows us to offer common features and functionality and leads to consistent usability across each product
family. The integration between our products is designed to enable service providers and enterprises to deliver wireless broadband access
and other services that have high performance characteristics without significant management, deployment costs or upgrade complexity.
• Scalable community-led approach . Purchasing our proprietary products and solutions enables immediate access to the Ubiquiti
Community, including current and historical troubleshooting and technical information as well as best practices and deployment advice
for our end users. Product support from our Community is self-sustaining and scales efficiently, with growth and relevance driven by the
size and engagement of our customer base. This scalable community-led approach to customer support contributes to the substantially
lower total cost of ownership of our products and solutions relative to incumbent providers. Additionally, our Community provides an
effective channel for product feedback from our customer base.
We are growing our intellectual property portfolio to help protect the development of our proprietary software, hardware and complete solutions.
We believe that protecting the innovation and technology underlying our comprehensive wireless networking solutions is key to ensuring our
continued ability to provide customers with differentiated value .
Our Strategy
Our goal is to disrupt the market for communications technology with innovative solutions that provide leading performance at prices that are a
fraction of those of alternative solutions. Key elements of our strategy include the following:
• Continue to deliver high performance characteristics at disruptive price points. We intend to expand the market opportunity for service
providers by continuing to provide products and solutions with disruptive price-performance characteristics. We also intend to expand the
market and displace high-priced alternative solutions in enterprise markets. We believe that we can sustain our disruptive strategy
through our unique business model, focusing on the features and functionalities most critical to customers and avoiding the fringe
features, which add both cost and complexity.
• Leverage our technologies and business model in adjacent markets. We intend to continue to leverage our technologies and business
model to target other large and growing markets that we believe are ripe for disruption such as video surveillance, machine-to-machine
communications, routing and licensed microwave wireless backhaul markets. For the enterprise market, we introduced our enterprise
WLAN product, UniFi, in fiscal 2011 and have experienced strong adoption by a largely new customer base. We believe we are well
positioned to gain traction in these new addressable markets and will continue to accelerate our innovation in these products. Similarly,
we intend to drive adoption of UniFi Video, our IP camera management system, airFiber, our outdoor wireless backhaul radio platform,
EdgeMAX, our advanced routing technology and mFi, our machine-to-machine communication platform.
• Maintain and extend our technological leadership . We intend to continue to develop innovative solutions for our target markets. We
believe that our continued focus on developing such technologies with customer-driven feedback from the Ubiquiti Community will
allow us to deliver products and solutions with disruptive price-performance characteristics that are specifically targeted to our markets.
In addition, we believe our continued innovation is key to the value our products and solutions provide, and is a critical component to
achieving user lock-in.
• Continue to grow our powerful user community. We believe our differentiated business model, powered by the Ubiquiti Community,
provides us with a significant and sustainable competitive advantage over competitors. The Ubiquiti Community facilitates streamlined
and efficient product development coupled with a highly efficient sales and distribution model that allows us to avoid the costs associated
with expensive direct and channel organizations. The self-sustaining product support aspect of the Ubiquiti Community simplifies the
deployment process and provides a highly effective real-time support system for customers.
• Continue to sell to our existing customers. We plan to continue to provide our customers with high performance, reliable, and cost-
effective integrated products and solutions. In particular, we believe our use of differentiated proprietary protocols and the scalability of
our products positions us to grow with our customers as they build out their networks. Furthermore, we intend to cross-sell
complementary solutions to our existing customers. For example, we
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believe customers of our airMAX solutions can benefit significantly from the incremental deployment of our EdgeMAX and airFiber
products.
Our Technology and Products
We offer products and solutions based on our proprietary technology with disruptive price-performance characteristics across multiple markets.
Utilizing low cost hardware, consumer chipsets and innovative software and firmware, we build price-performance solutions to address both
service providers and enterprises. In addition, our technology allows us to design our products for ease of manufacture. Our focus on cost
efficiency, robust product design and high performance drives the development of our technology, products and solutions.
Technology Platforms
Our current major service provider and carrier solutions include:
Base Station/Backhaul/Customer Premise Equipment (“CPE”)/Bridge—airMAX
We offer end-to-end solutions that incorporate our proprietary RF technology, antenna design and firmware technologies. These technologies
simplify the adoption and use of our products and provide our products and solutions with performance characteristics usually found only in the
carrier-class wireless networking solutions and solve significant performance, reliability, scalability and ease-of-use challenges in the unlicensed
RF spectrum.
In September 2009, we introduced our airMAX platform which includes proprietary protocols developed by us, which contain advanced
technologies for minimizing signal noise. These proprietary protocols help our products deliver carrier-class wireless networking performance
for video, voice and data applications. airMAX is able to support a wireless network that can scale to hundreds of clients per base station over
long distances while maintaining low latency and high throughput. Unlike most systems using 802.11 standard protocols, which are primarily
designed for indoor networks, our airMAX systems use a proprietary Time Division Multiple Access, or TDMA, protocol to manage the sending
and receiving of data over the network to maximize air time efficiency. airMAX incorporates smart polling, which is a feature that improves the
scalability of a wireless network by predicting the voice and data requirements of an application at any given time and allocating the required
bandwidth. airMAX also improves scalability by giving priority to active client hardware over idle client hardware to reduce perceived latency
on large networks. airMAX provides users with the ability to seamlessly switch operating frequencies in real time to overcome noise and
interference due to changes in the operating environment.
A majority of our airMAX products and solutions can leverage multiple input multiple output, or MIMO, technology, which relates to the use of
multiple antennas at both the transmitter and receiver to improve performance. Most of our radios employ multiple independent transmitters and
receivers to create independent communication channels using the same frequency spectrum. We use advanced array signal processing
techniques to combine our radios’ communications channels into a single, higher data rate channel. Our approach to MIMO technology
effectively doubles the capacity of our radios when compared to traditional radios. Each of our standalone antennas is dual polarized with
radiation patterns that are optimized for MIMO performance. Our high performance outdoor antennas are designed to amplify signal power,
resulting in stronger signals and better link quality, and to block noise. Our design produces a better signal-to-noise ratio for each channel and
simplified signal processing to combine the channels, which in turn effectively doubles the throughput of our antennas, when compared to single
input single output devices. Our devices support various encryption protocols including: WEP, WPA, WPA-TKIP, WPA-AES, WPA2, WPA2-
TKIP and WPA2-AES.
Network Routing Platform—EdgeMAX
In September 2012, we announced EdgeMAX, a disruptive price-performance software and systems routing platform. We believe the initial
product, the EdgeRouter Lite, is the world’s first sub-$100 router capable of over 1 million packets-per-second processing performance.
EdgeMAX is powered by our full-featured EdgeOS operating system that includes advanced QoS, firewall, dynamic routing and VPN
functionality. Since the initial launch we have introduced a full series of routers and switches that address our core markets.
Point-to-point Wireless Backhaul—airFiber
In March 2012, we introduced airFiber, a point-to-point radio system. Components of the airFiber product, including the radio, were designed to
provide low latency with high throughput. Our airFiber product uses an integrated split antenna and a global positioning system to
simultaneously send data packets from each side of the link. We engineered proprietary communication protocols so that airFiber does not suffer
from the traditional packet overhead associated with Wi-Fi based standards. We
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believe airFiber will be considered a compelling alternative to wired backhaul as airFiber is not easily susceptible to vandalism, copper theft, and
fiber optic damage because only the endpoints need to be secured. airFiber does not require physical infrastructure such as laying cable or fiber,
and by utilizing unlicensed spectrum, customers achieve significantly faster deployment.
Our current major enterprise solutions include:
Enterprise WLAN—UniFi
In January 2011, we released our UniFi Enterprise Wi-Fi System, which is a scalable Wi-Fi solution that includes Wi-Fi certified hardware with
a software based management controller, targeting enterprise customers. UniFi hardware utilizes MIMO technology, works with 802.11a/b/g/n
and ac standards and uses a single cable for data transmission and power-over-Ethernet. Unlike other enterprise Wi-Fi systems that utilize a
costly hardware Wi-Fi switch, UniFi uses a virtual controller that allows for on-site management or remote management through the cloud,
allowing customers to deploy UniFi in both indoor and outdoor applications. Each UniFi access point can be managed centrally with the UniFi
Controller software, which we provide free of charge. The UniFi Controller enables enterprise WLAN managers to centrally configure and
administer a UniFi network and individual access points without any special training and through secure access from any web browser. The
UniFi platform provides automatic UniFi access point detection, firmware updates, real-time status, map loading, advanced security options and
“zero handoff roaming”, our proprietary innovation for seamless roaming for mobile devices.
Video Surveillance—UniFi Video
In August 2011, we introduced our line of UniFi Video H.264 megapixel IP cameras and our UniFi Video management software controller. The
H.264 cameras use a single cable for data transmission and power-over-Ethernet. UniFi Video, our management controller software, can be used
to manage multiple UniFi Video H.264 IP cameras as well as manage digital video recorder devices. UniFi Video software is available for
download at no cost on our website and only manages Ubiquiti Network camera devices. Similar to our other network management products,
UniFi Video can be accessed securely from any web browser, provides detailed statistical reporting and advanced analytics and provides a
management console with multiple views, versatile camera settings and customizable event recordings.
Machine-To-Machine Communication—mFi
In June 2012, we announced availability of mFi, which includes hardware sensors, power devices, and management software that allows devices
to be monitored and controlled remotely via Wi-Fi. For example, mFi allows users to manage and monitor their building temperature and power
consumption. The management controller software is IP based and can be accessed from any browser locally or through the cloud. mFi software
allows management to create rules to control numerous devices.
The table below summarizes information about our product platforms:
Name
Service Provider Products
airMAX
EdgeMAX
airFiber
Enterprise Products
UniFi
UniFi Video
mFi
Target Applications
Bands of
Operation (GHz)
MSRP
Base station/Backhaul/CPE/Bridge
Routing/Switching
Wireless Backhaul
0.9/ 2/ 3/ 5/10
N/A
5/24
$39 - $399
$99 - $369
$999 - $1,498( 1)
WLAN
IP Video Surveillance
Machine-To-Machine Communication
2/5
N/A
2/5
$69 - $489
$99 - $469
$8 - $99
(1) MSRP listed is for one airFiber unit only, but is typically sold in pairs.
The Ubiquiti Community
We established the Ubiquiti forum, wiki and newsletter to foster a large, growing and engaged online community of service providers and
distributors, customers and employees among others. The Ubiquiti Community powers our business model by facilitating rapid introductions and
development of customer-oriented products. The Ubiquiti Community provides best practices, advice, troubleshooting and product feedback. It
also acts as a source of product support and drives viral marketing.
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The following describes the key aspects of our sustainable business model that are powered by the Ubiquiti Community:
• Rapid customer and community-driven product development . We seek to identify features and products that are, or are expected to be,
needed or desired by the majority of customers for that product. We rely on the Ubiquiti Community as a significant source of requests
for features that we translate into new product ideas and designs.
• Scalable sales and marketing model . We rely on 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. For example, there have been many instances where members of the
Ubiquiti Community, who happen to be on online forums not affiliated with us, have strongly recommended that users of other wireless
networking solutions try our products and solutions. We also hold conferences as an effective way to introduce and promote our products
and solutions to the global Ubiquiti Community. For example, in 2012 and 2013, we held our Ubiquiti World Conference at locations in
the United States, Brazil, Argentina, Hungary, Russia, China and India.
• Self-sustaining product support. Our service providers and IT professionals, who enthusiastically support each other through the
Ubiquiti forum, as well as other blogs and online groups, have fostered a large, scalable and, we believe, self-sustaining mechanism for
rapid product support and dissemination of information. The members of the Ubiquiti Community respond to user questions posted on
our forum in a rapid manner. These responses are then rated by other members of the Ubiquiti Community to help ensure that the users
are receiving the best possible answers. Top answers to common questions are stored in the Ubiquiti Networks Community Knowledge
Base. In addition, our internal customer support organization provides feedback on critical product issues, and augments the information
in the Ubiquiti Community.
Research and Development
Our research and development organization is responsible for the design, development and testing of our products. Our engineering team has
deep expertise and experience in networking and antenna design, and we have a number of personnel with longstanding experience with network
architecture and operation. We have developed and intend to continue to develop our technology in part by operating with a relatively flat
reporting structure that relies on individual contributors or small development teams to develop, test and obtain feedback for our products. Our
products and solutions benefit from the active engagement between the Ubiquiti Community and our research and development personnel
throughout the product development cycle, resulting in rapid introduction and adoption of new products. Our research and development
personnel evaluate the input from service providers, IT professionals and enterprises and respond to their needs by modifying our products or
developing new products based on the input received.
As of June 30, 2014 , our research and development team consisted of 216 full time equivalent employees, including contractors, located in the
United States, Taiwan, China, Lithuania, Poland, Latvia and elsewhere. Our research and development operations work on product development
and new versions of our existing products. Our research and development expenses were $34.0 million , $21.0 million and $16.7 million for
fiscal 2014 , fiscal 2013 and fiscal 2012 , respectively. We expect that the number of our research and development personnel will continue to
increase over time and that our research and development expenses will also increase.
Manufacturing and Suppliers
We retain contract manufacturers to manufacture, control the quality of and ship our products. We primarily utilize contract manufacturers
located in China. Our relationships with contract manufacturers allow us to conserve working capital, reduce manufacturing costs and minimize
delivery lead times while maintaining high product quality and the ability to scale quickly to handle increased order volume. We make
substantially all of our purchases from our contract manufacturers on a purchase order basis. Our contract manufacturers are not required to
manufacture our products for any specific period or in any specific quantity. We expect that it would take approximately three to six months to
transition manufacturing, quality assurance and shipping services to new providers.
Our internal manufacturing organization consists of supply chain managers, logistics employees and contractors who supervise the manufacture
of our products at contract manufacturer sites and test engineers. We rely on our contract manufacturers and our internal quality assurance
resources to implement quality assurance programs designed to achieve high product quality and reliability. We believe that our low warranty
expenses and product return rate to date reflect a high level of product quality. We tightly integrate our research and development efforts with
our supplier selection process. Once product manufacturing quality
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reaches a satisfactory level, we move into full scale production at the same contract manufacturer site. We also evaluate and utilize other
suppliers for components from time to time.
We rely on third party components and technology to build and operate our products, and we rely on our contract manufacturers to obtain the
components, subassemblies and products necessary for the manufacture of our products. While components and supplies are generally available
from a variety of sources, we and our contract manufacturers currently depend on a single or limited number of suppliers for several components
for our products. We and our contract manufacturers rely on purchase orders rather than long-term contracts with these suppliers. The majority
of our product revenues are dependent upon the sale of products that incorporate components from Qualcomm Atheros, Inc. ("Qualcomm
Atheros"). We are party to a non-exclusive license agreement with Qualcomm Atheros whereby we license certain technology that we
incorporate into our products. The current term of our amended license agreement with Qualcomm Atheros expires on September 1, 2014. This
agreement automatically renews for successive one year periods unless the agreement is terminated by written notice of nonrenewal at least 90
days prior to the end of its then-current term. We depend on this license agreement to modify and replace firmware that Qualcomm Atheros
provides with the chipsets with our proprietary firmware. While our agreement with Qualcomm Atheros remains effective, in accordance with
the current terms of the agreement, either party may terminate the agreement without cause at the end of the annual contract term.
We do not stockpile sufficient chipsets to cover the time it would take to re-engineer our products to replace the Qualcomm Atheros chipsets
which comprise the raw materials for our product offerings. If we need to seek a suitable second source for Qualcomm Atheros in our products,
there can be no assurance that we would be able to successfully source our chipsets on suitable terms, if at all. In any event, our use of chipsets
from multiple sources may require us to significantly modify our designs and manufacturing processes to accommodate these different chipsets.
Sales and Distribution
Historically, we have not employed a direct sales force, nor do we plan to in the future. We sell our products and solutions globally to service
providers and enterprises primarily through our extensive network of distributors, and, to a lesser extent, original equipment manufacturers
(“OEMs”) and direct customers. During fiscal 2014 , we sold our products to over 100 distributors, OEMs and direct customers (collectively,
“customers”) in over 60 countries. In fiscal 2014 , fiscal 2013 and fiscal 2012 , Flytec Computers Inc. represented 13% , 13% and 16% of our
revenues, respectively. In fiscal 2012 , Streakwave Wireless Inc. represented 10% of our revenues. We had no other customer or distributor that
accounted for more than 10% of our revenues in fiscal 2014 , fiscal 2013 and fiscal 2012 .
A substantial majority of our sales are made to distributors outside the United States and we anticipate that non-U.S. sales will continue to be a
significant portion of our revenues. Sales in South America accounted for 19% , 21% and 25% of our revenues in fiscal 2014 , fiscal 2013 and
fiscal 2012 , respectively. Sales in Europe, the Middle East and Africa accounted for 43% , 40% , and 37% of our revenues in fiscal 2014 , fiscal
2013 and fiscal 2012 , respectively. We do not have any visibility on the location or extent of purchases of our products by individual network
operators and service providers from our distributors. Information regarding financial data by geographic areas is set forth in Item 7 and Item 15
of this Form 10-K. See Note 13 of Notes to Consolidated Financial Statements under Item 15.
Although we publish a manufacturer's suggested retail price, or MSRP, for our products, our distributors have control of pricing to the ultimate
purchaser. Historically, we have not provided our distributors with any substantial sales training or marketing materials; however, currently, we
are expanding our product education offerings for distributors, as well as increasing marketing support. Our agreements with our distributors do
not limit their ability to carry products that compete with ours. Our distribution agreements generally have a one year term, subject to automatic
renewal unless cancelled by one of the parties. Our distributors typically provide us with purchase orders for delivery within 60 days, which we
use to forecast future demand and estimate desired inventory builds.
We have initiated a training program for our distributors and other interested individuals so that they can educate and train others on the effective
deployment and use of our products and solutions. As of June 30, 2014 , Ubiquiti had 243 certified trainers across our various product platforms
with over 6,700 integrators, resellers and other interested individuals having completed the certification process.
The goal is for those completing the certification process to in turn educate and train service providers and enterprise customers on the effective
deployment and use of our products and solutions. We offer the training program to distributors and other interested individuals in different
languages throughout the world.
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Backlog
Our sales are primarily made through standard purchase orders for delivery of products. As we allow customers to cancel or change orders with
limited advance notice prior to shipment and because some orders remain in backlog due to concerns about the credit worthiness of the customer,
we do not consider backlog to be firm and do not believe our backlog information is a reliable indicator of our ability to achieve any particular
level of revenue of financial performance.
Competition
The markets for networking solutions for service providers, enterprise WLAN, video surveillance, microwave backhaul and machine-to-machine
communications technology are highly competitive and are influenced by the following competitive factors, among others:
total cost of ownership and return on investment associated with the solutions;
simplicity of deployment and use of the solutions;
ability to rapidly develop high performance integrated solutions;
reliability and scalability of the solutions;
•
•
•
•
• market awareness of a particular brand;
•
•
•
•
ability to provide secure access to wireless networks;
ability to offer a suite of products and solutions;
ability to allow centralized management of the solutions; and
ability to provide quality product support.
We believe we compete favorably with respect to these factors. Although we are a recent entrant in the video surveillance, microwave backhaul,
routing and machine-to-machine communication markets, we believe our products compete favorably in these product categories. We have been
successful in rapidly developing high performance integrated solutions because we use individual contributors and small, experienced
development teams that focus on the key needs of underserved and underpenetrated markets. Our products and solutions are designed to meet the
price-performance characteristics demanded by our customers to achieve a strong overall return on their investment. Our products are designed
to operate in growing networks without degradation in performance or operational complexity.
In the integrated radio market, our competitors include Cambium Networks, TP-Link and Mikrotîkls. In the embedded radio market, our
competitors include Mikrotîkls and Senao Networks. In the backhaul market, our competitors include Cambium Networks, Ceragon Networks,
DragonWave and Mikrotîkls. In the CPE market, our competitors include Cambium Networks, Mikrotîkls, Ruckus Wireless and TP-LINK
Technologies. In the antenna market, we primarily compete with PCTEL, ARC, ITELITE and Radio Waves. In the enterprise WLAN market,
we primarily compete with Aerohive Networks, Aruba Networks, Ruckus Wireless and Cisco. In the video surveillance market, we primarily
compete with Axis Communications, Mobotix and Vivotek. In the microwave backhaul market, we primarily compete with Cambium
Networks, DragonWave, SAF Tehnika and Trango. In the machine-to-machine communications market, we primarily compete with
AlertMe.com, EnergyHub and Motorola. We expect increased competition from other established and emerging companies if our market
continues to develop and expand. As we enter new markets, we expect to face competition from incumbent and new market participants.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions,
to establish and protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and the legal standards
relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and still evolving. Furthermore,
effective patent, trademark, copyright and trade secret protection may not be available in every country in which our services and products are
available. We seek patent protection for certain of our key concepts, components, protocols, processes and other inventions.
As of June 30, 2014 , we had 14 issued patents in the United States, six issued patents in foreign countries and over 80 pending U.S. and foreign
patent applications. These patent applications relate to various features embedded in certain of our products, including the integration of
components in a microwave system and certain performance improvements to radio receivers, and certain technologies in developments. We
have filed, and will continue to file, patent applications in the United States and other countries where we believe there to be a strategic
technological or business reason to do so. Any patents issued to us now or in the future may be challenged, invalidated or circumvented and may
not provide sufficiently broad protection or may not prove to be enforceable in actions against alleged infringers.
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As of June 30, 2014 , we owned U.S. trademark registrations in Ubiquiti, Ubiquiti Networks, the beam logo, UBNT, airMAX, airOS, airFiber,
airGrid, UniFi, mFi, EdgeMAX, NanoBeam, NanoStation, NanoBridge, and a number of trademark applications and registrations in the United
States and other countries.
We endeavor to enter into agreements with our employees and contractors and with parties with whom we do business in order to limit access to
and disclosure of our proprietary information. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse
engineering of our technology. Moreover, others may independently develop technologies that are competitive with ours or that infringe on our
intellectual property. The enforcement of our intellectual property rights also depends on the success of our legal actions against infringers and
counterfeiters, but these actions may not be successful, even when our rights have been infringed.
Employees
As of June 30, 2014 , we employed 312 full time equivalent employees, which included 216 in research and development, 40 in sales, general
and administrative and 56 in operations. We also engage a number of temporary employees and consultants. None of our employees are
represented by a labor union or is a party to a collective bargaining agreement. We consider our relations with our employees to be good.
Corporate Information
We incorporated in the State of California in 2003 as Pera Networks, Inc. and we commenced our current operations in 2005 and changed our
name to Ubiquiti Networks, Inc. at that time. In June 2010, Ubiquiti Networks, Inc., a California corporation, changed its state of organization to
Delaware by merging with and into Ubiquiti Networks, Inc., a Delaware corporation. Our executive offices are located at 2580 Orchard
Parkway, San Jose, California 95131, and our telephone number is (408) 942-3085. Our website address is www.ubnt.com. The information on,
or that can be accessed through, our website is not part of this Annual Report on Form 10-K.
Unless the context requires otherwise, the words “we,” “us,” “our” and “Ubiquiti” refer to Ubiquiti Networks, Inc. and its subsidiaries as a
whole.
Financial Information About Geographic Areas
Refer to Note 13 in our Notes to Consolidated Financial Statements included under Part IV, Item 15 of this report for financial information about
our geographic areas.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are filed with the U.S. Securities
and Exchange Commission (the “SEC”). Such reports and other information filed by the Company with the SEC are available free of charge on
the Company’s website at http://ir.ubnt.com/sec.cfm when such reports are available on the SEC website. The public may read and copy any
materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the
SEC at www.sec.gov . The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for
these websites are intended to be inactive textual references only.
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. If any event related to these known or unknown risks or uncertainties actually occurs, our business prospects,
results of operation, and financial condition could be materially adversely affected.
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Risks Related to Our Business and Industry
Fluctuations in our operating results 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 are difficult or
impossible to predict. We expect our operating results will continue to fluctuate. 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 experienced substantial price volatility since our initial public offering. In
addition, the stock market as a whole has experienced major 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;
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•
•
•
•
shifts in our fulfillment practices including increasing inventory levels as part of efforts to decrease our delivery lead times;
failure of our contract manufacturers and suppliers to meet our demand;
success and timing of new product introductions by us, and our competitors;
increased warranty costs;
announcements by us or our competitors regarding products, promotions or other transactions;
costs related to legal proceedings or responding to government inquiries;
• our ability to control and reduce product costs; and
•
expenses of our entry into new markets, such as video surveillance, wireless backhaul, and machine-to-machine communications.
In addition, our business may be subject to seasonality, although our recent growth rates and timing of product introductions may have masked
seasonal changes in demand.
We have limited visibility into future sales, which makes it difficult to forecast our future operating results.
Because of our limited visibility into end customer 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. We do not employ a direct sales force. Sales to our distributors have accounted for nearly all of our revenues. Our distributors do
not make long term purchase commitments to us, and do not typically provide us with information about market demand for our products. We
endeavor to obtain information on inventory levels and sales data from our distributors. This information has been generally difficult to obtain in
a timely manner, and we cannot always be certain that the information is reliable. If we over forecast demand, we may not be able to decrease
our expenses in time to offset any shortfall in revenues. If we under forecast demand, our ability to fulfill sales orders will be compromised and
sales to distributors may be deferred or lost altogether.
We are subject to risks associated with our distributors’ inventory management practices.
Our distributors purchase and maintain their own inventories of our products, and we do not control their inventory management. Distributors
may manage their inventories in a manner that causes significant fluctuations in their purchases from quarter to quarter, and which may not be in
alignment with the actual demand of end customers for our products. If some distributors decide to purchase more of our products than are
required to satisfy their customers’ demand in any particular quarter, because they do not accurately forecast demand or otherwise, they may
reduce future orders until their inventory levels realign with their customers’ demand. If some distributors decide to purchase less of our
products than are required to satisfy their customers’ demand in any particular quarter, because they do not accurately forecast demand or
otherwise, sales of our products may be deferred or lost altogether.
If our forecasts of future sales are inaccurate, we may manufacture too many or not enough products.
We may over or under forecast our customers’ actual demand for our products or the actual mix of our products that they will ultimately
demand. If we over-forecast demand, we may build excess inventory which could materially adversely affect our operating results. If we under-
forecast demand, we may miss opportunities for sales and may impair our customer relationships, which could materially adversely affect our
operating results.
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The lead times that we face for the procurement of components and subsequent manufacturing of our products are usually much longer than the
lead time from our customers’ orders to the expected delivery date. This increases the risk that we may manufacture too many or not enough
products in any given period.
We may decide to increase or maintain higher levels of inventory.
With the use of third party logistics and warehousing providers, we may decide to increase or maintain higher levels of inventory of finished
products or components, which may expose us to a greater risk of carrying excess or obsolete inventory. Decisions to increase or maintain higher
inventory levels are typically based upon uncertain forecasts or other assumptions. If the assumptions on which we base these decisions turn out
to be incorrect, our financial performance could suffer and we could be required to write-off the value of excess products or components
inventory.
We rely on a limited number of distributors, and changes in our relationships with our distributors or changes within our distributors may
disrupt our sales.
Although we have a large number of distributors in numerous countries who sell our products, a limited number of these distributors represent a
significant portion of our sales. One or more of our major distributors may suffer from a decline in their financial condition, decrease in demand
from their customers, or a decline in other aspects of their business which could impair their ability to purchase and resell our products. Any
distributor may also cease doing business with us at any time with little or no notice. The 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.
We may not be able to enhance our products to keep pace with technological and market developments while offering competitive prices.
The market for our wireless broadband networking equipment is emerging and is characterized by rapid technological change, evolving industry
standards, frequent new product introductions and short product life cycles. Our ability to keep pace in this market depends upon our ability to
enhance our current products, and continue to develop and introduce new products rapidly and at competitive prices. Our ability to compete
successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff, to successfully
innovate, and to adapt to technological changes and advances in the industry. Development and delivery schedules for our products are difficult
to predict. We may fail to introduce new versions of our products in a timely fashion. If new releases of our products are delayed, our
distributors may curtail their efforts to market and promote our products and our users may switch to competing products.
The markets in which we compete are highly competitive.
The networking, enterprise WLAN, video surveillance, wireless backhaul and machine-to-machine communications markets in which we
primarily compete are highly competitive and are influenced by competitive factors including:
• our ability to rapidly develop and introduce new high performance integrated solutions;
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•
•
•
the price and total cost of ownership and return on investment associated with the solutions;
the simplicity of deployment and use of the solutions;
the reliability and scalability of the solutions;
the market awareness of a particular brand;
• our ability to provide secure access to wireless networks;
• our ability to offer a suite of products and solutions;
• our ability to allow centralized management of the solutions; and
• our ability to provide quality product support.
New entrants seeking to gain market share by introducing new technology and new products may also make it more difficult for us to sell our
products, and could create increased pricing pressure. In addition, broadband equipment providers or system integrators may also offer wireless
broadband infrastructure equipment for free or as part of a bundled offering, which could force us to reduce our prices or change our selling
model to remain competitive.
If there is a shift in the market such that network operators and service providers begin to use closed network solutions that only operate with
other equipment from the same vendor, we could experience a significant decline in sales because our products would not be interoperable.
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We expect competition to continuously intensify as other established and new companies introduce new products in the same markets that we
serve or intend to enter, as these markets consolidate. Our business will suffer if we do not maintain our competitiveness.
A number of our current or potential competitors have longer operating histories, greater brand recognition, larger customer bases and
significantly greater resources than we do.
As we move into new markets for different types of equipment, our brand may not be as well-known as incumbents in those markets. Potential
customers may prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features. We
expect increased competition from other established and emerging companies if our market continues to develop and expand. As we enter new
markets, we expect to face competition from incumbent and new market participants.
Many of these companies have significantly greater financial, technical and other resources than we do and are better positioned to acquire and
offer complementary products and technologies.
Industry consolidation and other arrangements among competitors may adversely affect our competitiveness because it may be more difficult to
compete with entities that have access to their combined resources. These combinations may also affect customers’ perceptions regarding the
viability of companies our size and, consequently, affect their willingness to purchase our products.
The complexity of our products could result in unforeseen delays or expenses caused by undetected defects or bugs.
Our products may contain defects and bugs when they are introduced, or as new versions are released. We have focused, and intend to focus in
the future, on getting our new products to market quickly. Due to our rapid product introductions, defects and bugs that may be contained in our
products may not yet have manifested. We have in the past experienced, and may in the future experience, defects and bugs. If any of our
products contains material defects or bugs, or has reliability, quality or compatibility problems, we may not be able to promptly or successfully
correct these problems. The existence of defects or bugs in our products may damage our reputation and disrupt our sales. If any of these
problems are not found until after we have commenced commercial production and distribution of a new product, we may be required to incur
additional development costs, repair or replacement costs and claims.
Security vulnerabilities in our products, services and systems could lead to reduced revenues and claims against us.
The quality and performance of some of our products and services may depend upon their ability to withstand cyber attacks. Third parties may
develop and deploy viruses, worms and other malicious software programs, some of which may be designed to attack our products, systems, or
networks. Some of our products and services also involve the storage and transmission of users' and customers' proprietary information which
may be the target of cyber attacks. Hardware and software that we produce or procure from third parties also may contain defects in manufacture
or design, including bugs and other problems, which could compromise their ability to withstand cyber attacks.
We may have experienced cyber attacks in the past, and may experience cyber attacks in the future. As a result, unauthorized parties may have
obtained, and may in the future obtain, access to our systems, data or our users' or customers' data. Our security measures may also be breached
due to employee error, malfeasance, or otherwise. Third parties may also attempt to induce employees, users, or customers to disclose sensitive
information in order to gain access to our data or our users' or customers' data. Any such breach or unauthorized access could result in
significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our products and services. Because
the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, and often are not
recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
The costs to us to eliminate or alleviate security vulnerabilities can be significant, and our efforts to address these problems may not be
successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales,
manufacturing, distribution or other critical functions, as well as potential liability to the company. The risk that these types of events could
seriously harm our business is likely to increase as we expand the web-based products and services that we offer.
Our business and prospects depend on the strength of our brand.
Maintaining and enhancing our brand is critical to expanding our base of distributors and end customers. Maintaining and enhancing our brand
will depend largely on our ability to continue to develop and provide products and solutions that address the price-performance characteristics
sought by end customers and the users of our products and services, particularly in
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developing markets which comprise a significant part of our business. If we fail to promote, maintain and protect our brand successfully, our
ability to sustain and expand our business and enter new markets will suffer.
We rely on the Ubiquiti Community to provide our engineers with valuable feedback that is important in our research and development
processes.
We rely on the Ubiquiti Community to provide rapid and substantive feedback on the functionality and effectiveness of our products. The
insights, problems and suggestions raised by the Ubiquiti Community enable our engineers to quickly resolve issues with our existing products
and improve functionality in subsequent product releases. If the members of the Ubiquiti Community were to become less engaged or otherwise
ceased providing valuable, timely feedback, our internal research and development costs and our time to market could increase, which could
cause us to incur additional expenses or make our products less attractive to customers.
We rely on the Ubiquiti Community to generate awareness of, and demand for, our products.
We believe a significant portion of our growth to date has been driven by the diverse and actively engaged Ubiquiti Community, and our
business model is predicated on the assumption that the Ubiquiti Community will continue to provide these benefits. We do not have a direct
sales force and we engage in limited marketing expenditures. Although the Ubiquiti Community is central to the success of our business, the
interactions within the Ubiquiti Community, and participation levels, are largely outside of our control. Any negative information about us or our
products in the Ubiquiti Community, whether or not justified, could quickly and materially decrease the demand for our products.
We rely on the Ubiquiti Community to provide network operators and service providers with support to install, operate and maintain our
products.
We rely on the Ubiquiti Community to provide assistance and other information to network operators and service providers for the installation,
operation and maintenance of our products. Because we do not generate or control all of the information provided through the Ubiquiti
Community, inaccurate information regarding the installation, operation and maintenance of our products could be promulgated through forum
postings by members of the Ubiquiti Community.
Although we moderate and review many forum postings to learn of reported problems and assess the accuracy of advice provided by the
Ubiquiti Community, we may not devote sufficient time or resources to adequately monitor the quality of Ubiquiti Community information.
Inaccurate information in the Ubiquiti Community could lead to poor customer experiences or dissatisfaction with our products, which could
negatively impact our reputation and diminish our sales.
We may fail to effectively manage the challenges associated with our growth.
Over the past several years we have expanded, and continue to expand, our product offerings, the number of customers we sell to, our transaction
volumes, the number of our facilities, and the number of contract manufacturers that we utilize to produce our products. Failure to effectively
manage the increased complexity associated with this expansion, particularly in light of our lean management structure, would make it difficult
to conduct our business, fulfill customer orders, and pursue our strategies. We may also need to increase costs to add personnel, upgrade or
replace our existing reporting systems, as well as improve our business processes and controls as a result of these changes. If we fail to
effectively manage any of these challenges we could suffer inefficiencies, errors and disruptions in our business, which in turn would adversely
affect our operating results.
We rely on a limited number of contract manufacturers to produce our products.
We retain contract manufacturers, located primarily in China, to manufacture our products. Any significant change in our relationship with these
manufacturers could have a material adverse effect on our business, operating results and financial condition. Our reliance on contract
manufacturers for manufacturing our products can present significant risks to us because, among other things, we do not have direct control over
their activities. We significantly depend upon our contract manufacturers to:
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assure the quality of our products;
• manage capacity during periods of volatile demand;
• qualify appropriate component suppliers;
•
ensure adequate supplies of components and materials;
• deliver finished products at agreed upon prices and schedules; and
•
safeguard materials and finished goods.
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The ability and willingness of our contract manufacturers to perform is largely outside our control.
We believe that our orders may not represent a material portion of our contract manufacturers’ total orders and, as a result, fulfilling our orders
may not be a priority in the event our contract manufacturers are constrained in their capacity. If any of our contract manufacturers experiences
problems in its manufacturing operations, or if we have to change or add additional contract manufacturers, our ability to ship products to our
customers would be impaired.
We rely upon a limited number of suppliers, and it can be costly and time consuming to use components from other suppliers.
We purchase components, directly or through our contract manufacturers, from third parties that are necessary for the manufacture of our
products. Shortages in the supply of components or other supply disruptions may not be predicted in time to design-in different components or
qualify other suppliers. Shortages or supply disruptions may also increase the prices of components due to market conditions. While many
components are generally available from a variety of sources, we and our contract manufacturers currently depend on a single or limited number
of suppliers for several components for our products. For example, we currently rely upon Qualcomm Atheros as a single-source supplier of
certain components for some of our products, and a disruption in the supply of those components would significantly disrupt our business.
We and our contract manufacturers generally rely on short-term purchase orders rather than long-term contracts with the suppliers of
components for our products. As a result, even if components are available, we and our contract manufacturers may not be able to procure
sufficient components at reasonable prices to build our products in a timely manner. We may, therefore, be unable to meet customer demand for
our products, which would have a material adverse effect on our business, operating results and financial condition.
Risks Related to Our International Operations
Our business is susceptible to risks associated with operations outside of the United States.
We have operations in China, Lithuania, Poland, Taiwan, United States and elsewhere. We also sell to distributors in numerous countries
throughout the world. Our operations outside of the United States subject us to risks that we generally do not face in the United States. These
include:
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the burdens of complying with a wide variety of foreign laws and regulations, and the risks of non-compliance;
fluctuations in currency exchange rates;
increasing labor costs, especially in China;
• difficulties in managing the geographically remote personnel;
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the complexities of foreign tax systems and changes in their tax rates and rules;
limited protection and enforcement regimes for intellectual property rights in some countries;
increased financial accounting and reporting burdens and complexity; and
• political, social and economic instability in some jurisdictions.
Our third party logistics and warehousing providers in China and elsewhere may fail to safeguard and accurately manage and report our
inventory.
We use third party logistics and warehousing providers located in China to fulfill the majority of our worldwide sales. We also rely on our third
party logistics and warehousing providers to safeguard, and manage and report on the status of our products at their warehouse and in transit.
These service providers may fail to safeguard our products, fail to accurately segregate and report our inventory, or fail to manage and track the
delivery of our products, which could have a material adverse effect on our operating results and financial condition.
To the extent that we develop some of our own manufacturing capacity, we will be subject to various risks associated with such activities.
We have begun to invest in developing some of our own manufacturing capacity, for example to support our product development and
prototyping. To the extent that we may invest in and expand these manufacturing capabilities, and increasingly rely upon such activities, we will
face increased risks associated with:
• bearing the fixed costs of these activities;
• directly procuring components and materials;
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•
•
regulatory and other compliance requirements;
exposure to casualty loss and other disruptions;
• quality control;
•
labor relations; and
• our limited experience in operating manufacturing facilities.
Since these activities would be conducted in China, some of these risks may be more significant due to the less predictable legal and political
environment.
Our business may be negatively affected by political events and foreign policy responses.
Geopolitical uncertainties and events could cause damage or disruption to international commerce and the global economy, and thus could have
a material adverse effect on us, our suppliers, logistics providers, manufacturing vendors and customers, including our channel partners. The
foreign policies of governments may be volatile, and may result in rapid changes to import and export requirements, customs classifications,
tariffs, trade sanctions and embargoes that may prevent us from offering products or providing services to particular entities or markets or may
create delays and inefficiencies in our supply chain. For example, political unrests and uncertainties in Eastern Europe and Middle East may lead
to disruptions in commerce in those regions, which would in turn impact our sales to those regions. Furthermore, if the U.S. government imposes
new sanctions against certain countries or entities, such sanctions could sufficiently restrict our ability to market and sell our products and may
materially adversely affect our results of operations.
Our ability to introduce new products and support our existing products depends on our ability to manage geographically dispersed research
and development teams.
Significant parts of our research and development operations are conducted in geographically dispersed localities. Our success depends on the
effectiveness of our research and development activities. We must successfully manage these geographically dispersed teams in order to meet
our objectives for new product introduction, product quality and product support. It can be difficult to effectively manage geographically
dispersed research and development teams. If we fail to do so, we could incur unexpected costs or delays in product development.
Our contract manufacturers, logistics centers and certain administrative and research and development operations are located in areas likely
to be subject to natural disasters.
The manufacturing or shipping of our products at one or more facilities may be disrupted because our manufacturing and logistics contractors are
all located in southern China. Our principal executive offices are located in California. The risks of earthquakes, extreme storms and other
natural disasters in these geographic areas are significant. Any disruption resulting from these events could cause significant delays in product
development or shipments of our products until we are able to shift our development, manufacturing or logistics centers from the affected
contractor to another vendor, or shift the affected administrative or research and development activities to another location.
Risks Related to Intellectual Property
We have limited ability to obtain and enforce intellectual property rights, and may fail to most effectively obtain and enforce such rights.
Our success can depend significantly upon our intellectual property rights. We rely on a combination of patent, copyright, trademark, trade secret
laws, and contractual rights to establish, maintain and protect these intellectual property rights, all of which afford only limited protection. Our
patent rights, and the prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial
advantage and they could be opposed, contested, circumvented or designed around by our competitors or be declared invalid or unenforceable in
legal proceedings. In addition, patents may not be issued from any of our current or future patent applications. Any failure of our patents or other
intellectual property rights to adequately protect our technology might make it easier for our competitors to offer similar products or
technologies.
Confidentiality agreements with our employees, licensees, independent contractors and others may not effectively prevent disclosure of our trade
secrets, and may not provide an adequate remedy in the event of unauthorized use or disclosure of our trade secrets. We may also fail or have
failed to obtain such agreements from such persons due to administrative oversights or other reasons.
Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property, such as the
production of counterfeits of our products, and unauthorized registration and use of our trademarks by third parties, is a matter of ongoing
concern. The steps we have taken may not prevent unauthorized use of our intellectual property. We may
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fail to detect infringements of, or take appropriate steps to enforce, our intellectual property rights. Our competitors might independently develop
similar technology without infringing our intellectual property rights. Our inability or failure to effectively protect our intellectual property could
reduce the value of our technology and could impair our ability to compete. Any inability or failure by us to meaningfully protect our intellectual
property could result in competitors offering products that incorporate our most technologically advanced features.
We have initiated and may continue to initiate legal proceedings to enforce our intellectual property rights. Litigation, whether we are a plaintiff
or a defendant, can be expensive and time-consuming, may place our intellectual property at risk of being invalidated or narrowed in scope, and
may divert the efforts of our technical staff and managerial personnel.
Enforcement of our intellectual property rights abroad, particularly in China and South America, is limited.
The intellectual property protection and enforcement regimes in certain countries outside the United States are generally not as comprehensive as
in the United States, and may not adequately protect our intellectual property The legal regimes relating to the recognition and enforcement
intellectual property rights in China and South America are particularly limited. Legal proceedings to enforce our intellectual property in these
jurisdictions may progress slowly, during which time infringement may continue largely unimpeded. Countries that have relatively inefficient
intellectual property protection and enforcement regimes represent a significant portion of the demand for our products. These factors may make
it more challenging for us to enforce our intellectual property rights against infringement. The infringement of our intellectual property rights,
particularly in these jurisdictions, may materially harm our business in these markets and elsewhere by reducing our sales, and diluting our brand
or reputation.
Our contract manufacturers may not respect our intellectual property, and may produce products that compete with ours.
Our contract manufacturers operate in China, where the prosecution of intellectual property infringement and trade secret theft is more difficult
than in the United States. In the past, our contract manufacturers, their affiliates, their other customers or their suppliers have attempted to
participate in efforts to misappropriate our intellectual property and trade secrets to manufacture our products for themselves or others without
our knowledge. Even if the agreements with our contract manufacturers, and applicable laws, prohibit them from misusing our intellectual
property and trade secrets, we may be unsuccessful in monitoring and enforcing our intellectual property rights against them. We have in the
past, and continue to discover, counterfeit goods being sold as our products.
We operate in an industry with extensive intellectual property litigation.
Our commercial success depends in part upon us and our component suppliers not infringing intellectual property rights owned by others, and
being able to resolve intellectual property claims without major financial expenditures. Our key component suppliers are often targets of
intellectual property claims, and we are subject to claims as well.
There are numerous patents and patent applications in the United States and other countries relating to communications technologies. It can be
difficult or impossible to conduct meaningful searches for patents relating to our technologies, or to approach third parties to seek a license to
their patents. Even extensive searches for patents that may be relevant to our products may not uncover all relevant patents and patent
applications. We cannot determine with certainty whether any existing or future third party intellectual property rights would require us to alter
our technologies, obtain licenses or cease certain activities.
We have received, and may in the future receive, claims from third parties asserting intellectual property infringement and other related claims.
As our revenues grow and our profile increases, the frequency and significance of these claims may increase. Whether or not there is merit to a
given claim, it can be time consuming and costly to defend against, and could:
•
•
•
adversely affect our relationships with our current or future users, customers and suppliers;
cause delays or stoppages in the shipment of our products;
cause us to modify or redesign our products;
• divert management’s attention and resources;
•
•
•
subject us to significant damages or settlements;
require us to enter into costly licensing agreements; or
require us to cease offering certain of our products or services.
The production of counterfeit versions of our products may reduce our sales levels and damage our brand.
We have in the past and continue to discover counterfeit versions of our products. Although we have taken steps to combat counterfeiting, it is
difficult or impossible to detect or prevent all instances of counterfeiting. Particularly if the quality of
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counterfeit products is poor, damage could be done to our brand. Combating counterfeiting is difficult and expensive, and may not be successful,
especially in countries that have a relatively weak legal regime for the protection of intellectual property.
We use open source software in our products that may subject source code to public release or require us to re-engineer our products.
We use open source software in certain of our products, and may use more open source software in the future.
There have been claims challenging the ownership of software against companies that use open source software in the development of their
products. We could become subject to claims regarding the ownership of what we believe to be our proprietary software.
Usage of open source software can also lead to greater risks than the use of third party commercial software, since open source licensors
generally do not provide warranties or controls on origin of the software.
Some open source licenses contain requirements that users make available and license the source code for the modifications or derivative works
that they create based upon the open source software. If we combine our proprietary software with open source software we could, in some
circumstances, be required to release our proprietary source code publicly or license such source code on unfavorable terms or at no cost. That
could significantly diminish the value of some of our products and negatively affect our business.
Risks Related to Our Management and Structure
We may lose the services of our founder and chief executive officer, Robert J. Pera, or other key personnel.
Our success and future growth depend on the skills, working relationships and continued services of our management team, and in particular our
founder and chief executive officer, Robert J. Pera. Our future performance may also depend on our ability to retain other key personnel. We do
not maintain any significant key person insurance with regard to any of our personnel.
Our business model relies in part on leanly staffed, independent and efficient research and development teams. Our research and development
teams are organized around small groups or individual contributors for a given platform, and there is little overlap in knowledge and
responsibilities. In the event that we are unable to retain the services of any key contributors, we may be unable to bring our products or product
improvements to market in a timely manner, if at all, due to disruption in our development activities.
Our future success also depends on our ability to attract, retain and motivate skilled personnel. All of our employees work for us on an at will
basis. Competition for personnel is intense in the networking equipment industry, particularly for persons with specialized experience in areas
such as antenna design and radio frequency equipment. If we are unable to attract and retain the necessary personnel our business could be
materially adversely affected.
We may fail to manage our growth effectively and develop and implement appropriate control systems.
We have substantially expanded our business and operations in recent periods, including increases in the number of our distributors, contract
manufacturers, headcount locations and facilities. This rapid expansion places a significant strain on our managerial, administrative, and
operational resources. Our business model reflects our decision to operate with streamlined infrastructure, with lower support and administrative
headcount. That may increase the risks associated with managing our growth, and we may not have sufficient internal resources to adapt or
respond to unexpected challenges and compliance requirements.
Our profitability may decline as we expand into new product areas.
We receive a substantial majority of our revenues from the sale of outdoor wireless networking equipment. As we expand into other products
and services, such as enterprise WLAN, video surveillance equipment, wireless backhaul and machine-to-machine communications, we may not
be able to compete effectively with existing market participants and may not be able to realize a positive return on the investment we have made
in these products or services. Entering these markets may result in increased product development costs, and our new products may have
extended time to market relative to our current products. If our introduction of a new product is not successful, or if we are not able to achieve
the revenues or margins we expect, our operating results may be harmed and we may not recover our product development and marketing
expenditures.
We may also be required to add a direct sales force and customer support personnel to market and support new or existing products, which
would cause us to experience substantially lower product margins or increase our operating expenses. Adding a direct sales force or customer
support personnel could reduce our operating income and may not be successful.
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Our operating expenses are increasing as we make expenditures to enhance and expand our operations.
Over the past several years, we have increased our expenditure on infrastructure to support our anticipated growth and as a result of our being a
public company. We are continuing to make significant investments in information systems, hiring more administrative personnel, using more
professional services and expanding our operations outside the United States. We intend to make additional investments in systems and
personnel and continue to expand our operations to support anticipated growth in our business. As a result, we expect our operating expenses to
increase.
In addition, we may need in the future to build a direct sales force to market and sell our products or provide additional resources or cooperative
funds to our distributors. Such changes to our existing sales model would likely result in higher selling, general and administrative expenses as a
percentage of our revenues.
We rely on third party software and services to conduct our enterprise resource planning, financial planning and analysis, and financial
reporting.
We currently use NetSuite and other software and services to conduct our order management and financial processes. The availability of this
service is essential to the management of our business. As we expand our operations, we expect to utilize additional systems and service
providers that may also be essential to managing our business. Although the systems and services that we require are typically available from a
number of providers, it is time consuming and costly to qualify and implement these relationships.
Our ability to manage our business would suffer if one or more of our providers suffer an interruption in their business, or experience delays,
disruptions or quality control problems in their operations, or we have to change or add additional systems and services. We may not be able to
control the quality of the systems and services we receive from third party service providers, which could impair our financial reporting and may
negatively impact our operating results and financial condition.
Our debt levels could adversely affect our ability to raise additional capital to fund our operations or limit our ability to react to changes in
our industry or the economy.
As of June 30, 2014, our balance outstanding under our existing credit facility was $72.3 million . In the future we may need to raise additional
capital to fund our growth and operational goals. If additional financing is not available when required or on acceptable terms, we may not be
able to expand our business, develop or enhance our products, take advantage of business opportunities or respond to competitive pressures,
which could result in lower revenues and reduce the competitiveness of our products.
In addition, any potential debt level increases could have important consequences, including:
•
•
•
•
•
requiring a substantial portion of cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness,
thereby reducing our ability to use our cash flows to fund our operations and capital expenditures, and pursue business opportunities;
increasing our vulnerability to general industry and economic conditions;
limiting our ability to make strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and
general corporate or other purposes; and
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to competitors who
are less highly leveraged or have access to more capital.
If we are unable to integrate future acquisitions successfully, our operating results and prospects could be harmed.
We may make acquisitions to improve or expand our product offerings. Our future acquisition strategy will depend on our ability to identify,
negotiate, complete and integrate acquisitions. These transactions involve numerous risks, including:
• difficulties in integrating and managing the operations, technologies and products of the companies we acquire, particularly in light of
our lean organizational structure;
• diversion of our management’s attention from normal daily operation of our business;
• our inability to maintain the key business relationships and the brand equity of the businesses we acquire;
• our inability to retain key personnel of the acquired business, particularly in light of the demands we place on individual contributors;
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• uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market
positions;
• our dependence on unfamiliar affiliates and partners of the companies we acquire;
•
insufficient revenues to offset our increased expenses associated with acquisitions;
• our responsibility for the liabilities of the businesses we acquire, including those which we may not anticipate; and
• our inability to maintain internal standards, controls, procedures and policies, particularly in light of our lean organizational structure.
We may be unable to secure the equity or debt funding necessary to finance future acquisitions on terms that are acceptable to us. Completing
acquisitions could consume significant amounts of cash. If we finance acquisitions by issuing equity or convertible debt securities, our existing
stockholders will likely experience dilution, and if we finance future acquisitions with debt funding, we will incur interest expense and may have
to comply with covenants and secure that debt obligation with our assets.
Our CEO has control over key decision making as a result of his control of a majority of our voting stock.
Robert Pera, our founder, Chairman, and CEO, is able to exercise voting rights with respect to a majority of the voting power of our outstanding
stock and therefore has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of
directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a
change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this
concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control
could also discourage certain potential investors from acquiring our common stock and might harm the trading price of our stock. In addition,
Mr. Pera has the ability to control the management and major strategic investments of our company as a result of his position as our CEO and his
ability to control the election or replacement of our directors. In the event of his death, the shares of our stock that Mr. Pera owns will be
transferred to his successors. As a board member and officer, Mr. Pera owes a fiduciary duty to our stockholders and must act in good faith in a
manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Pera is
entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.
Risks Related to Regulatory, Legal and Tax Matters
We are subject to export control and economic sanctions laws in the United States and elsewhere which could impair our ability to compete
in international markets and subject us to liability if we do not comply with applicable laws.
A substantial majority of our sales are into countries outside of the United States. Sales of our products into certain countries are restricted or
prohibited under U.S. export control and economic sanctions laws. In addition, certain of our products incorporate encryption components that
are subject to export control regulations.
In May 2011, we filed a self-disclosure statement with the U.S. Commerce Department, Bureau of Industry and Security’s (“BIS”) Office of
Export Enforcement (“OEE”) relating a review conducted by us regarding certain export transactions from 2008 through March 2011 in which
products may have been later sold into Iran by third parties. In June 2011, we also filed a self-disclosure statement with the U.S. Department of
the Treasury’s Office of Foreign Asset Control (“OFAC”) regarding these compliance issues. We resolved the matters described in our self-
disclosures with the BIS and OFAC, and have taken significant steps towards ensuring our compliance with export control regulations and
embargoes. It is, however, possible that violations may occur in the future. If violations should occur in the future, the response of regulators
may be more severe in light of prior compliance concerns.
In addition to U.S. export regulations, various other countries regulate the import of certain encryption technology and products, and these laws
could limit our ability to distribute our products or our customers’ ability to implement our products in those countries. Changes in our products
or changes in export and import regulations may create delays in the introduction of our products in other countries, prevent our customers with
international operations from deploying our products or, in some cases, prevent the transfer of our products to certain countries altogether. Any
change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in
the countries, persons or technologies targeted by such regulations, could negatively impact our ability to sell our products to existing customers
or the ability of our current and potential distributors, network operators and service providers outside the United States.
New regulations or changes in existing regulations related to our products may result in unanticipated burdens, costs and liabilities.
Products that involve electromagnetic emissions are subject to regulation in the United States and the other countries in which we do business. In
the United States, various federal agencies including the Center for Devices and Radiological Health of the
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Food and Drug Administration, the Federal Communications Commission, the Occupational Safety and Health Administration and various state
agencies have promulgated regulations that concern the use of electromagnetic emissions standards. Member countries of the EU and other
countries have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions standards. If any of our
products becomes subject to new regulations or if any of our products becomes specifically regulated by additional government entities,
compliance with such regulations could become more burdensome, and we may be unable to ship our products or they may cost substantially
more to produce, which would reduce our revenues and increase our cost of revenues.
Government regulations designed to protect personal privacy may make it difficult for us to sell our products.
Our products may transmit and store personal information. The handling of such information is increasingly subject to regulations in numerous
jurisdictions around the world. These regulations are typically intended to protect the privacy and security of personal information that is
collected, stored and transmitted in or from the governing jurisdiction. In addition, because various foreign jurisdictions have different
regulations concerning the storage and transmission of personal information, we may face unknown requirements that pose compliance
challenges in new geographic markets that we seek to enter. Our efforts to protect the privacy of information may also fail if our encryption and
security technology is inadequate or fails to operate as expected. The difficulties in complying with privacy and data protection regulations could
subject us to costs, delayed product launches, liabilities or negative publicity that could impair our ability to maintain or expand our operations
into some countries and therefore limit our future growth.
Our products rely on the availability of specific unlicensed radio frequency spectrum.
Our products operate in unlicensed radio frequency (“RF”) spectrum, which is used by a wide range of devices such as cordless phones, baby
monitors, and microwave ovens, and is becoming increasingly crowded. If such spectrum usage continues to increase through the proliferation of
consumer electronics and products competitive with ours, and others, the resultant higher levels of clutter and interference in the bands of
operation our products use could decrease. Our business could be further harmed if currently unlicensed RF spectrum becomes subject to
licensing in the United States or elsewhere. Network operators and service providers that use our products may be unable to obtain licenses for
RF spectrum at reasonable prices or at all. Even if the unlicensed spectrum remains unlicensed, existing and new government regulations may
require we make changes in our products. For example, to provide products for network operators and service providers who utilize unlicensed
RF spectrum, we may be required to limit their ability to use our products in licensed RF spectrum. The operation of our products by network
operators or service providers in the United States or elsewhere in a manner not in compliance with local law could result in fines, operational
disruption, or harm to our reputation. In addition, if new spectrums, either licensed or unlicensed, are made available by government regulatory
agencies for broadband wireless communication that may disrupt the competitive landscape of our industry and impact our business.
We could be adversely affected by unfavorable results in litigation.
We 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 and otherwise. It can be difficult or impossible to predict the outcome of legal proceedings with any degree of
certainty, particularly given that laws may be ambiguous and factual findings can often be the result of incomplete evidence, opinions, varying
standards or proof, and extraneous factors. If one or more of the legal proceedings to which we may be or become a party are resolved against us,
our results of operations and financial condition could adversely affected.
We may become subject to warranty claims, product liability and product recalls.
We have received, and may in the future receive, warranty or product liability claims that may require us to make significant expenditures to
defend these claims or pay damage awards. In the event of a successful warranty claim, we may also incur costs if we compensate the affected
network operator or service provider. Such claims may require a significant amount of time and expense to resolve and defend against, and could
also harm our reputation by calling into question the quality of our products. We also may incur costs and expenses relating to a recall of one or
more of our products. The process of identifying recalled products that have been widely distributed may be lengthy and require significant
resources and we may incur significant replacement costs, contract damage claims and harm to our reputation.
Our customers and the users of our products may expect us to indemnify them against claims for intellectual property infringement, defective
products and other losses.
Our customers, users and other parties may expect us to indemnify them for losses incurred in connection with our products, including as a result
of intellectual property infringement, defective products, and security vulnerabilities, even if our agreements with them do not require us to
provide this indemnification. In some instances we may decide to defend and
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indemnify them, irrespective of whether we believe that we have an obligation to do so. The expenses associated with providing indemnification
can be substantial. We may also reject demands for indemnification, which may lead to disputes with a customer or other party and may
negatively impact our relationships with them.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial condition or results of
operations.
Section 404 of the Sarbanes-Oxley Act requires our management to furnish a report on, and our independent registered public accounting firm to
attest to, the effectiveness of our internal control over financial reporting. The applicable rules require us to disclose any material weaknesses in
our internal controls over financial reporting. In the event that we disclose a material weakness in our internal controls over financial reporting,
investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock.
Failure to comply with the FCPA and similar laws could subject us to penalties and other adverse consequences.
We face significant risks if we fail to comply with the Foreign Corrupt Practices Act (“FCPA”) of the United States and other laws that prohibit
improper payments or offers of payment to foreign governments and their officials and political parties by us and other business entities for the
purpose of obtaining or retaining business. In many foreign countries, particularly in countries with developing economies, which represent our
principal markets, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the
FCPA or other laws and regulations. Although we have implemented a company policy requiring our employees and consultants to comply with
the FCPA and similar laws, there can be no assurance that all of our employees, and agents, as well as those companies to which we outsource
certain of our business operations, will not take actions in violation of our policies, for which we may be ultimately held responsible. Any
violation of FCPA or similar laws could result in severe criminal or civil sanctions and suspension or debarment from U.S. government
contracting, which could have a material and adverse effect on our reputation, business, operating results and financial condition.
We may suffer from unfavorable tax law changes, an unfavorable government review of our tax returns, or changes in our geographic
earnings mix.
We are subject to periodic audits or other reviews by tax authorities in the jurisdictions in which we conduct our activities. Tax authorities could
challenge our assertions with respect to how we have conducted our business operations as might result in a claim for larger tax payments from
us.
In the ordinary course of our business, there are many instances where the determination of tax implications is uncertain. Our calculations of
income taxes may be based on our interpretations of applicable tax laws in the jurisdictions in which we file. The final determination of our
income tax liabilities may be materially different than what is reflected in our income tax provisions and accruals.
The legislative bodies in many jurisdictions regularly consider proposed legislation that, if adopted, could affect our tax rate in such
jurisdictions, and the carrying value of our deferred tax assets or our tax liabilities.
We conduct operations in multiple jurisdictions, and therefore our effective tax rate is influenced by the amounts of income and expense
attributed to each such jurisdiction. If such amounts were to change so as to increase the amounts of our net income subject to taxation in higher
tax jurisdictions, or if we were to increase our operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could be
adversely affected.
If we are required to bring cash into the United States to meet our future funding requirements, we may have to pay high tax rates or seek
other available funds.
We hold the substantial majority of our cash and cash equivalents in accounts of our subsidiaries outside of the United States, as our business is
largely outside of the United States. Our expenses in the United States could increase faster than we expect. If our cash held in the United States
became insufficient to meet our future funding requirements in the United States, we may transfer cash into the United States. If we decide to
transfer earnings from our non-U.S. subsidiaries to the United States, that could give rise to the imposition of potentially significant withholding
taxes by the jurisdictions in which such amounts were earned, and we may incur substantial tax liabilities in the United States. In addition, we
may not receive the benefit of offsetting tax credits, which also could adversely impact our effective tax rate.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Our corporate headquarters are located in San Jose, California consisting of approximately 64,512 square feet of space, which we lease through
June 30, 2017. Additionally, we lease approximately 93,000 square feet of space in Suzhou, China, which is being leased through June 16, 2016.
These facilities would house our proposed manufacturing facility in China.
In addition, we also lease facilities around the world and within the facilities of certain suppliers for use as research and development facilities,
business development and support offices, warehouses and logistics centers and test facilities. The size and location of these properties change
from time to time based on business requirements. For our research and development and business development and support personnel, we also
have leased offices in Taiwan, China, Lithuania, Latvia, Poland, and various locations within the United States of America. We believe that our
existing properties are in good condition and suitable for the conduct of our business.
Item 3. Legal Proceedings
Information with respect to this item may be found in Note 8 in the Notes Consolidated Financial Statements included under Part IV, Item 15 of
this report.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol “UBNT.” The following table shows, for the
periods indicated, the high and low intra-day sale prices for our common stock on the NASDAQ Global Select Market.
PART II
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended June 30, 2014
High
Low
$
$
$
$
37.40 $
46.88 $
56.85 $
47.92 $
Year Ended June 30, 2013
High
Low
$
$
$
$
15.26
13.15
16.66
20.89
$
$
$
$
17.17
33.61
37.50
30.50
7.80
9.97
11.39
12.81
As of August 18, 2014 , the number of record holders of our common stock was 13. Because most of our shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.
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Stock Performance Graph
The following graph compares, for the period between October 14, 2011 (the date of our initial public offering) and June 30, 2014 , the
cumulative total stockholder return for our common stock, the NASDAQ Composite Index and the NASDAQ Computer Index. The graph
assumes that $100 was invested on October 14, 2011 in our common stock, the NASDAQ Composite Index and the NASDAQ Computer Index
and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock
price performance. This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), or incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set forth by specific reference in such filing.
COMPARISON OF 32 MONTH CUMULATIVE TOTAL RETURN*
Among Ubiquiti Networks, Inc., the NASDAQ Composite Index, and the NASDAQ Computer Index
*$100 invested on 10/14/11in stock or 9/30/11 in index, including reinvestment of dividends.
Fiscal year ending June 30.
Dividends
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. Any future determination with respect to the declaration and payment of dividends will be at the
discretion of our Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding the securities authorized for issuance under our equity compensation plans can be found under Item 12 of this Annual
Report on Form 10-K.
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Unregistered Securities Sold During fiscal 2014
We did not sell any unregistered securities during fiscal 2014 .
Item 6. Selected Financial Data
The selected consolidated statement of operations data for the fiscal years ended June 30, 2014 , 2013 and 2012 and the consolidated balance
sheet data as of June 30, 2014 and 2013 are derived from our audited consolidated financial statements included elsewhere in this report. The
selected consolidated statement of operations and comprehensive income data for the fiscal years ended June 30, 2011 and 2010 and the
consolidated balance sheet data as of June 30, 2012 , 2011 and 2010 are derived from our audited consolidated financial statements which are not
included in this report. Historical results are not necessarily indicative of future results and should be read in conjunction with the section titled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related
notes, and other financial information included in this report.
In thousands, except per share data
Consolidated Statements of Operations and Comprehensive
Income Data:
Revenues
$
Cost of revenues (1)
Gross profit
Operating expenses:
Research and development (1)
Sales, general and administrative (1)(2)(3)
Total operating expenses
Income from operations
Interest income (expense) and other, net
Income before provision for income taxes
Provision for income taxes
Net income and comprehensive income (loss)
Preferred stock cumulative dividend and accretion of cost of
preferred stock
Less allocation of net income to participating preferred
stockholders
Net income (loss) attributable to common stockholders—basic
Undistributed earnings re-allocated to common stockholders
Net income (loss) attributable to common stockholders—diluted
Net income (loss) per share of common stock:
Basic
Diluted
Weighted average shares used in computing net income (loss) per
share of common stock:
Basic
Diluted
Cash dividends declared per common share
(1) Includes stock-based compensation as follows:
Cost of revenues
Research and development
Sales, general and administrative
Total stock-based compensation
(2) Includes a charge for (gain on reversal of charge for) an export
compliance matter as follows:
(3) Includes gain from a trademark coexistence agreement as
follows:
$
$
$
$
$
$
$
$
2014
2013
2012
2011
2010
Years Ended June 30,
572,464 $
318,997
253,467
320,823 $
185,489
135,334
353,517 $
202,514
151,003
197,874 $
117,062
80,812
136,952
82,404
54,548
33,962
23,560
57,522
195,945
(1,334 )
194,611
17,674
176,937
—
—
176,937
—
176,937 $
20,955
21,775
42,730
92,604
(851 )
91,753
11,263
80,490
—
—
80,490
—
80,490 $
16,699
9,012
25,711
125,292
(1,269 )
124,023
21,434
102,589
11,374
7,358
18,732
62,080
79
62,159
12,432
49,727
(112,431 )
(42,068 )
—
(9,842 )
—
(9,842 ) $
(2,784 )
4,875
103
4,978 $
2.02 $
1.97 $
0.91 $
0.89 $
(0.12 ) $
(0.12 ) $
0.08 $
0.07 $
87,772
89,715
88,314
90,259
83,460
83,460
63,092
66,907
— $
0.18 $
— $
— $
446 $
1,433
1,497
3,376 $
— $
— $
117 $
542
834
1,493 $
— $
(1,500 ) $
30 $
285
637
952 $
— $
— $
590 $
2,423
1,893
4,906 $
(1,121 ) $
— $
29
31,704
18,162
49,866
4,682
581
5,263
10,719
(5,456 )
(1,436 )
—
(6,892 )
—
(6,892 )
(0.08 )
(0.08 )
88,972
88,972
—
124
26,221
9,814
36,159
1,625
—
Table of Contents
In thousands
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Debt – long-term
Redeemable convertible preferred stock
Common stock and additional paid-in capital
Treasury stock
Total stockholders’ equity (deficit)
2014
2013
June 30,
2012
2011
2010
$
347,097 $
413,409
476,151
72,254
—
145,960
(123,864 )
335,264
227,826 $
224,053
292,340
71,116
—
135,069
(123,864 )
147,436
122,060 $
155,462
213,736
22,623
—
129,073
(69,515 )
130,951
76,361 $
90,301
131,678
—
145,847
608
(69,515 )
(53,872 )
28,415
55,003
82,090
—
106,781
2,057
(62,268 )
(52,835 )
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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.
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For the years ended June 30, 2014 , 2013 and 2012 , our revenue was $572.5 million , $320.8 million and $353.5 million , respectively. In the
same periods, we generated a net income of $176.9 million , $80.5 million and $102.6 million , respectively. In this Annual Report on Form 10-
K we refer to the fiscal years ended June 30, 2014 , 2013 and 2012 as fiscal 2014 , fiscal 2013 and fiscal 2012 , respectively.
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 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 UniFi Video platforms.
We sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors, and, to a
lesser extent, original equipment manufacturers, or OEMs, and direct customers. Sales to distributors accounted for 99% , 98% and 98% of our
revenues in the years ended June 30, 2014 , 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.
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• 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. As of June 30, 2014 and 2013 , $2.1 million and $2.2 million of revenue was deferred for
transactions where we lacked evidence that collectability of the receivables recorded was reasonably assured, respectively. The related deferred
cost of revenues balance was $1.3 million and $1.2 million as of June 30, 2014 and 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 June 30, 2014
and 2013 , we had deferred revenues of $2.8 million and $1.0 million , respectively, related to these obligations.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require
management’s judgment in its application. In other cases, management’s judgment is required in selecting among available alternative
accounting standards that provide for different accounting treatment for similar transactions. The preparation of consolidated financial statements
also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs and expenses and affect
the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the
circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting
estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made
by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation,
financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to
understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and
estimates.
Recognition of Revenues
Revenues consist primarily of revenues from the sale of hardware and management tools, as well as the related implied PCS. We recognize
revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and the collectability
of the resulting receivable is reasonably assured. In cases where we lack evidence that collectability of the resulting receivable is reasonably
assured, we defer recognition of revenue until the receipt of cash.
For our sales, evidence of the arrangement consists of an order from a customer. We consider delivery to have occurred once our products have
been shipped and title and risk of loss have been transferred. For our sales, these criteria are met at the time the products are transferred to the
customer's shipping agent. Our arrangements with customers do not include provisions for cancellation, returns, inventory swaps or refunds that
would significantly impact recognized revenues.
We record amounts billed to distributors for shipping and handling costs as revenues. We classify shipping and handling costs incurred by us as
cost of revenues. Deposit payments received from distributors in advance of recognition of revenues are included in current liabilities on our
balance sheet and are recognized as revenues when all the criteria for recognition of revenues are met.
Our multi-element arrangements generally include two deliverables. The first deliverable is the hardware and software essential to the
functionality of the hardware device delivered at the time of sale. The second deliverable is the implied right to PCS included with the purchase
of certain products. PCS is the right to receive, on a when and if available basis, future unspecified software upgrades and features relating to the
product’s essential software as well as bug fixes, email and telephone support.
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We use a hierarchy to determine the allocation of revenues to the deliverables. The hierarchy is as follows: (i) vendor-specific objective evidence
of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”).
(i) VSOE generally exists only when a company sells the deliverable separately and is the price actually charged by the company for that
deliverable. Generally we do not sell the deliverables separately and, as such, do not have VSOE.
(ii) TPE can be substantiated by determining the price that other parties sell similar or substantially similar offerings. We do not believe that
there is accessible TPE evidence for similar deliverables.
(iii) BESP reflects our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. We
believe that BESP is the most appropriate methodology for determining the allocation of revenues among the multiple elements.
We have allocated revenues between these two deliverables using the relative selling price method which is based on the BESP for all
deliverables. Revenues allocated to the delivered hardware and the related essential software are recognized at the time of sale provided the other
conditions for recognition of revenues have been met. Revenues allocated to the PCS are deferred and recognized on a straight-line basis over
the estimated life of each of these devices which currently is two years. All costs of revenues, including estimated warranty costs, are recognized
at the time of sale. Costs for research and development and sales and marketing are expensed as incurred. If the estimated life of the hardware
product should change, the future rate of amortization of the revenues allocated to PCS would also change.
Our process for determining BESP for deliverables involves multiple factors that may vary depending upon the unique facts and circumstances
related to each deliverable. For PCS, we believe our network operators and service providers would be reluctant to pay for such services
separately. This view is primarily based on the fact that unspecified upgrade rights do not obligate us to provide upgrades at a particular time or
at all, and do not specify to network operators and service providers which upgrades or features will be delivered. We believe that the relatively
low prices of our products and our network operators, and service providers’ price sensitivity would add to their reluctance to pay for PCS.
Therefore, we have concluded that if we were to sell PCS on a stand-alone basis, the selling price would be relatively low.
Key factors considered by us in developing the BESP for PCS include reviewing the activities of specific employees engaged in support and
software development to determine the amount of time that is allocated to the development of the undelivered elements, determining the cost of
this development effort, and then adding an appropriate level of gross profit to these costs.
Inventory and Inventory Valuation
Our inventories are primarily finished goods and, to a lesser extent, raw materials, which we have consigned to our contract manufacturers. Our
inventories are stated at the lower of actual cost (computed on a first-in, first-out basis), or market value. Market value is based upon an
estimated average selling price reduced by the estimated costs of disposal. The determination of market value involves numerous judgments
including estimating average selling prices based upon recent sales, industry trends, existing customer orders, and seasonal factors. Should actual
market conditions differ from our estimates, our future results of operations could be materially affected. We reduce the value of our inventory
for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory and the estimated market value.
Write-downs are not reversed until the related inventory has been subsequently sold or scrapped.
The valuation of inventory also requires us to estimate excess and obsolete inventory. The determination of excess or obsolete inventory is
estimated based on a comparison of the quantity and cost of inventory on hand to our forecast of customer demand. Customer demand is
dependent on many factors and requires us to use significant judgment in our forecasting process. We also make assumptions regarding the rate
at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. If
actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which
would have a negative impact on our gross margin. If we ultimately sell inventory that we have previously written down, our gross margins in
future periods will be positively impacted.
Product Warranties
We offer warranties on certain products and record a liability for the estimated future costs associated with potential warranty claims. These
warranty costs are reflected in our consolidated statement of operations and comprehensive income within cost of revenues. Our warranties are
in effect for 12 months from the distributors’ purchase date of the product. Our estimates of future warranty costs are largely based on historical
experience of product failure rates, material usage and service delivery costs
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incurred in correcting product failures. Our operating results could be materially and adversely affected if future warranty claims exceed
historical experiences and we are not able to recover costs from our contract manufacturers.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts for estimated probable losses on uncollectible accounts receivable. In estimating the allowance,
management considers, among other factors, the aging of the accounts receivable, our historical write offs, the credit worthiness of each
distributor based on payment history and general economic conditions.
Income Taxes
We account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of events that have been
included in our financial statements or tax returns. Deferred tax assets and liabilities are determined based on the temporary difference between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. We establish valuation allowances when necessary to reduce deferred tax assets to the amount we expect to realize. The
assessment of whether or not a valuation allowance is required often requires significant judgment including current operating results, the
forecast of future taxable income and ongoing prudent and feasible tax planning initiatives.
In addition, our calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We may be
subject to income tax audits in each of the jurisdictions in which we operate and, as a result, must also assess exposures to any potential issues
arising from current or future audits of current and prior years’ tax returns. Accordingly, we must assess such potential exposures and, where
necessary, provide a reserve to cover any expected loss. To the extent that we establish a reserve, our provision for income taxes would be
increased. We review our potential liabilities periodically and, if necessary, record an additional charge in our provision for taxes in the period in
which we determine that tax liability is greater than our original estimate. If we ultimately determine that payment of these amounts is
unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary.
Stock-based Compensation
We record stock-based awards at fair value as of the grant date and recognize expense, net of forfeitures, ratably on a straight-line basis over the
requisite service period, which is generally the vesting term of the awards. We estimate the fair value of stock option awards on the grant date
using the Black-Scholes option pricing model. The determination of the fair value of a stock-based award on the date of grant using the Black-
Scholes option-pricing model is affected by our stock price on the date of grant as well as assumptions regarding a number of complex and
subjective variables. These variables include our expected stock price volatility over the expected term of the award, actual and projected
employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award and expected dividends. Restricted stock
units are valued based on the fair value of our common stock on the date of grant. Since our initial public offering on October 14, 2011, the fair
value of our common stock is determined using the closing market price of our common stock as of the date of grant.
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Results of Operations
Comparison of Years Ended June 30, 2014 and 2013
Revenues
Cost of revenues (1)
Gross profit
Operating expenses:
Research and development (1)
Sales, general and administrative (1)(2)
Total operating expenses
Income from operations
Interest expense and other, net
Income before provision for income taxes
Provision for income taxes
Net income and comprehensive income
* Less than 1%
(1) Includes stock-based compensation as follows:
Cost of revenues
Research and development
Sales, general and administrative
Total stock-based compensation
(2) Includes gain on reversal of charge for an export compliance matter
Revenues
Years Ended June 30,
2014
2013
(In thousands, except percentages)
572,464
318,997
253,467
33,962
23,560
57,522
195,945
(1,334 )
194,611
17,674
176,937
100 % $
56 %
44 %
6 %
4 %
10 %
34 %
*
34 %
3 %
31 % $
320,823
185,489
135,334
20,955
21,775
42,730
92,604
(851 )
91,753
11,263
80,490
100 %
58 %
42 %
6 %
7 %
13 %
29 %
*
29 %
4 %
25 %
590
2,423
1,893
4,906
(1,121 )
$
$
$
446
1,433
1,497
3,376
—
$
$
$
$
$
Revenues increased $251.6 million , or 78% , from $320.8 million in fiscal 2013 to $572.5 million in fiscal 2014 . We believe the overall
increase in revenues in fiscal 2014 was primarily driven by increased adoption of our service provider and enterprise technologies. Additionally,
during fiscal 2013 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 during our fiscal 2013 .
In both fiscal 2014 and fiscal 2013 , Flytec Computers Inc. represented 13% of our revenues. No other distributor or customer represented more
than 10% of our revenues in fiscal 2014 or fiscal 2013 .
Revenues by Product Type
Service provider technology
Enterprise technology
Total revenues
Years Ended June 30,
2014
2013
(in thousands, except percentages)
$
$
450,663
121,801
572,464
79 % $
21 %
100 % $
285,390
35,433
320,823
89 %
11 %
100 %
Service Provider Technology revenues increased $165.3 million , or 58% , primarily due to continued expansion of core infrastructure build-outs
in our wireless markets. Additionally, we believe we experienced significant lost sales during fiscal 2013 due to the proliferation of counterfeit
versions of our products as discussed above, which also created customer uncertainty regarding the authenticity of their potential purchases.
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Enterprise Technology revenues increased $86.4 million , primarily due to product expansion and further adoption of our UniFi technology
platform.
Revenues by Geography
We have determined the geographical distribution of our product revenues based on our customers' ship-to destinations. A majority of our sales
are to distributors who in turn sell to resellers or directly to end customers, which may be different countries than the initial ship-to destination.
Additionally, during fiscal 2013 , 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. The following are our revenues by geography for fiscal 2014
and fiscal 2013 (in thousands, except percentages):
North America(1)
South America
Europe, the Middle East and Africa
Asia Pacific
Total revenues
Years Ended June 30,
2014
142,438
109,584
247,009
73,433
572,464
25 % $
19 %
43 %
13 %
100 % $
2013
84,820
65,764
127,860
42,379
320,823
26 %
21 %
40 %
13 %
100 %
$
$
(1) Revenue for the United States was $136.6 million and $80.6 million in fiscal 2014 and fiscal 2013 , respectively.
Cost of Revenues and Gross Profit
Cost of revenues increased $133.5 million , or 72% , from $185.5 million in fiscal 2013 to $319.0 million in fiscal 2014 . The increase in cost of
revenues in fiscal 2014 was primarily due to increased revenues and to a lesser extent, changes in product mix.
Gross profit as a percentage of revenue increased to 44% in fiscal 2014 compared to 42% in fiscal 2013 , reflecting increasing economies of
scale, a one-time benefit from a rebate program with one of our vendors, and changes in product mix, partially offset by an increase in our
provision for inventory obsolescence.
Operating Expenses
Research and Development
Research and development expenses increased $13.0 million , or 62% , from $21.0 million in fiscal 2013 to $34.0 million in fiscal 2014 . As a
percentage of revenues, research and development expenses remained flat at 6% in both fiscal 2014 and 2013 . The increase in research and
development expenses in absolute dollars was primarily due to increases in headcount as we broadened our research and development activities
to introduce new products and new versions of existing products. 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 $1.8 million , or 8% , from $21.8 million in fiscal 2013 to $23.6 million in fiscal 2014 . As
a percentage of revenues, sales, general and administrative expenses decreased from 7% in fiscal 2013 to 4% in fiscal 2014 . Sales, general and
administrative expenses increased in fiscal 2014 compared to fiscal 2013 primarily due to increased marketing activity, increased professional
fees, primarily related to the ancillary support of certain management functions, and overall increases in headcount to further 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, decreases to our allowance for doubtful accounts and the partial reversal of our accrual relating to the settlement
agreement with OFAC in March 2014. As a percentage of revenues, sales, general and administrative expenses decreased 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 the growth in business and operations.
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Interest Expense and Other, Net
Interest expense and other, net was $1.3 million for fiscal 2014 , representing an increase of $483,000 from $851,000 for fiscal 2013 . The
increase in fiscal 2014 as compared to fiscal 2013 was primarily due a loss on extinguishment of debt of $458,000 associated with the retirement
of our debt with East West Bank.
Provision for Income Taxes
Our provision for income taxes increased $6.4 million , or 57% , from $11.3 million for fiscal 2013 to $17.7 million for fiscal 2014 . Our
effective tax rate decreased to 9% for fiscal 2014 as compared to 12% fiscal 2013 . The lower effective tax rate in fiscal 2014 was primarily due
to a larger percentage of our overall profitability occurring in foreign jurisdictions with lower income tax rates.
Comparison of Years Ended June 30, 2013 and 2012
Revenues
Cost of revenues (1)
Gross profit
Operating expenses:
Research and development (1)
Sales, general and administrative (1)(2)
Total operating expenses
Income from operations
Interest expense and other, net
Income before provision for income taxes
Provision for income taxes
Net income and comprehensive income
* Less than 1%
(1) Includes stock-based compensation as follows:
Cost of revenues
Research and development
Sales, general and administrative
Total stock-based compensation
(2) Includes a gain from a trademark coexistence agreement as follows:
Revenues
Years Ended June 30,
2013
2012
(In thousands, except percentages)
320,823
185,489
135,334
100 % $
58 %
42 %
353,517
202,514
151,003
100 %
57 %
43 %
20,955
21,775
42,730
92,604
(851 )
91,753
11,263
80,490
6 %
7 %
13 %
29 %
*
29 %
4 %
25 % $
16,699
9,012
25,711
125,292
(1,269 )
124,023
21,434
102,589
5 %
3 %
8 %
35 %
*
35 %
6 %
29 %
446
1,433
1,497
3,376
—
$
$
$
117
542
834
1,493
(1,500 )
$
$
$
$
$
Revenues decreased $32.7 million, or 9%, from $353.5 million in fiscal 2012 to $320.8 million in fiscal 2013. We believe the overall decrease in
revenues in fiscal 2013 was primarily driven by lost sales, predominantly during the first nine months of fiscal 2013 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 during the first nine months of
fiscal 2013. This has had the most significant impact on our airMAX platform which decreased $21.1 million in fiscal 2013 compared to
fiscal 2012.
In fiscal 2013, revenues from Flytec represented 13% of our revenues. In fiscal 2012, revenues from Flytec and Streakwave
represented 16% and 10% of our revenues, respectively. No other distributor or customer represented more than 10% of our revenues in
fiscal 2013 or fiscal 2012.
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Revenues by Product Type
Service provider technology
Enterprise technology
Total revenues
Years Ended June 30,
2013
2012
$ 285,390
35,433
$ 320,823
(in thousands, except percentages)
89 % $ 321,648
31,869
11 %
100 % $ 353,517
91 %
9 %
100 %
Service Provider Technology revenues decreased $36.3 million , or 11% , from $321.6 million in fiscal 2012 to $285.4 million in fiscal 2013 .
We believe we experienced significant lost sales during fiscal 2013 due to the proliferation of counterfeit versions of our products as discussed
above, which also created customer uncertainty regarding the authenticity of their potential purchases.
Enterprise Technology revenues increased $3.6 million , or 11% , from $31.9 million in fiscal 2012 to $35.4 million in fiscal 2013 . The increase
in Enterprise Technology revenues in fiscal 2013 was primarily due to further adoption of our UniFi technology platform.
Revenues by Geography
We generally forward products directly from our 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. We
believe the decline in revenues in all regions, and most significantly in South America, during the fiscal year ended June 30, 2013 as compared
to June 30, 2012 was primarily driven by the proliferation of counterfeit versions of our products, which has also created customer uncertainty
regarding the authenticity of their potential purchases. The following are our revenues by geography for fiscal 2013 and fiscal 2012 (in
thousands, except percentages):
North America(1)
South America
Europe, the Middle East and Africa
Asia Pacific
Total revenues
Years Ended June 30,
2013
84,820
65,764
127,860
42,379
320,823
26 % $
21 %
40 %
13 %
100 % $
2012
88,309
88,325
130,494
46,389
353,517
25 %
25 %
37 %
13 %
100 %
$
$
(1) Revenue for the United States was $80.6 million and $84.3 million in fiscal 2013 and fiscal 2012, respectively.
Cost of Revenues and Gross Profit
Cost of revenues decreased $17.0 million, or 8%, from $202.5 million in fiscal 2012 to $185.5 million in fiscal 2013. The decreases in cost of
revenues in fiscal 2013 was primarily due to decreased revenues and to a lesser extent, changes in product mix.
Gross profit as a percentage of revenue decreased to 42% in fiscal 2013 compared to 43% in fiscal 2012. The decrease in gross profit percentage
in the fiscal 2013 reflects increases in variable operating costs and changes in product mix.
Operating Expenses
Research and Development
Research and development expenses increased $4.3 million, or 25%, from $16.7 million in fiscal 2012 to $21.0 million in fiscal 2013. As a
percentage of revenues, research and development expenses increased from 5% in fiscal 2012 to 6% in fiscal 2013. The increase in research and
development expenses in absolute dollars was largely due to increases in headcount and facilities
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related costs as we broadened our research and development activities to new product areas. As a percentage of revenues, research and
development expenses increased in both periods primarily due to our overall decrease in revenues.
Sales, General and Administrative
Sales, general and administrative expenses increased $12.8 million, or 142%, from $9.0 million in fiscal 2012 to $21.8 million in fiscal 2013. As
a percentage of revenues, sales, general and administrative expenses increased from 3% in fiscal 2012 to 7% in fiscal 2013. Sales, general and
administrative expenses increased in absolute dollars and as a percentage of revenue due largely to increased legal expenses of $4.3 million,
primarily associated with our anti-counterfeiting litigation, increased professional fees of $2.0 million, primarily related to the ancillary support
of certain management functions, increases in headcount and related salaries of $1.0 million. Additionally, in fiscal 2012 we recorded a gain of
$1.5 million from a trademark coexistence agreement within sales, general and administrative expenses.
Interest Expense and Other, Net
Interest expense and other, net was $851,000 for fiscal 2013, representing a decrease of $418,000 from $1.3 million for fiscal 2012. The decrease
in fiscal 2013 as compared to fiscal 2012 was primarily due to the additional interest coupon on our convertible subordinated promissory notes
issued as part of the repurchase of Series A convertible preferred stock from entities affiliated with Summit Partners, L.P. in July 2011. The
convertible subordinated promissory notes were repaid in full in October 2011. Interest expense during fiscal 2013 consisted primarily of interest
related to our term loan and credit facility borrowings with East West Bank.
Provision for Income Taxes
Our provision for income taxes decreased $10.2 million, or 47%, from $21.4 million for fiscal 2012 to $11.3 million for fiscal 2013. Our
effective tax rate decreased to 12% for fiscal 2013 as compared to 17% fiscal 2012. The decrease in our effective tax rate was primarily due to a
larger percentage of our overall profitability occurring in foreign jurisdictions with lower income tax rates. Additionally, on January 2, 2013, the
American Taxpayer Relief Act of 2012 ("the Act") was signed into law. One of the provisions of the Act provides a retroactive extension of the
research and experimentation tax credit ("R&D credit") through December 31, 2013, which had expired on December 31, 2011. We recognized a
tax benefit of $539,000 during the third quarter of fiscal 2013 as a result of the retroactive extension of the R&D credit.
Liquidity and Capital Resources
Sources and Uses of Cash
Since inception, our operations primarily have been funded through cash generated by operations. We had cash and cash equivalents of $347.1
million , $227.8 million and $122.1 million at June 30, 2014 , 2013 and 2012 , respectively.
Consolidated Cash Flow Data
The following table sets forth the major components of our consolidated statements of cash flows data for the periods presented:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash Flows from Operating Activities
2014
Years Ended June 30,
2013
(In thousands)
121,327 $
(4,045 )
1,989
119,271 $
131,891 $
(5,363 )
(20,762 )
105,766 $
$
$
2012
81,788
(3,310 )
(32,779 )
45,699
Net cash provided by operating activities in the fiscal 2014 consisted primarily of net income of $176.9 million partially offset by net changes in
operating assets and liabilities that resulted in net cash outflows of $62.9 million . These changes consisted primarily of a $33.8 million increase
in inventory due to our efforts to build warehouse stock levels and ultimately decrease lead times, an $18.3 million increase in accounts
receivable due to our overall increase in revenue, a $9.6 million increase in prepaid expenses and other current assets due to timing of deposit
payments with our suppliers, a $6.9 million decrease in accounts payable and accrued liabilities due to the timing of payments with our vendors,
a $3.9 million net increase in taxes
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payable and prepaid income taxes due the timing of federal tax payments, and a $1.9 million increase in deferred revenues and related costs.
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 $7.3 million .
Net cash provided by operating activities in the fiscal 2013 consisted primarily of net income of $80.5 million and net changes in operating
assets and liabilities that resulted in net cash inflows of $45.9 million. These changes consisted primarily of a $38.7 million decrease in accounts
receivable due to improved cash collections, a $10.2 million increase in accounts payable and accrued liabilities due to the timing of payments
with our vendors, a $9.0 million increase in inventory due to increased inventory on hand as a result of a transition to a third-party logistics
provider during December 2012, a $6.6 million increase in taxes payable due the timing of federal tax payments, a $1.9 million increase in
prepaid expenses and other current assets due to an increase in overall business activity and a $1.2 million increase in deferred revenues and
related costs. 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 $5.5 million.
Net cash provided by operating activities in fiscal 2012 consisted primarily of net income of $102.6 million offset by changes in operating assets
and liabilities. These changes consisted primarily of a $36.6 million increase in accounts receivable due to our overall revenue growth and
slower payment patterns from our customers, a $16.5 million increase in accounts payable and accrued liabilities due to increased overall
business activity, a $9.5 million increase in taxes payable due to our higher profitability, a $3.7 million decrease in prepaid expenses and other
current assets due primarily to decreased deposits with our vendors and a $2.3 million increase in inventories related to increases in our overall
business activity. Additionally, our net income included non-cash adjustments due to stock-based compensation, depreciation and amortization,
adjustments to our provisions for doubtful accounts and inventory obsolescence and an excess tax benefit from stock-based awards. The net of
these non-cash adjustments resulted in a reduction of our net cash provided by operating activities of $11.6 million.
Cash Flows from Investing Activities
Our investing activities consist solely of capital expenditures and purchases of intangible assets. Capital expenditures for fiscal 2014 , fiscal 2013
and fiscal 2012 were $3.8 million , $4.1 million and $3.3 million, respectively. Additionally, we had cash outflows related to intangible assets of
$219,000 and $1.2 million during fiscal 2014 and fiscal 2013 , respectively, consisting primarily of legal costs associated with the trademark
applications.
Cash Flows from Financing Activities
We had $2.0 million of cash provided by financing activities during fiscal 2014 . On May 5, 2014, we entered into a credit agreement, or the
Credit Agreement, with Wells Fargo Bank, National Association, or Wells Fargo, the financial institutions named as lenders therein, and Wells
Fargo as administrative agent for the lenders, that provides for a $150 million senior secured revolving credit facility, with an option to request
an increase in the amount of the credit facility by up to an additional $50 million (any such increase to be in each lender’s sole discretion). We
initially borrowed $72.3 million under the Credit Agreement, which was used to repay obligations under our Loan Agreement with East West
Bank and to pay transaction fees and costs.
On May 29, 2014, we announced that our Board of Directors had authorized us to repurchase up to $75 million of our common stock. The share
repurchase program commenced on June 2, 2014. To date no shares have been repurchased under the program.
We used $20.8 million of cash in financing activities during fiscal 2013. On August 7, 2012, we entered into a Loan and Security Agreement, or
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 provided 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, or the Revolving Credit Facility, and (ii) a $50.0 million term loan facility, or the Term Loan Facility. We borrowed $20.8
million of term loans under the Term Loan Facility, bringing the total borrowed to $50.0 million, to partially fund our common stock repurchase
program. No borrowings remain available under the Term Loan Facility. 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 to fund our
special cash dividend.
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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 one year later. During fiscal 2013 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.
We used $32.8 million of cash in financing activities during fiscal 2012. In July 2011, we repurchased an aggregate of 12,041,700 shares of our
Series A preferred stock from entities affiliated with Summit Partners, L.P., one of our major stockholders, at a price of $8.97 per share for an
aggregate consideration of $108.0 million. Of the aggregate purchase price, $40.0 million was paid in cash at the time of closing and the balance
of the shares were paid for through the issuance of convertible subordinated promissory notes in the aggregate principal amount of $68.0 million.
On September 15, 2011, $34.0 million was paid against the notes reducing the aggregate principal amount outstanding to $34.0 million.
On September 15, 2011, we entered into a Loan and Security Agreement with East West Bank, or the EWB Loan Agreement. The EWB Loan
Agreement consisted of a $35.0 million term loan facility and a $5.0 million revolving line of credit facility. The term loan was scheduled to
mature on September 15, 2016 with principal and interest to be repaid in 60 monthly installments. During the three months ended September 30,
2011, we used $34.0 million of the term loan to repay a portion of our outstanding convertible subordinated promissory notes held by entities
affiliated with Summit Partners, L.P. The EWB Agreement was replaced by the Loan Agreement on August 7, 2012 as discussed above.
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 twelve months. However, this
estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier
than presently anticipated. Our future capital requirements may vary materially from those currently planned and will depend on many factors,
including our rate of revenue growth, the timing and extent of spending to support development efforts, the timing of new product introductions,
market acceptance of our products and overall economic conditions. As of June 30, 2014 , we held $307.6 million of our $347.1 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.
On June 18, 2013, we 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 our existing stockholders, including entities affiliated with Summit Partners, L.P., and our chief
executive officer, Robert J. Pera. We did not sell any shares in the offering, and as such, we did not receive any proceeds from the offering.
We believe that the combination of our existing United States cash and cash equivalent balances and future United States operating cash flows
are sufficient to meet our ongoing United States operating expenses and debt repayment obligations for at least the next twelve months.
We earn a significant amount of our operating income outside the United States, which is deemed to be indefinitely reinvested in foreign
jurisdictions. As a result, a significant portion of our cash and short-term investments are held by foreign subsidiaries. We currently do not
intend nor foresee a need to repatriate these funds. We expect existing domestic cash and short-term investments and cash flows from operations
to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular
quarterly dividends, debt repayment, and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.
If we should require more capital in the United States than is generated by our domestic operations, for example to fund significant discretionary
activities such as business acquisitions and share repurchases, we could elect to repatriate future earnings from foreign jurisdictions or raise
capital in the United States through debt or equity issuances. These alternatives could result in higher effective tax rates, increased interest
expense, or dilution of our earnings. We have borrowed funds domestically and continue to believe we have the ability to do so at reasonable
interest rates.
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Contractual Obligations and Off-Balance Sheet Arrangements
The following table summarizes our contractual obligations as of June 30, 2014 :
Less Than 1 Year
1-3 Years
4-5 years
Over 5 years
Total
Payments Due by Period
Operating leases
Debt payment obligations
Interest payments on debt payment obligations
Total
$
$
2,947 $
—
1,012
3,959 $
(In thousands)
4,561 $
—
2,025
6,586 $
395 $
72,254
1,869
74,518 $
— $
—
—
— $
7,903
72,254
4,906
85,063
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 May 5, 2014, we entered into a credit agreement ("the Credit Agreement") with Wells Fargo Bank, National Association, or Wells Fargo, the
financial institutions named as lenders therein, and Wells Fargo as administrative agent for the lenders, that provides for a $150 million senior
secured revolving credit facility, with an option to request an increase in the amount of the credit facility by up to an additional $50 million (any
such increase to be in each lender’s sole discretion). We initially borrowed $72.3 million under the Credit Agreement, which was used to repay
obligations under our Loan Agreement with East West Bank and to pay transaction fees and costs.
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. We had $20.9 million in non-
cancelable purchase commitments as of June 30, 2014 , the related expenses of which are expected to be incurred in future periods.
As of June 30, 2014 , we had gross unrecognized tax benefits of $14.5 million and an additional $695,000 for gross interest classified as
noncurrent liabilities. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in
connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table.
Commitments and Contingencies
In May 2011, we filed a self-disclosure statement with the U.S. Commerce Department, Bureau of Industry and Security’s (“BIS”) Office of
Export Enforcement (“OEE”) relating a review conducted by us regarding certain export transactions from 2008 through March 2011 in which
products may have been later resold into Iran by third parties. In June 2011, we also filed a self-disclosure statement with the U.S. Department of
the Treasury’s Office of Foreign Asset Control (“OFAC”) regarding these compliance issues. 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 and closed the investigation of us
without penalty. Based upon its review of the matter, OFAC identified certain apparent violations (“Apparent Violations”) of the Iranian
Transactions and Sanctions Regulations by us during the period of in or about March 2008 through in or about February 2011. On March 4,
2014, we entered into a settlement agreement with OFAC resolving this administrative matter. Pursuant to the terms of the settlement agreement,
we agreed to make a one-time payment to the U.S. Department of the Treasury in the amount of $504,000 in consideration of OFAC agreeing to
release and forever discharge us from any and all civil liability in connection with the Apparent Violations. We previously accrued a reserve of
$1.6 million relating to this matter in fiscal 2010 and, accordingly, reversed the excess of the accrual of $1.1 million as of the effective date of
the settlement agreement.
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 Directors and Officers 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 June 30, 2014 or 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 June 30, 2014 .
Off-Balance Sheet Arrangements
As of June 30, 2014 and 2013 , we had no off-balance sheet arrangements other than those indemnification agreements described above.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board, or FASB, issued a new accounting standard update on revenue from contracts with
customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To
achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with
customers, significant judgments and any assets recognized from the costs to obtain or fulfill a contract. The guidance will be effective for us
beginning July 1, 2017. We are currently assessing the impact of this new guidance.
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 became effective for us 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. We have assessed the impact of this new guidance, however
we do not expect adoption to have a significant impact on our consolidated financial statements.
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 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 or loss and diluted net income or loss per share.
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Our Non-GAAP measures primarily exclude stock-based compensation, net of taxes and other special charges and credits. Additionally, in fiscal
2014 we had a gain on the reversal of a charge for an export compliance matter and in fiscal 2012 we had a gain of $1.5 million from a
trademark coexistence agreement. 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:
Non-GAAP net income and comprehensive income
Non-GAAP diluted net income per share of common stock
Years Ended June 30,
2014
2013
2012
(In thousands, except per share amounts)
$
$
179,208 $
2.00 $
82,515 $
0.91 $
102,585
1.09
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.
The following table shows a reconciliation of GAAP net income and comprehensive income to non-GAAP net income and comprehensive
income:
Net income and comprehensive income
Stock-based compensation:
Cost of revenues
Research and development
Sales, general and administrative
Gain from a trademark coexistence agreement
Gain on reversal of charge for an export compliance matter
Tax effect of non-GAAP adjustments
Non-GAAP net income and comprehensive income
Non-GAAP diluted net income per share of common stock (1)
Years Ended June 30,
2014
2013
2012
(In thousands, except per
share amounts)
$
176,937 $
80,490 $
102,589
590
2,423
1,893
—
(1,121 )
(1,514 )
179,208 $
2.00 $
446
1,433
1,497
—
—
(1,351 )
82,515 $
0.91 $
117
542
834
(1,500 )
—
3
102,585
1.09
$
$
Weighted-average shares used in computing non-GAAP diluted net income per share
of common stock (1)
89,715
90,259
93,762
(1) Non-GAAP diluted net income per share of common stock is calculated using non-GAAP net income and comprehensive income excluding stock-based
compensation and a gain from a trademark coexistence agreement, net of taxes and weighted-average shares outstanding as if Series A preferred stock is
treated as common stock for the periods presented.
44
Table of Contents
The following table shows a reconciliation of weighted-average shares used in computing net income (loss) per share of common stock-diluted
to weighted-average shares used in computing non-GAAP diluted net income per share of common stock:
Weighted average shares used in computing net loss per share of common stock-
diluted
Weighted average dilutive effect of stock options and restricted stock units
Weighted average shares of Series A preferred stock outstanding
Weighted-average shares used in computing non-GAAP diluted income per share
of common stock
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Years Ended June 30,
2014
2013
2012
(In thousands)
89,715
—
—
90,259
—
—
89,715
90,259
83,460
2,695
7,607
93,762
We have interest rate risk from the LIBOR index that is used to determine the interest rates on our Credit Agreement with Wells Fargo.
Revolving loans bear interest, at our option, at either (i) a floating rate per annum equal to the base rate plus a margin of between 0.250% and
1.000%, depending on our leverage ratio as of the most recently ended fiscal quarter or (ii) a per annum rate equal to the applicable LIBOR rate
for a specified period, plus a margin of between 1.250% and 2.000%, depending on our leverage ratio as of the most recently ended fiscal
quarter. Swingline loans will bear interest at a floating rate per annum equal to the base rate plus a margin of between 0.250% and 1.000%,
depending on our leverage ratio as of the most recently ended fiscal quarter. Base rate is defined as the greatest of (A) Wells Fargo’s prime rate,
(B) the federal funds rate plus 0.500% or (C) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank
market for a period of one month plus 1.000%. A default interest rate shall apply on all obligations during a payment event of default under the
Credit Agreement at a rate per annum equal to 2.000% above the applicable interest rate. Based on a sensitivity analysis, as of June 30, 2014 , 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 income before income taxes of approximately $1.4 million over the next 12 months.
We had cash and cash equivalents of $347.1 million and $227.8 million as of June 30, 2014 and 2013 , respectively. These amounts were held
primarily in cash deposit accounts. The fair value of our 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. Cash balances are
primarily held in U.S. Dollars, and therefore are not subject to significant currency risk. During the fiscal year ended June 30, 2014 , 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 8. Financial Statements and Supplementary Data
The response to this Item is submitted as a separate section of this Form 10-K. See Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 June 30, 2014 . The term “disclosure controls and procedures,” as
45
Table of Contents
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 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 June 30, 2014 , 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Management, with the participation of our principal executive officer and principal financial
officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth
in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation under the framework set forth in Internal Control—Integrated Framework, our management concluded that our internal control
over financial reporting was effective as of June 30, 2014 .
The effectiveness of our internal control over financial reporting as of June 30, 2014 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 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.
Item 9B. Other Information
Not applicable.
46
Table of Contents
Item 10. Directors and Executive Officers and Corporate Governance
PART III
The information required by this Item 10 is incorporated by reference to our Proxy Statement for the 2014 Annual Meeting of Stockholders (to
be filed with the Securities and Exchange Commission within 120 days of our June 30, 2014 fiscal year end) under the headings “Election of
Directors – Executive Officers and Directors,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to our Proxy Statement for the 2014 Annual Meeting of Stockholders (to
be filed with the Securities and Exchange Commission within 120 days of our June 30, 2014 fiscal year end) under the headings “Executive
Compensation,” “Election of Directors—Directors’ Compensation” and “Election of Directors—Compensation Committee Interlocks and
Insider Participation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 with respect to security ownership of certain beneficial owners and management is incorporated by
reference to our Proxy Statement for the 2014 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within
120 days of our June 30, 2014 fiscal year end) under the headings “Security Ownership of Certain Beneficial Owners and Management Related
Stockholder Matters.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to our Proxy Statement for the 2014 Annual Meeting of Stockholders (to
be filed with the Securities and Exchange Commission within 120 days of our June 30, 2014 fiscal year end) under the headings “Certain
Relationships and Related Party Transactions” and “Election of Directors—Committees of the Board of Directors.”
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated by reference to our Proxy Statement for the 2014 Annual Meeting of Stockholders (to
be filed with the Securities and Exchange Commission within 120 days of our June 30, 2014 fiscal year end) under the headings “Ratification of
the Appointment of Independent Registered Public Accounting Firm—Audit and Non-Audit Fees” and “—Audit Committee Pre-Approval
Policies.”
47
Table of Contents
Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
PART IV
The financial statements filed as part of this report are identified in the Index to Consolidated Financial Statements on page 52 of this Form 10-
K.
2. Financial Statement Schedules
See Item 15(c) below.
3. Exhibits
See Item 15(b) below.
(b) Exhibits
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange
Commission. Ubiquiti Networks, Inc. (the “Registrant”) shall furnish copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request.
Exhibit
Number
Description
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
3.1
3.2
4.1
4.2
4.3
10.1
10.2#
10.3#
10.4#
10.5#
10.6#
Form of Third Amended and Restated Certificate of
Incorporation of Ubiquiti Networks, Inc.
Form of Amended and Restated Bylaws of Ubiquiti
Networks, Inc.
Specimen Common Stock Certificate of Ubiquiti
Networks, Inc.
Registration Agreement, dated March 2, 2010, between
Ubiquiti Networks, Inc. and certain holders of Ubiquiti
Networks, Inc.’s capital stock named therein.
Investor Rights Agreement, dated as of March 2, 2010,
between Ubiquiti Networks, Inc. and certain holders of
Ubiquiti Networks, Inc.’s capital stock named therein.
Form of Indemnification Agreement between Ubiquiti
Networks, Inc. and its directors and officers.
Amended and Restated 2005 Equity Incentive Plan and
forms of agreement thereunder.
Amended and Restated 2010 Equity Incentive Plan and
forms of agreement thereunder.
Employment Agreement, dated as of February 10, 2011,
between Ubiquiti Networks, Inc. and Benjamin Moore.
Executive Employment Agreement between the
Company and Craig Foster, effective March 4, 2013.
Employment Agreement, dated as of May 1, 2010,
between Ubiquiti Networks, Inc. and John Sanford.
S-1
S-1
S-1
S-1
Date Filed
June 17, 2011
June 17, 2011
3.2
3.4
4.1
October 3, 2011
4.2
June 17, 2011
S-1
4.3
June 17, 2011
S-1
S-1
S-1
S-1
8-K
S-1
10.1
October 3, 2011
10.2
June 17, 2011
10.3
June 17, 2011
10.5
June 17, 2011
10.1
March 8, 2013
10.7
June 17, 2011
48
Table of Contents
Exhibit
Number
10.7#
10.8
10.9
Description
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
Date Filed
Employment Agreement, dated as of March 19, 2012,
between Ubiquiti Networks, Inc. and Jessica Zhou.
10-K
10.8
September 28, 2012
Non-Residential Property Lease Agreement, dated as of
May 28, 2009, between UAB “Devint” and Tomas
Grébliúnas, Tomas Skučas, and Vygante Skučiené.
Jinyong Ji Investment Taiwan Lease, dated as of March
16, 2010, between Ubiquiti Networks, Inc. and Jinyong
Ji Investment Co., Ltd.
S-1
10.9
June 17, 2011
S-1
10.10
June 17, 2011
10.10
Lease, dated as of July 9, 2010, between Ubiquiti
Networks, Inc. and The Welsh Office Center LLC.
10.11†
Amended Technology License Agreement, dated as of
September 1, 2010, between Ubiquiti Networks, Inc. and
Atheros Communications, Inc.
S-1
S-1
10.11
June 17, 2011
10.12
June 17, 2011
10.12
10.13
10.14
10.15
10.16
Loan and Security Agreement, dated as of September 15,
2011, between Ubiquiti Networks, Inc. and East West
Bank.
Taiwan Lease, dated as of July 20, 2011, between Jin
Yeoung Ji Co., Ltd. and Ubiquiti Networks International
Limited, Taiwan Branch.
Office Lease, dated as of December 8, 2011 and
executed on December 22, 2011, by and between
Ubiquiti Networks, Inc. and Carr NP Properties, L.L.C.
Loan and Security Agreement, dated as of August 7,
2012, by and among Ubiquiti Networks, Inc., the lenders
from time to time party thereto, U.S. Bank, as
Syndication Agent, and East West Bank, as
Administrative Agent
Credit Agreement, dated as of May 3, 2014, by and
among Ubiquiti Networks, Inc. and Ubiquiti
International Holding Company Limited, as Borrowers,
the Lenders referred to therein, as Lenders and Wells
Fargo Bank, National Associate, as Administration
Agent
S-1
10.14
September 16, 2011
10-Q
10.15
November 14, 2011
10-Q/A
10.16
March 20, 2012
8-K
10.1
August 13, 2012
10-Q
10.1
May 9, 2014
10.17
Aircraft Lease Agreement between Ubiquiti Networks,
Inc. and RJP Manageco LLP, dated November 13, 2013
10-Q
10.1
February 7, 2014
10.18
10.19
Release of Claims Agreement between Ubiquiti
Networks, Inc. and Jessica Zhou
8-K
10.1
October 18, 2013
Offer Letter between Ubiquiti Networks, Inc., and David
Hsieh
10-Q
10.2
November 8, 2013
21.1
List of subsidiaries of Ubiquiti Networks, Inc.
23.1
24.1
Consent of independent registered public accounting
firm
Power of Attorney (contained in the signature page to
this Form 10-K)
49
Table of Contents
Exhibit
Number
31.1
31.2
32.1~
Description
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
Date Filed
Certification of Principal Executive Officer Required
Under Rule 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
Certification of Principal Financial Officer Required
Under Rule 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
Certification of Principal Executive Officer and Principal
Financial Officer Required Under Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended, and 18
U.S.C. §1350.
101.INS(*)
XBRL Instance Document
101.SCH(*) XBRL Taxonomy Schema Linkbase Document
101.CAL(*) XBRL Taxonomy Calculation Linkbase Document
101.DEF(*)
XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB(*) XBRL Taxonomy Labels Linkbase Document
101.PRE(*)
XBRL Taxonomy Presentation Linkbase Document
# Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
† Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment.
~ In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal
Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are
deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
(*) XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and is not otherwise subject to liability under these Sections.
(c) Financial Statement Schedules.
Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
50
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: August 22, 2014
Ubiquiti Networks, Inc.
/s/ Robert J. Pera
Robert J. Pera
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Craig L. Foster
Craig L. Foster
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert J. Pera and Craig
L. Foster and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-
in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and
agents, or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Robert J. Pera
Robert J. Pera
/s/ Craig L. Foster
Craig L. Foster
/s/ Steven R. Altman
Steven R. Altman
/s/ Ronald A. Sege
Ronald A. Sege
/s/ Rafael Torres
Rafael Torres
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
Director
Director
Director
August 22, 2014
August 22, 2014
August 22, 2014
August 22, 2014
August 22, 2014
51
Table of Contents
UBIQUITI NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
52
Page
53
54
55
56
57
58
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Ubiquiti Networks, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income,
stockholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of Ubiquiti Networks, Inc. and its
subsidiaries at June 30, 2014 and June 30, 2013, and the results of their operations and their cash flows for each of the three years in the period
ended June 30, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2014, based on criteria established
in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over
Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's
internal control over financial reporting based on our audits (which were integrated audits in 2014 and 2013). We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 22, 2014
53
Table of Contents
Assets
Current assets:
UBIQUITI NETWORKS, INC.
Consolidated Balance Sheets
(In thousands, except share data)
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $1,395 and $2,200,
respectively
Inventories
Current deferred tax assets
Prepaid income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Long-term deferred tax assets
Other long–term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Customer deposits
Deferred revenues - short-term
Income taxes payable
Debt - short-term
Other current liabilities
Total current liabilities
Long-term taxes payable
Debt - long-term
Deferred revenues - long-term
Total liabilities
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:
88,179,448 and 87,213,803 outstanding at June 30, 2014 and June 30, 2013,
respectively
Additional paid–in capital
Treasury stock—44,238,960 shares held in treasury at June 30, 2014 and June 30, 2013
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
54
June 30,
2014
2013
$
347,097 $
227,826
54,871
46,349
884
3,256
13,267
465,724
7,260
1,255
1,912
476,151 $
33,933 $
1,835
4,218
2,499
—
9,830
52,315
15,346
72,254
972
140,887
35,884
15,880
733
—
3,151
283,474
5,976
4
2,886
292,340
36,187
5,123
691
1,257
5,013
11,150
59,421
11,857
71,116
2,510
144,904
—
—
88
145,872
(123,864 )
313,168
335,264
476,151 $
87
134,982
(123,864 )
136,231
147,436
292,340
$
$
$
Table of Contents
UBIQUITI NETWORKS, INC.
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Sales, general and administrative
Total operating expenses
Income from operations
Interest expense and other, net
Income before provision for income taxes
Provision for income taxes
Net income and comprehensive income
Preferred stock cumulative dividend and accretion of cost of preferred stock
Net income (loss) attributable to common stockholders
Net income (loss) per share of common stock:
Basic
Diluted
Weighted average shares used in computing net income (loss) per share of common stock:
Basic
Diluted
Cash dividends declared per common share
Years Ended June 30,
2014
572,464 $
318,997
253,467
2013
320,823 $
185,489
135,334
2012
353,517
202,514
151,003
33,962
23,560
57,522
195,945
(1,334 )
194,611
17,674
176,937 $
—
176,937 $
20,955
21,775
42,730
92,604
(851 )
91,753
11,263
80,490 $
—
80,490 $
16,699
9,012
25,711
125,292
(1,269 )
124,023
21,434
102,589
(112,431 )
(9,842 )
2.02 $
1.97 $
0.91 $
0.89 $
(0.12 )
(0.12 )
87,772
89,715
88,314
90,259
— $
0.18 $
83,460
83,460
—
$
$
$
$
$
$
See notes to consolidated financial statements.
55
Table of Contents
UBIQUITI NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
In thousands , except share data
Balances at June 30, 2011
Net income and comprehensive income
Accretion of costs of Series A convertible
preferred stock
Repurchase of Series A convertible preferred
stock
Preferred stock cumulative dividend
Conversion of preferred stock into common
stock in conjunction with initial public offering
Issuance of common stock pursuant to initial
public offering, net of offering expenses
Stock options exercised
Restricted stock units issued, net of tax
withholdings
Stock-based compensation expense
Tax impact of employee stock transactions
Balances at June 30, 2012
Net income and comprehensive income
Stock options exercised
Restricted stock units issued, net of tax
withholdings
Common stock repurchased
Dividends paid on common stock
Stock-based compensation expense
Tax impact of employee stock transactions
Balances at June 30, 2013
Net income and comprehensive income
Stock options exercised
Restricted stock units issued, net of tax
withholdings
Stock-based compensation expense
Tax impact of employee stock transactions
Balances at June 30, 2014
Convertible
Preferred Stock
Shares
Amount Shares
Common Stock
Additional
Paid-In
Capital
Amount Amount
36,034,630 145,847 62,685,955
—
—
—
63
—
545 (39,079,910 )
—
—
Treasury Stock
Shares
Amount
(69,515 )
Retained
Earnings
15,035
— 102,589
Total
Stockholders’
Equity
(Deficit)
(53,872 )
102,589
—
(45,903 )
(111,535 )
— 111,535
(12,041,701 ) (108,000 )
896
—
—
—
—
—
(65,632 )
—
—
—
(568 )
(23,992,929 ) (150,278 ) 23,992,929
24 150,254
—
—
—
—
—
—
—
—
—
—
—
—
(328 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 2,395,328
— 2,885,470
90,296
—
—
—
—
—
— 92,049,978
—
—
266,558
—
56,317
—
— (5,159,050 )
—
—
—
—
—
—
— 87,213,803
—
—
849,635
—
—
—
—
— $
116,010
—
—
—
—
—
— 88,179,448 $
2
3
30,450
808
(1,390 )
1,493
13,021
—
—
—
—
—
—
92 128,981 (39,079,910 )
—
—
—
—
635
—
—
—
—
(69,515 )
—
—
—
—
—
71,393
80,490
—
(214 )
—
(54,349 )
—
—
—
—
—
—
(5 )
— (5,159,050 )
—
—
—
—
(15,652 )
—
—
3,376
—
—
—
—
2,204
87 134,982 (44,238,960 ) (123,864 ) 136,231
— 176,937
—
—
—
—
—
1
—
2,089
(2,013 )
4,906
5,908
—
—
—
—
—
—
88 $ 145,872 (44,238,960 ) $ (123,864 ) $ 313,168 $
—
—
—
—
—
—
See notes to consolidated financial statements.
56
—
(896 )
150,278
30,452
811
(1,390 )
1,493
13,021
130,951
80,490
635
(214 )
(54,354 )
(15,652 )
3,376
2,204
147,436
176,937
2,090
(2,013 )
4,906
5,908
335,264
Table of Contents
UBIQUITI NETWORKS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Cash Flows from Operating Activities:
Net income and comprehensive income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for inventory obsolescence
Deferred taxes
Excess tax benefit from employee stock-based awards
Stock-based compensation
Loss on disposal of fixed assets
Write-off of intangible assets
Loss on extinguishment of debt
Provision for doubtful accounts
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Deferred cost of revenues
Prepaid income taxes
Prepaid expenses and other assets
Accounts payable
Taxes payable
Deferred revenues
Accrued liabilities and other
Net cash provided by operating activities
Cash Flows from Investing Activities:
Purchase of property and equipment and other long-term assets
Net cash used in investing activities
Cash Flows from Financing Activities:
Proceeds from borrowings under credit agreement
Proceeds from term loan, net
Repayments on term loan balance
Repayments on credit facility balance
Proceeds from credit facility
Repurchases of common stock and outstanding awards
Payment of special common stock dividend
Repurchase of Series A convertible preferred stock
Issuance of convertible subordinated promissory notes
Payment of convertible subordinated promissory notes
Proceeds from shares issued in initial public offering, net of offering costs
Proceeds from exercise of stock options
Excess tax benefit from employee stock-based awards
Tax withholdings related to net share settlements of restricted stock units
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Disclosure of Cash Flow Information:
Income Taxes paid
Years Ended June 30,
2014
2013
2012
$
176,937 $
80,490 $
102,589
2,819
3,295
2,087
(5,908 )
4,906
45
229
458
(658 )
(18,329 )
(33,764 )
(94 )
(3,256 )
(9,644 )
(2,326 )
7,150
1,989
(4,609 )
121,327
1,963
850
377
(2,323 )
3,376
150
—
1,096
38,664
(8,996 )
(1,185 )
—
(1,858 )
9,725
6,645
2,396
521
131,891
(4,045 )
(4,045 )
(5,363 )
(5,363 )
72,254
—
(46,250 )
(30,000 )
—
—
—
—
—
—
—
2,090
5,908
(2,013 )
1,989
119,271
227,826
347,097 $
—
20,833
(4,333 )
—
30,000
(54,354 )
(15,652 )
—
—
—
—
635
2,323
(214 )
(20,762 )
105,766
122,060
227,826 $
602
195
(897 )
(13,794 )
1,493
—
—
815
(36,648 )
(2,266 )
881
—
3,660
11,692
9,539
(929 )
4,856
81,788
(3,310 )
(3,310 )
—
34,813
(5,250 )
—
—
—
—
(108,000 )
68,000
(68,000 )
32,443
811
13,794
(1,390 )
(32,779 )
45,699
76,361
122,060
14,007 $
4,095 $
6,211
$
$
Interest paid
Conversion of preferred stock into common stock in conjunction with initial public offering
$
$
1,650 $
— $
1,699 $
— $
689
150,278
See notes to consolidated financial statements.
57
Table of Contents
UBIQUITI NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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”) is a product driven company that
leverages innovative proprietary technologies to deliver networking solutions to both startup and established network operators and service
providers.
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 these notes, Ubiquiti refers to the fiscal years ended June 30, 2014 , 2013 and 2012 as
fiscal 2014 , fiscal 2013 and fiscal 2012 , respectively.
Basis of Presentation — The Company’s consolidated financial statements and accompanying notes are prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) and include the accounts of Ubiquiti and its wholly owned subsidiaries.
The Company has wholly owned subsidiaries in Lithuania, Hong Kong, China and Poland. The Company’s Hong Kong subsidiary also operates
a branch office in Taiwan. All intercompany transactions and balances have been eliminated.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates these estimates, including those
related to allowance for doubtful accounts, inventory valuation, warranty costs, stock-based compensation and income taxes, among others. The
Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.
Actual results may differ materially from these estimates.
Segments
Management has determined that it operates as one reportable and operating segment as it only reports financial information on an aggregate and
consolidated basis to its chief executive officer, who is the Company’s chief operating decision maker. See Note 13.
Recognition of Revenues
Revenues consist primarily of revenues from the sale of hardware and management tools, as well as the related implied post contract customer
support (“PCS”). The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and the collectability of the resulting receivable is reasonably assured. In cases where the Company lacks evidence that
collectability of the resulting receivable is reasonably assured, it defers recognition of revenue until the receipt of cash.
For the Company’s sales, evidence of the arrangement consists of an order from a customer. The Company considers delivery to have occurred
once its products have been shipped and title and risk of loss have been transferred. For the Company’s sales, these criteria are met at the time
the products are transferred to the customer. The Company’s arrangements with customers do
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not, in most cases, include provisions for cancellation, returns, inventory swaps or refunds that would significantly impact recognized revenues.
The Company records amounts billed to distributors for shipping and handling costs as revenues. The Company classifies shipping and handling
costs incurred by it as cost of revenues.
Deposit payments received from distributors in advance of recognition of revenues are included in current liabilities on the Company’s balance
sheet and are recognized as revenues when all the criteria for recognition of revenues are met.
The Company’s multi-element arrangements generally include two deliverables. The first deliverable is the hardware and software essential to
the functionality of the hardware device delivered at the time of sale. The second deliverable is the implied right to PCS included with the
purchase of certain products. PCS is this right to receive, on a when and if available basis, future unspecified software upgrades and features
relating to the product’s essential software as well as bug fixes, email and telephone support.
The Company uses a hierarchy to determine the allocation of revenues to the deliverables. The hierarchy is as follows: (i) vendor-specific
objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price
(“BESP”).
(i) VSOE generally exists only when a company sells the deliverable separately and is the price actually charged by the company for that
deliverable. Generally the Company does not sell the deliverables separately and, as such, does not have VSOE.
(ii) TPE can be substantiated by determining the price that other parties sell similar or substantially similar offerings. The Company does not
believe that there is accessible TPE evidence for similar deliverables.
(iii) BESP reflects the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone
basis. The Company believes that BESP is the most appropriate methodology for determining the allocation of revenue among the
multiple elements.
The Company allocates revenues between these two deliverables using the relative selling price method which is based on the estimated selling
price for all deliverables. Revenues allocated to the delivered hardware and the related essential software are recognized at the time of sale
provided the other conditions for recognition of revenues have been met. Revenues allocated to the PCS are deferred and recognized on a
straight-line basis over the estimated life of each of these devices, which currently is two years . All cost of revenues, including estimated
warranty costs, are recognized at the time of sale. Costs for research and development and sales and marketing are expensed as incurred. If the
estimated life of the hardware product should change, the future rate of amortization of the revenues allocated to PCS would also change.
The Company’s process for determining BESP for deliverables involves multiple factors that may vary depending upon the unique facts and
circumstances related to each deliverable. For PCS, the Company believes its network operators and service providers would be reluctant to pay
for such services separately. This view is primarily based on the fact that unspecified upgrade rights do not obligate the Company to provide
upgrades at a particular time or at all, and do not specify to network operators and service providers which upgrades or features will be delivered.
The Company believes that the relatively low prices of its products and its network operators’ and service providers’ price sensitivity would add
to their reluctance to pay for PCS. Therefore, the Company has concluded that if it were to sell PCS on a standalone basis, the selling price
would be relatively low.
Key factors considered by the Company in developing the BESP for PCS include reviewing the activities of specific employees engaged in
support and software development to determine the amount of time that is allocated to the development of the undelivered elements, determining
the cost of this development effort, and then adding an appropriate level of gross profit to these costs.
Cash and Cash Equivalents
The Company considers investments purchased with a maturity period of three months or less at the date of purchase to be cash equivalents.
Cash and cash equivalents are stated at cost which approximates fair value. The Company deposits cash and cash equivalents with financial
institutions that management believes are of high credit quality. The Company’s cash and cash equivalents consist primarily of cash deposited in
U.S. dollar denominated interest-bearing deposit accounts.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts
receivable. The Company limits its exposure by primarily placing its cash in interest-bearing deposit accounts with high credit quality financial
institutions.
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The Company derives its accounts receivable from revenues earned from customers located worldwide. The Company bases credit decisions
primarily upon a customer’s past credit history. The Company’s standard credit terms are net 30 to 60 days.
The Company subcontracts with other companies to manufacture most of its products. The Company relies on the ability of these contract
manufacturers to produce the products sold to its distributors and original equipment manufacturers (“OEMs”). A significant portion of the
Company’s products are manufactured by a few contract manufacturers.
Inventory and Inventory Valuation
The Company's inventories are primarily finished goods and, to a lesser extent, raw materials, which have been consigned to the Company's
contract manufacturers. Inventories are stated at the lower of actual cost (computed on a first-in, first-out basis), or market value. Market value is
based upon an estimated average selling price reduced by the estimated costs of disposal. The determination of market value involves numerous
judgments including estimating average selling prices based up recent sales, industry trends, existing customer orders, and seasonal factors.
Should actual market conditions differ from the Company's estimates, future results of operations could be materially affected. The Company
reduces the value of its inventory for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory
and the estimated market value. Write-downs are not reversed until the related inventory has been subsequently sold or scrapped.
The valuation of inventory also requires the Company to estimate excess and obsolete inventory. The determination of excess or obsolete
inventory is estimated based on a comparison of the quantity and cost of inventory on hand to the Company's forecast of customer demand.
Customer demand is dependent on many factors and requires the Company to use significant judgment in our forecasting process. The Company
also makes assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition
from older products to newer products. If actual market conditions are less favorable than those projected by management, additional inventory
write-downs may be required, which would have a negative impact on the Company's gross margin. If the Company ultimately sells inventory
that has been previously written down, the Company's gross margins in future periods will be positively impacted.
Deferred Cost of Revenues
Deferred cost of revenues consist of the cost of product shipped to distributors for which the rights and obligations of ownership have passed to
the distributor but revenues have not yet been recognized primarily because the collectability criterion for revenue recognition has not been
fulfilled. The Company classifies these amounts as deferred cost of revenues. All deferred costs of revenues are stated at cost. The Company
periodically assesses the recoverability of deferred cost of revenues and writes down the deferred cost of revenues balances to establish a new
cost basis when recovery of deferred cost of revenues is not reasonably assured. The Company evaluates recoverability based on various factors
including the length of time the product has been held at the distributor’s site and the financial viability of the distributor.
Product Warranties
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 and
comprehensive income 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.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts for estimated probable losses on uncollectible accounts receivable. In estimating the
allowance, management considers, among other factors, (i) the aging of the accounts receivable, (ii) the Company’s historical write offs, (iii) the
credit worthiness of each distributor based on payment history and (iv) general economic conditions. In cases where the Company is aware of
circumstances that may impair a specific distributor’s ability to meet its obligations to the Company, the Company records a specific allowance
against amounts due from the distributor, and thereby reduces the net recognized receivable to the amounts it reasonably believes will be
collected.
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The allowance for doubtful accounts activity was as follows (in thousands):
Beginning balance
Charged to (released from) expenses
Bad debt write-offs
Ending Balance
Fair Value of Financial Instruments
Years Ended June 30,
2014
2013
2012
$
$
2,200 $
(658 )
(147 )
1,395 $
1,266 $
1,096
(162 )
2,200 $
596
815
(145 )
1,266
The carrying value of the Company’s cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value
due to their short maturities. The fair value of the Company's cash equivalents and debt are disclosed in Note 3.
Long Lived Assets
The Company evaluates its long lived assets including property and equipment for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable. An impairment loss is recognized when the net book value of such assets
exceeds the estimated future undiscounted cash flows attributable to the assets or asset group. If impairment is indicated, the asset is written
down to its estimated fair value. The Company did not recognize any impairment losses for fiscal 2014 , 2013 and 2012 .
Property and Equipment
Furniture, fixtures and equipment are recorded at cost. The Company computes depreciation or amortization using the straight line method over
estimated useful lives, as follows:
Testing equipment
Computer and other equipment
Furniture and fixtures
Leasehold improvements
Estimated Useful Life
3 to 5 years
3 to 5 years
3 years
shorter of lease term or useful life
Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized in the
statement of operations. Expenditures for maintenance and repairs are charged to operations as incurred.
Intangible Assets
The Company’s intangible assets consist primarily of legal costs associated with application for and registration of the Company’s trademarks.
The Company amortizes all acquisition-related intangible assets that are subject to amortization over the estimated useful life based on economic
benefit, which is generally 5 years.
Leases
The Company leases its facilities under cancelable and noncancelable operating leases. For leases that contain rent escalation or rent concessions
provisions, the Company records the total rent expense during the lease term on a straight line basis over the term of the lease. The Company
records the difference between the rent paid and the straight line rent as a deferred rent liability in the accompanying consolidated balance sheets.
Advertising Costs
The Company expenses all advertising costs as incurred.
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Income Taxes
The Company accounts for income taxes in accordance with accounting guidance which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in its financial statements or tax returns. Deferred tax assets and
liabilities are determined based on the temporary difference between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The Company establishes valuation allowances when
necessary to reduce deferred tax assets to the amount it expects to realize. The assessment of whether or not a valuation allowance is required
often requires significant judgment including current operating results, the forecast of future taxable income and ongoing prudent and feasible
tax planning initiatives. In addition, the Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of
complex tax regulations. The Company may be subject to income tax audits in all of the jurisdictions in which it operates and, as a result, must
also assess exposures to any potential issues arising from current or future audits of current and prior years’ tax returns. Accordingly, the
Company must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss. To the extent that the
Company establishes a reserve, its provision for income taxes would be increased. If the Company ultimately determines that payment of these
amounts is unnecessary, it reverses the liability and recognizes a tax benefit during the period in which it determines that the liability is no longer
necessary. The Company records an additional charge in its provision for taxes in the period in which it determines that tax liability is greater
than its original estimate.
Stock-based Compensation
The Company records stock-based awards at fair value as of the grant date and recognize expense, net of forfeitures, ratably on a straight-line
basis over the requisite service period, which is generally the vesting term of the awards. The Company estimates the fair value of stock option
awards on the grant date using the Black-Scholes option pricing model. The determination of the fair value of a stock-based award on the date of
grant using the Black-Scholes option-pricing model is affected by the Company's stock price on the date of grant as well as assumptions
regarding a number of complex and subjective variables. These variables include the Company's expected stock price volatility over the expected
term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award
and expected dividends. Restricted stock units are valued based on the fair value of the Company's common stock on the date of grant. Since the
Company's initial public offering on October 14, 2011, the fair value of our common stock is determined using the closing market price of the
Company's common stock as of the date of grant.
Commitments and Contingencies
The Company periodically evaluates all pending or threatened contingencies and any commitments, if any, that are reasonably likely to have a
material adverse effect on its results of operations, financial position or cash flows. The Company assesses the probability of an adverse outcome
and determines if it is remote, reasonably possible or probable. If information available prior to the issuance of the Company’s financial
statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the Company’s financial
statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then such loss is accrued and charged to
operating expenses. If no accrual is made for a loss contingency because one or both of the conditions pursuant to the accounting guidance are
not met, but the probability of an adverse outcome is at least reasonably possible, the Company discloses the nature of the contingency and
provides an estimate of the possible loss or range of loss, or states that such an estimate cannot be made.
Foreign Currency Translation
The functional currency of the Company and its subsidiaries is the U.S. dollar. For foreign operations, local currency denominated assets and
liabilities are remeasured at the period end exchange rates, and revenues, costs and expenses are remeasured at the average exchange rates during
the fiscal year. Foreign exchange gains and losses have been immaterial to the Company’s results of operations to date.
Deferred Offering Costs
Deferred offering costs, consisting of legal, accounting and other fees and costs relating to the Company’s initial public offering were
capitalized. Deferred offering costs of $3.1 million were offset against initial public offering proceeds upon the closing of the offering in October
2011.
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Research and Development Costs and Capitalized Software Development Costs
Research and development expenses are expensed as incurred. Research and development expenses associated with software development are
expensed as incurred as our software is typically released to end customers immediately after technological feasibility has been established.
Earnings Per Share
The Company applies the two-class method for calculating and presenting earnings per share (“EPS”). Under the two-class method, net income
is allocated between shares of common stock and other participating securities based on their participating rights. Participating securities are
defined as securities that participate in dividends with common stock according to a pre-determined formula or a contractual obligation to share
in the income of the entity. Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of
shares of common stock outstanding during the period. Diluted EPS is computed by dividing the amount of net income available to common
stockholders outstanding plus income allocable to participating securities, to the extent they are dilutive, by the weighted average number of
shares of common stock and potential dilutive shares outstanding during the period if the effect is dilutive. The Company’s potentially dilutive
common securities include outstanding stock options, restricted stock units and preferred stock.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board, or FASB, issued a new accounting standard update on revenue from contracts with
customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To
achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with
customers, significant judgments and any assets recognized from the costs to obtain or fulfill a contract. The guidance will be effective for the
Company beginning July 1, 2017. The Company is currently assessing the impact of this new guidance.
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 has assessed the impact of
this new guidance, however the Company does not expect adoption to have a significant impact on its consolidated financial statements.
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 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 of 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
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determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management
judgment or estimation.
For certain of the Company’s financial instruments, including cash, accounts receivable and accounts payable, the carrying amounts approximate
fair value due to their short maturities, and are therefore excluded from the fair value tables below. Additionally, as of June 30, 2014 , we held
$307.6 million of our $347.1 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 were to repatriate those amounts.
At June 30, 2014 and 2013 the Company had debt associated with its Loan and Security Agreements with Wells Fargo Bank and East West
Bank, respectively (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 Level 2 measurement.
As of June 30, 2014 and 2013 , the fair value hierarchy for the Company’s financial liabilities was as follows (in thousands):
June 30, 2014
June 30, 2013
Fair
Value
Level 1
Level 2
Level 3
Fair
Value
Level 1
Level 2
Level 3
Liabilities:
Debt (1)
$ 72,254 $
— $ 72,254 $
— $ 76,129 $
— $ 76,129 $
—
(1) Debt is carried at historical cost on the Company's consolidated balance sheet.
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):
Numerator:
Net income (loss) attributable to common stockholders
Denominator:
Years Ended June 30,
2014
2013
2012
$
176,937 $
80,490 $
(9,842 )
Weighted-average shares used in computing basic net income (loss) per share
Add—dilutive potential common shares:
87,772
88,314
83,460
Stock options
Restricted stock units
Weighted-average shares used in computing diluted net income (loss) per share
Net income (loss) per share of common stock:
Basic
Diluted
1,696
247
89,715
1,803
142
90,259
$
$
2.02
1.97
$
$
0.91 $
0.89 $
—
—
83,460
(0.12 )
(0.12 )
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):
Stock options
Restricted stock units
Years Ended June 30,
2014
2013
2012
—
36
36
658
364
1,022
3,348
454
3,802
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NOTE 5—BALANCE SHEET COMPONENTS
Inventories
Inventories consisted of the following (in thousands):
Finished goods
Raw materials
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
Vendor deposits
Non-trade receivables
Other current assets
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
Testing equipment
Computer and other equipment
Tooling equipment
Furniture and fixtures
Leasehold improvements
Software
Less: Accumulated depreciation and amortization
June 30,
2014
2013
45,881 $
468
46,349 $
15,618
262
15,880
June 30,
2014
2013
8,043 $
292
4,932
13,267 $
June 30,
2014
2013
3,785 $
1,019
2,898
973
3,173
521
12,369
(5,109 )
7,260 $
—
2,203
948
3,151
3,309
841
1,737
652
1,858
245
8,642
(2,666 )
5,976
$
$
$
$
$
$
Depreciation expense was $2.6 million and $1.8 million in fiscal 2014 and 2013 , respectively.
Other Long-term Assets
Other long-term assets consisted of the following (in thousands):
Intangible assets, net
Long-term deferred cost of revenues
Other long-term assets
June 30,
2014
2013
$
$
799 $
—
1,113
1,912 $
1,029
1,185
672
2,886
The Company's intangible assets consist primarily of legal costs associated with the application for and registration of the Company’s
trademarks. The Company recorded $270,000 and $200,000 of amortization of intangible assets during fiscal 2014 and 2013 , respectively.
During fiscal 2014, the Company wrote off $229,000 of intangible assets. The balance of accumulated amortization was $450,000 and $200,000
at June 30, 2014 and 2013 , respectively. Estimated future amortization related to
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trademark registration fees is $237,000 , $251,000 , $229,000 , $68,000 and $14,000 for fiscal years 2015, 2016, 2017, 2018, and thereafter,
respectively.
Other Current Liabilities
Accrued liabilities consisted of the following (in thousands):
Accrued compensation and benefits
Accrued accounts payable
Accrual for an export compliance matter
Warranty accrual
Other accruals
NOTE 6—ACCRUED WARRANTY
June 30,
2014
2013
$
$
3,432 $
10
—
2,850
3,538
9,830 $
Warranty obligations, included in other current liabilities, were as follows (in thousands):
Balance at June 30, 2012
Accruals for warranties issued during the period
Settlements made during the period
Balance at June 30, 2013
Accruals for warranties issued during the period
Settlements made during the period
Balance at June 30, 2014
NOTE 7—DEBT
$
$
2,712
323
1,625
2,913
3,577
11,150
1,381
4,079
(2,547 )
2,913
4,157
(4,220 )
2,850
In July 2011, the Company repurchased an aggregate of 12,041,700 shares of the Company’s Series A convertible preferred stock from entities
affiliated with Summit Partners, L.P., one of the Company’s major stockholders, at a price of $8.97 per share for an aggregate consideration of
$108.0 million . Of the aggregate purchase price, $40.0 million was paid in cash at the time of closing and the balance of the shares were paid for
through the issuance of convertible subordinated promissory notes in the aggregate principal amount of $68.0 million . On September 15, 2011,
$34.0 million was paid against the notes and was financed through the Company's EWB Loan Agreement (as further described below) reducing
the aggregate principal amount outstanding to $34.0 million . The remainder of the notes were retired in October 2011 with the proceeds of the
Company’s initial public offering and existing cash balances. The interest rate on the notes started at 5% per annum and increased by two
percentage points every three months until it would have reached 9% in January 2012. The notes were prepayable without penalty prior to
April 21, 2012, and were required to be paid in the event of the Company’s initial public offering or third party financing prior to April 21, 2012.
The notes mature on July 21, 2021. The unpaid principal on the notes was convertible into shares of Series A preferred stock at $8.97 per share
at any point after July 21, 2012. The difference between the repurchase price and the carrying value of the repurchased preferred stock on
June 30, 2011 was $59.0 million . The difference was debited to available retained earnings with the remaining amount debited to additional
paid-in capital and reduced the net income attributable to common stock shareholders resulting in a reduction of basic and diluted net income per
share.
On September 15, 2011, the Company entered into a Loan and Security Agreement with East West Bank, (the “EWB Loan Agreement”), which
was replaced by the Loan Agreement as discussed below. The credit facilities available under the EWB Loan Agreement consisted of a $35.0
million term loan facility and a $5.0 million revolving line of credit facility. The term loan would have matured on September 15, 2016 with
principal and interest to be repaid in 60 monthly installments. The Company used $34.0 million of the term loan to repay a portion of the
outstanding convertible subordinated promissory notes held by entities affiliated with Summit Partners, L.P leaving $1.0 million available for
borrowing under the term loan facility.
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 replaced the EWB Loan
Agreement discussed above. The Loan Agreement provided 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
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Loan Facility”). The Company could request borrowings under the Revolving Credit Facility until August 7, 2015. On August 7, 2012, the
Company borrowed $20.8 million under the Term Loan Facility, and no borrowings remained 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 remained available for borrowing thereunder.
On May 5, 2014, the Company and certain of its subsidiaries entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank,
National Association (“Wells Fargo”), the financial institutions named as lenders therein, and Wells Fargo as administrative agent for the
lenders, that provides for a $150 million senior secured revolving credit facility, with an option to request an increase in the amount of the credit
facility by up to an additional $50 million (any such increase to be in each lender’s sole discretion). The Company may borrow up to $110
million of the facility as a U.S. sublimit. The entire amount of the facility is available to Ubiquiti International Holding Company Limited, a
wholly-owned subsidiary of the Company organized under the laws of the Cayman Islands. The credit facility includes a sub-limit of $5 million
for letters of credit and a sub-limit of $15 million for swingline loans. In connection with the execution of the Credit Agreement, the Company
terminated the $50 million line of credit facility under the Loan Agreement with East West Bank described above. Under the Credit Agreement,
revolving loans and swingline loans may be borrowed, repaid and reborrowed until May 5, 2019, at which time all amounts borrowed must be
repaid. Additionally, $72.3 million is currently outstanding under the Credit Agreement, which was borrowed by the Company to repay
obligations under the Loan Agreement and to pay transaction fees and costs. Revolving loans bear interest, at the Company’s option, at either (i)
a floating rate per annum equal to the base rate plus a margin of between 0.250% and 1.000% , depending on the Company’s leverage ratio as of
the most recently ended fiscal quarter or (ii) a per annum rate equal to the applicable LIBOR rate for a specified period, plus a margin of between
1.250% and 2.000% , depending on the Company’s leverage ratio as of the most recently ended fiscal quarter. Swingline loans will bear interest
at a floating rate per annum equal to the base rate plus a margin of between 0.250% and 1.000% , depending on the Company’s leverage ratio as
of the most recently ended fiscal quarter. Base rate is defined as the greatest of (A) Wells Fargo’s prime rate, (B) the federal funds rate plus
0.500% or (C) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market for a period of one month
plus 1.000% . A default interest rate shall apply on all obligations during a payment event of default under the Credit Agreement at a rate per
annum equal to 2.000% above the applicable interest rate. The Company will pay to each lender a facility fee on a quarterly basis based on the
unused amount of each lender’s commitment to make loans, of between 0.200% and 0.350% , depending on the Company’s leverage ratio as of
the most recently ended fiscal quarter. Revolving loans and swingline loans may be prepaid at any time without penalty. The Company is also
obligated to pay Wells Fargo, as agent, fees customary for a credit facility of this size and type.
The Credit Agreement requires the Company to maintain a maximum leverage ratio and a minimum interest coverage ratio during the term of
the credit facility. In addition, the Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or
restrict the ability of the Company and its subsidiaries to, among other things, grant liens or enter into agreements restricting their ability to grant
liens on property, enter into mergers, dispose of assets, change their accounting or reporting policies, change their business and incur subsidiary
indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Credit Agreement includes customary
events of default that, include among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties,
violation of covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments, change of control and
certain ERISA events. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement. The
credit facility under the Credit Agreement expires May 5, 2019.
The obligations of the Company and its subsidiaries under the Credit Agreement are collateralized by substantially all assets (excluding
intellectual property) of the Company and its subsidiaries.
Wells Fargo and the lenders party to the Credit Agreement, and certain of their respective affiliates, have provided, and in the future may
provide, financial, banking and related services to the Company. These parties have received, and in the future may receive, compensation from
the Company for these services.
During the fiscal years 2014 and 2013 , the Company made aggregate payments of $5.0 million and $4.3 million , respectively, against the Loan
Agreement. At the time the Loan Agreement was retired in May 2014, the Company paid the remaining principal balance of $71.3 million . No
payments were made for borrowings under the Credit Agreement with Wells Fargo in fiscal 2014 . As of June 30, 2014 , the Company has
classified $72.3 million as long-term debt on its consolidated balance sheet related to the Credit Agreement.
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The following table summarizes our estimated debt and interest payment obligations as of June 30, 2014 (in thousands):
Debt payment obligations
Interest payments on debt payment
obligations
Total
$
$
2015
2016
2017
2018
— $
— $
— $
— $
2019
72,254 $
— $
Total
72,254
Thereafter
1,012
1,012 $
1,013
1,013 $
1,012
1,012 $
1,012
1,012 $
857
73,111 $
—
— $
4,906
77,160
NOTE 8—COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its headquarters in San Jose, California and other locations worldwide under non-cancelable operating leases that expire at
various dates through 2019 .
At June 30, 2014 , future minimum annual payments under operating leases are as follows (in thousands):
Operating leases
$
2,947 $
2,950 $
1,611 $
342 $
53 $
— $
7,903
2015
2016
2017
2018
2019
Thereafter
Total
Rent expense under operating leases was $2.3 million , $1.7 million and $1.6 million for fiscal 2014 , fiscal 2013 and fiscal 2012 , respectively.
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. The Company had $20.9 million in non-
cancelable purchase commitments as of June 30, 2014 , the related expenses of which are expected to be incurred in future periods.
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 Company 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 May 2011, the Company filed a self-disclosure statement with the U.S. Commerce Department, Bureau of Industry and Security’s (“BIS”)
Office of Export Enforcement (“OEE”) relating to a review conducted by the Company regarding certain export transactions from 2008 through
March 2011 in which products may have been later resold into Iran by third parties. In
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June 2011, the Company also filed a self-disclosure statement with the U.S. Department of the Treasury’s Office of Foreign Asset Control
(“OFAC”) regarding these compliance issues. 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. Based upon its review of the matter, OFAC identified certain apparent violations (“Apparent Violations”) of the Iranian Transactions
and Sanctions Regulations by the Company during the period of in or about March 2008 through in or about February 2011. On March 4, 2014,
the Company entered into a settlement agreement with OFAC resolving this administrative matter. Pursuant to the terms of the settlement
agreement, the Company agreed to make a one-time payment to the U.S. Department of the Treasury in the amount of $504,000 in consideration
of OFAC agreeing to release and forever discharge the Company from any and all civil liability in connection with the Apparent Violations. The
Company previously accrued a reserve of $1.6 million relating to this matter in fiscal 2010 and, accordingly, reversed the excess of the accrual
of $1.1 million as of the effective date of the settlement agreement.
Shareholder Class Action Lawsuits
Beginning on September 7, 2012, two class action lawsuits were filed in the United States District Court for the Northern District of California
against Ubiquiti Networks, Inc. (the “Company”), certain of its officers and directors, and the underwriters of its initial public offering, alleging
claims under U.S. securities laws. On January 30, 2013, the plaintiffs filed an amended consolidated complaint. The Company filed a motion to
dismiss the complaint, and on March 26, 2014, the court issued an order granting the motion to dismiss with leave to amend the complaint.
Following the plaintiffs’ decision not to file an amended complaint, on April 16, 2014 the court ordered the dismissal of the shareholder class
action lawsuit with prejudice, and entered judgment in favor of the Company and the other defendants, and against the plaintiffs. On May 15,
2014, the plaintiffs filed a notice of appeal from the judgment of the court. There can be no assurance that the Company will prevail in the appeal
proceeding. The Company cannot currently estimate the possible loss it may experience in connection with this litigation.
NOTE 9—PREFERRED STOCK
In July 2011, the Company repurchased an aggregate of 12,041,700 shares of the Company’s Series A convertible preferred stock from entities
affiliated with Summit Partners, L.P., one of the Company’s major stockholders, at a price of $8.97 per share for an aggregate consideration of
$108.0 million . Of the aggregate purchase price, $40.0 million was paid in cash at the time of closing and the balance of the shares were paid for
through the issuance of convertible subordinated promissory notes in the aggregate principal amount of $68.0 million . The $68.0 million was
paid down primarily using proceeds from the EWB Loan Agreement and the remaining balance was subsequently paid down by funds raised
upon the completion of the Company’s initial public offering on October 19, 2011 and the Company’s existing cash balances as discussed in
Note 7.
NOTE 10—COMMON STOCK AND TREASURY STOCK
As of June 30, 2014 and 2013 , the authorized capital of the Company included 500,000,000 shares of common stock. As of June 30, 2014 ,
132,418,408 shares of common stock were issued and 88,179,448 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 Board of Directors authorized the Company to repurchase up to $100 million of its common stock. The share repurchase
program commenced on August 13, 2012 and expired on August 12, 2013. The share repurchase program was been funded from proceeds from
the Loan Agreement as discussed in Note 7 and from existing cash on hand. The Company repurchased 5,159,050 shares at an average share
price of $10.52 per share under this plan. All repurchased shares are recorded as treasury stock at cost.
On May 29, 2014, the Board of Directors authorized the Company to repurchase up to an additional $75 million of its common stock. The share
repurchase program commenced on June 2, 2014 and will expire on May 10, 2015. The share repurchase program was been funded from
proceeds from the Credit Agreement as discussed in Note 8 and from existing cash on hand. As of June 30, 2014 the Company has not
repurchased any of its common stock under this plan.
Special Dividend
On December 14, 2012, the Board of Directors 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
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stockholders of record on December 24, 2012. The dividend payment was funded using proceeds from the Loan Agreement as discussed in Note
8.
Common Stock Offering
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.
NOTE 11—STOCK BASED COMPENSATION
Stock-Based Compensation Plans
2010 Equity Incentive Plan
In March 2010, the Company’s board of directors and stockholders approved the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan
replaced the 2005 Equity Incentive Plan (the “2005 Plan”), and no further awards will be granted pursuant to the 2005 Plan. Under the terms of
the 2010 Plan, nonstatutory stock options, stock appreciation rights, restricted stock, and restricted stock units (“RSUs”) may be granted to
employees or non-employee service providers. Incentive stock options may be granted only to employees.
The maximum aggregate number of shares that may be awarded under the 2010 Plan as of June 30, 2014 was 8,000,000 shares, plus any shares
subject to stock options or similar awards granted under the 2005 Plan that expire or otherwise terminate without having been exercised in full
and shares issued pursuant to awards granted under the 2005 Plan that are forfeited to (but not repurchased by) the Company.
The 2010 Plan is administered by the board of directors or a committee of the Company’s board of directors. Subject to the terms and conditions
of the 2010 Plan, the administrator has the authority to select the persons to whom awards are to be made, to determine the number of shares to
be subject to awards and the terms and conditions of awards, and to make all other determinations and to take all other actions necessary or
advisable for the administration of the 2010 Plan. The administrator is also authorized to adopt, amend or rescind rules relating to administration
of the 2010 Plan. Options and RSUs generally vest over a four year period from the date of grant and generally expire five to ten years from the
date of grant. The terms of the 2010 Plan provide that an option price shall not be less than 100% of fair market value on the date of grant.
2005 Equity Incentive Plan
With the adoption of the 2010 Plan, no additional awards may be granted under the 2005 Plan. In February 2005, the Company’s board of
directors and the stockholders approved the 2005 Plan, which was amended and restated in March 2006. The 2005 Plan provided for the issuance
of stock options, restricted stock and stock bonuses to employees, consultants, advisors, directors and officers of the Company. The terms of the
options granted under the 2005 Plan were determined at the time of grant. The Company made use of different vesting schedules through fiscal
2009, but subsequent new grants generally vested as to 25% on the first anniversary of the date of grant and monthly thereafter over the next
three years and generally have a term of 10 years from the date of grant.
As of June 30, 2014 , the Company had 9,918,184 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 Consolidated Statements of Operations and Comprehensive
Income for fiscal 2014 , 2013 and 2012 (in thousands):
Cost of sales
Research and development
Sales, general and administrative
Years Ended Years Ended June 30,
2014
2013
2012
590 $
2,423
1,893
4,906
$
446 $
1,433
1,497
3,376 $
117
542
834
1,493
$
$
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Stock Options
The following is a summary of option activity for the Company’s stock incentive plans for fiscal 2014 , 2013 and 2012 :
Balance, June 30, 2011
Granted
Exercised
Forfeitures and cancellations
Balance, June 30, 2012
Granted
Exercised
Forfeitures and cancellations
Balance, June 30, 2013
Exercised
Forfeitures and cancellations
Balance, June 30, 2014
Vested and expected to vest as of June 30, 2014
Vested and exercisable as of June 30, 2014
Common Stock Options Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
(In thousands)
0.72
10.44
0.28
4.71
1.45
11.29
2.39
5.68
3.07
2.46
10.55
2.96
2.89
1.60
6.44 $
43,135
6.62 $
42,920
6.17 $
52,330
5.11 $
5.09 $
4.56 $
112,215
111,482
97,363
Number
of Shares
6,171,707 $
161,000
(2,885,470 )
(99,792 )
3,347,445 $
683,500
(266,558 )
(150,125 )
3,614,262 $
(849,635 )
(107,485 )
2,657,142 $
2,635,599 $
2,233,533 $
Additional information regarding options outstanding as of June 30, 2014 is as follows (in thousands, except weighted average exercise price
amounts and contractual life):
Range of Exercise Prices
$0.01 - $0.04
$0.05 - $0.39
$0.40 - $5.11
$5.12 - $10.76
$10.77 - $11.74
$11.75 - $18.48
$18.49 - $18.70
$18.71 - $19.98
$19.99 - $26.28
$0.01 – $26.28
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
3.17 $
3.78
6.28
6.98
8.37
8.41
7.51
7.36
7.48
5.11 $
0.01
0.05
3.07
6.95
10.77
13.30
18.49
18.71
21.43
2.96
Number of
Options
75,270 $
1,594,890
319,027
74,886
107,537
58,105
1,406
645
1,767
2,233,533 $
Weighted
Average
Exercise
Price
0.01
0.05
2.99
7.00
10.77
13.36
18.49
18.71
21.17
1.60
Number of
Options
75,270
1,594,890
370,220
124,817
321,500
163,267
2,907
1,000
3,271
2,657,142
During fiscal 2014 and 2013 and 2012 , the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was $30.5
million , $3.4 million , and $48.6 million , respectively, as determined as of the date of option exercise.
As of June 30, 2014 , the Company had unrecognized compensation cost of $2.0 million related to stock options which the Company expects to
recognize over a weighted-average period of 2.2 years. Future option grants will increase the amount of compensation expense to be recorded in
these periods.
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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 stock
options during fiscal 2014 . For fiscal 2013 and 2012 the fair value of employee stock options was estimated using the following weighted
average assumptions:
Expected term
Expected volatility
Risk-free interest rate
Expected dividend yield
Weighted average grant date fair value
Years Ended Years Ended June 30,
2013
6.1 years
2012
6.1 years
52 %
0.9 %
—
5.57
$
49 %
1.6 %
—
5.05
$
Expected term. Expected term represents the period that the Company’s stock-based awards are expected to be outstanding. As the Company
has limited historical option exercise data, the expected term of the stock options granted to employees was calculated based on the simplified
method. Under the simplified method, the expected term is equal to the average of an option’s weighted-average vesting period and its
contractual term. The Company is permitted to continue using the simplified method until sufficient information regarding exercise behavior,
such as historical exercise data or exercise information from external sources, becomes available.
Expected volatility. The expected volatility was based on the historical stock volatilities of a group of publicly listed comparable companies over
a period equal to the expected terms of the options, as the Company does not have any trading history to use the volatility of its common stock.
Expected dividend yield. Although the Company paid a special cash dividend during fiscal 2013, the Company does not currently plan to pay
dividends on its common stock.
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S.
Treasury notes with maturities approximately equal to the option’s expected term.
Fair value of common stock. The Company’s common stock began trading on the NASDAQ Global Select Market on October 14, 2011, upon
its initial public offering. The fair value of the Company’s common stock is determined using the market price of the Company’s common stock
as of the date of grant. Prior to October 14, 2011, the fair value of the shares of common stock underlying the stock options has historically been
the responsibility of and determined by the Company’s board of directors. Because there had been no public market for the Company’s common
stock, its board of directors has determined fair value of the common stock at the time of grant of the option by considering a number of
objective and subjective factors including independent third-party valuations of its common stock, operating and financial performance, the lack
of liquidity of capital stock and general and industry specific economic outlook, amongst other factors.
Forfeiture rate. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the
adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The impact from
a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that
estimated, the Company may be required to record adjustments to stock-based compensation expense in future periods.
Cash received from stock option exercises during the fiscal 2014 , 2013 and 2012 was $2.1 million, $635,000 and $811,000 , respectively.
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Restricted Stock Units (“RSUs”)
The following table summarizes the activity of the RSUs made by the Company:
Non-vested RSUs, June 30, 2011
RSUs granted
RSUs vested
RSUs canceled
Non-vested RSUs, June 30, 2012
RSUs granted
RSUs vested
RSUs canceled
Non-vested RSUs, June 30, 2013
RSUs granted
RSUs vested
RSUs canceled
Non-vested RSUs, June 30, 2014
Number of Shares
Weighted
Average Grant
Date Fair Value
488,385 $
169,710
(146,475 )
(58,000 )
453,620 $
656,500
(70,512 )
(294,702 )
744,906 $
209,032
(170,197 )
(234,039 )
549,702 $
2.66
22.33
2.37
8.04
9.42
14.11
14.14
5.29
14.74
37.87
15.59
16.18
22.65
The intrinsic value of RSUs vested in fiscal 2014 , 2013 and 2012 was $6.1 million , $1.0 million and $3.5 million , respectively. The total
intrinsic value of all outstanding RSUs was $24.8 million as of June 30, 2014 .
As of June 30, 2014 , there was unrecognized compensation costs related to RSUs of $9.6 million which the Company expects to recognize over
a weighted average period of 3.2 years.
NOTE 12—INCOME TAXES
For financial reporting purposes, the components of income before provision for income taxes were as follows (in thousands):
Domestic
Foreign
Years Ended June 30,
2014
2013
2012
$
$
44,551 $
150,060
194,611 $
17,860 $
73,893
91,753 $
41,490
82,533
124,023
The components of the Company’s provision for income taxes consisted of the following (in thousands):
Current
Foreign
Federal
State
Current tax expense
Deferred
Foreign
Federal
State
Deferred tax expense
Provision for income taxes
Years Ended June 30,
2014
2013
2012
$
$
2,451 $
16,516
109
19,076
—
(1,507 )
105
(1,402 )
17,674 $
1,790 $
8,515
581
10,886
—
(130 )
507
377
11,263 $
2,040
17,437
2,854
22,331
—
(217 )
(680 )
(897 )
21,434
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Significant components of the Company’s deferred tax assets and liabilities consisted of the following (in thousands):
Deferred tax assets
Allowance for doubtful accounts
Stock-based compensation
Accrued expenses
Research and development credits
State tax
Other
Total deferred tax assets
Deferred tax liabilities
Basis difference for fixed assets
Other
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
June 30,
2014
2013
$
200 $
1,038
455
345
570
353
2,961
(477 )
—
(477 )
(345 )
2,139 $
$
337
833
191
—
—
323
1,684
(829 )
(118 )
(947 )
—
737
As of June 30, 2014 , the Company had California research tax credit carry-forwards, net of ASC 740-10 unrecognized tax benefits, of
approximately $1.1 million . The California research credits can be carried forward indefinitely.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the
existing deferred tax assets. In the fourth quarter of fiscal 2014, the Company determined that it is more likely than not that our deferred tax asset
for California research credits will not be realized as for the foreseeable future the Company is expecting to generate credits in excess of its
ability to use such attributes. As a result, the Company established a valuation allowance of $345,000 for the amount of California deferred tax
assets that may not be realized as of June 30, 2014 .
As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation , the table of deferred tax assets and liabilities
shown above does not include certain deferred tax assets as of June 30, 2014 , that arose directly from (or the use of which was postponed by)
tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased
by approximately $541,000 if and when such deferred tax assets are ultimately realized. The Company uses ASC 740 ordering when determining
when excess tax benefits have been realized.
The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:
Statutory rate
Stock-based compensation
State tax expense
Tax rate differential, foreign income
Federal research and development credits
Other permanent items
Effective tax rate
Years Ended June 30,
2014
2013
2012
35.0 %
0.4
—
(25.3 )
(0.3 )
(0.7 )
9.1 %
35.0 %
0.8
0.7
(24.2 )
(0.4 )
0.4
12.3 %
35.0 %
—
1.0
(23.0 )
—
4.3
17.3 %
The Company had increased foreign operations in fiscal 2014 as compared to fiscal 2013 and in fiscal 2013 as compared to fiscal 2012 , which
resulted in the generation more income on a comparative year over year basis in foreign jurisdictions that have lower tax rates than the U.S.
It is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of June 30, 2014 , the
Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $347.0 million of the excess of the amount
for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. Generally, such
amounts become subject to U.S. taxation upon the remittance of
74
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dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in
these foreign subsidiaries.
While management believes that the Company has adequately provided for all tax positions, amounts asserted by tax authorities could be greater
or less than the recorded position. Accordingly, the Company's provisions on federal, state and foreign tax-related matters to be recorded in the
future may change as revised estimates are made or the underlying matters are settled or otherwise resolved.
A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended June 30, 2014 2013 and 2012
consists of the following (in thousands):
Unrecognized benefit—beginning of period
Gross increases—current year tax positions
Gross increases (decreases)—prior year tax positions
Gross Decreases - prior year tax positions due to statue lapse
Unrecognized benefit—end of period
Years Ended June 30,
2014
2013
2012
(In thousands)
$
$
$
11,455 $
3,871
(213 )
(199 )
14,914 $
7,825 $
3,806
(176 )
11,455 $
2,020
4,697
1,108
7,825
Included in the gross unrecognized tax benefits balance as of June 30, 2014 are $14.5 million of tax positions which would affect income tax
expense if recognized. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in
the accompanying Consolidated Statement of Operations and Comprehensive Income. Accrued interest and penalties are included within the
related tax liability line in the Consolidated Balance Sheet. As of June 30, 2014 , the Company had $695,000 accrued interest related to uncertain
tax matters. The Company does not expect its unrecognized tax benefits as of June 30, 2014 will materially change within the next 12 months.
The Company files income tax returns in the United States, various states and certain foreign jurisdictions. Tax years 2011 through 2014 are
subject to examination by the U.S. federal tax authorities. Tax years 2010 through 2014 are subject to examination by the state tax authorities.
Tax year 2014 is subject to examination by the foreign tax authorities. There are no income tax examinations currently in process.
NOTE 13—SEGMENT INFORMATION, REVENUES BY GEOGRAPHY AND SIGNIFICANT CUSTOMERS
Management has determined that the Company operates as one reportable and operating segment as it only reports financial information on an
aggregate and consolidated basis to its chief executive officer, who is the Company’s chief operating decision maker.
Revenue
Revenues by product type were as follows (in thousands, except percentages):
Service provider technology
Enterprise technology
Total revenues
Years Ended June 30,
2014
2013
2012
$ 450,663
121,801
$ 572,464
79 % $
21 %
100 % $
285,390
35,433
320,823
89 % $ 321,648
31,869
11 %
100 % $ 353,517
91 %
9 %
100 %
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Revenues by geography based on customer’s ship-to destinations were as follows (in thousands, except percentages):
North America(1)
South America
Europe, the Middle East and Africa
Asia Pacific
Total revenues
2014
2013
Years Ended June 30,
$
$
142,438
109,584
247,009
73,433
572,464
25 % $
19 %
43 %
13 %
100 % $
84,820
65,764
127,860
42,379
320,823
26 % $
21 %
40 %
13 %
100 % $
2012
88,309
88,325
130,494
46,389
353,517
25 %
25 %
37 %
13 %
100 %
(1) Revenue for the United States was $136.6 million , $80.6 million and $84.3 million for fiscal 2014 , 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:
Flytec Computers, Inc.
Streakwave Wireless, Inc.
P.W. Batna Magdalena Mucha
* denotes less than 10%
Percentage of Revenues
Years Ended June 30,
Percentage of Accounts Receivable
June 30,
2014
2013
2012
2014
2013
13 %
*
*
13 %
*
*
16 %
10 %
*
13 %
12 %
12 %
12 %
15 %
11 %
NOTE 14—SUPPLEMENTARY DATA (UNAUDITED)
The following table presents the Company’s unaudited consolidated statements of operations data for each of the eight quarters during fiscal
2014 and 2013 . In management’s opinion, this information has been presented on the same basis as the audited consolidated financial
statements included in a separate section of this report, and all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts below to state fairly the unaudited quarterly results when read in conjunction with the audited consolidated
financial statements and related notes. The operating results for any quarter should not be relied upon as necessarily indicative of results for any
future period.
In thousands, except per share data
Net revenue
Gross profit
Income from operations
Net income and comprehensive income
Net income per share of common stock:
Basic
Diluted
Net revenue
Gross profit
Income from operations
Net income and comprehensive income
Net income per share of common stock:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal 2014
129,687 $
58,023
45,896
40,528
0.46 $
0.45 $
138,439 $
60,971
47,120
41,792
0.48 $
0.47 $
Fiscal 2013
148,331 $
65,612
50,135
45,199
0.51 $
0.50 $
156,007
68,861
52,794
49,418
0.56
0.55
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
61,535 $
25,020
15,775
13,179
0.14 $
0.14 $
74,901 $
30,485
20,119
17,803
0.20 $
0.20 $
83,155 $
35,465
23,503
20,667
0.24 $
0.23 $
101,232
44,364
33,207
28,841
0.33
0.32
$
$
$
$
$
$
76
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Exhibit Index
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange
Commission. Ubiquiti Networks, Inc. (the “Registrant”) shall furnish copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request.
Exhibit
Number
Description
Incorporated by
Reference from
Form
Incorporated by
Reference from
Exhibit Number
3.1
3.2
4.1
4.2
4.3
10.1
10.2#
10.3#
10.4#
10.5#
10.6#
10.7#
10.8
10.9
10.10
Form of Third Amended and Restated Certificate of
Incorporation of Ubiquiti Networks, Inc.
Form of Amended and Restated Bylaws of Ubiquiti
Networks, Inc.
Specimen Common Stock Certificate of Ubiquiti
Networks, Inc.
Registration Agreement, dated March 2, 2010, between
Ubiquiti Networks, Inc. and certain holders of Ubiquiti
Networks, Inc.’s capital stock named therein.
Investor Rights Agreement, dated as of March 2, 2010,
between Ubiquiti Networks, Inc. and certain holders of
Ubiquiti Networks, Inc.’s capital stock named therein.
Form of Indemnification Agreement between Ubiquiti
Networks, Inc. and its directors and officers.
Amended and Restated 2005 Equity Incentive Plan and
forms of agreement thereunder.
Amended and Restated 2010 Equity Incentive Plan and
forms of agreement thereunder.
Employment Agreement, dated as of February 10, 2011,
between Ubiquiti Networks, Inc. and Benjamin Moore.
Date Filed
June 17, 2011
June 17, 2011
3.2
3.4
4.1
October 3, 2011
4.2
June 17, 2011
S-1
S-1
S-1
S-1
S-1
4.3
June 17, 2011
S-1
S-1
S-1
S-1
10.1
October 3, 2011
10.2
June 17, 2011
10.3
June 17, 2011
10.5
June 17, 2011
Executive Employment Agreement between the
Company and Craig Foster, effective March 4, 2013.
8-K
10.1
March 8, 2013
Employment Agreement, dated as of May 1, 2010,
between Ubiquiti Networks, Inc. and John Sanford.
S-1
10.7
June 17, 2011
Employment Agreement, dated as of March 19, 2012,
between Ubiquiti Networks, Inc. and Jessica Zhou.
10-K
10.8
September 28, 2012
Non-Residential Property Lease Agreement, dated as of
May 28, 2009, between UAB “Devint” and Tomas
Grébliúnas, Tomas Skučas, and Vygante Skučiené.
Jinyong Ji Investment Taiwan Lease, dated as of March
16, 2010, between Ubiquiti Networks, Inc. and Jinyong
Ji Investment Co., Ltd.
S-1
10.9
June 17, 2011
S-1
10.10
June 17, 2011
Lease, dated as of July 9, 2010, between Ubiquiti
Networks, Inc. and The Welsh Office Center LLC.
S-1
10.11
June 17, 2011
10.11†
Amended Technology License Agreement, dated as of
September 1, 2010, between Ubiquiti Networks, Inc. and
Atheros Communications, Inc.
S-1
10.12
June 17, 2011
77
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Exhibit
Number
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
21.1
23.1
24.1
31.1
31.2
32.1~
Description
Loan and Security Agreement, dated as of September 15,
2011, between Ubiquiti Networks, Inc. and East West
Bank.
Taiwan Lease, dated as of July 20, 2011, between Jin
Yeoung Ji Co., Ltd. and Ubiquiti Networks International
Limited, Taiwan Branch.
Office Lease, dated as of December 8, 2011 and
executed on December 22, 2011, by and between
Ubiquiti Networks, Inc. and Carr NP Properties, L.L.C.
Loan and Security Agreement, dated as of August 7,
2012, by and among Ubiquiti Networks, Inc., the lenders
from time to time party thereto, U.S. Bank, as
Syndication Agent, and East West Bank, as
Administrative Agent
Credit Agreement, dated as of May 3, 2014, by and
among Ubiquiti Networks, Inc. and Ubiquiti
International Holding Company Limited, as Borrowers,
the Lenders referred to therein, as Lenders and Wells
Fargo Bank, National Associate, as Administration
Agent
Incorporated by
Reference from
Form
S-1
Incorporated by
Reference from
Exhibit Number
10.14
Date Filed
September 16, 2011
10-Q
10.15
November 14, 2011
10-Q/A
10.16
March 20, 2012
8-K
10.1
August 13, 2012
10-Q
10.1
May 9, 2014
Aircraft Lease Agreement between Ubiquiti Networks,
Inc. and RJP Manageco LLP, dated November 13, 2013
10-Q
10.1
February 7, 2014
Release of Claims Agreement between Ubiquiti
Networks, Inc. and Jessica Zhou
8-K
10.1
October 18, 2013
Offer Letter between Ubiquiti Networks, Inc., and David
Hsieh
10-Q
10.2
November 8, 2013
List of subsidiaries of Ubiquiti Networks, Inc.
Consent of independent registered public accounting
firm
Power of Attorney (contained in the signature page to
this Form 10-K)
Certification of Principal Executive Officer Required
Under Rule 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
Certification of Principal Financial Officer Required
Under Rule 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
Certification of Principal Executive Officer and Principal
Financial Officer Required Under Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended, and 18
U.S.C. §1350.
101.INS(*)
XBRL Instance Document
101.SCH(*)
XBRL Taxonomy Schema Linkbase Document
101.CAL(*)
XBRL Taxonomy Calculation Linkbase Document
101.DEF(*)
XBRL Taxonomy Extension Definition Linkbase
Document
78
Table of Contents
Exhibit
Number
101.LAB(*)
XBRL Taxonomy Labels Linkbase Document
Description
101.PRE(*)
XBRL Taxonomy Presentation Linkbase Document
Incorporated by
Reference from
Form
Incorporated by
Reference from
Exhibit Number
Date Filed
# Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
† Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment.
~ In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal
Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are
deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
(*) XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and is not otherwise subject to liability under these Sections.
79
Subsidiaries of Ubiquiti Networks, Inc.*
Exhibit 21.1
Ubiquiti Networks International Limited
Hong Kong
Ubiquiti International Holding Company Limited
Cayman Islands
*Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Ubiquiti Networks, Inc. are omitted because, considered
in the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by referen ce in the Registration Statement on Form S-8 (No. 333-177310, No. 333-185958 and No. 333-
193793) of Ubiquiti Networks, Inc. of our report dated August 22, 2014 relating to the consolidated financial statements, which appears in this
Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 22, 2014
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
RULE 13A-14(A) AND 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Robert J. Pera, certify that:
1. I have reviewed this annual report on Form 10-K of Ubiquiti Networks, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and
15d–15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
August 22, 2014
/s/ Robert J. Pera
Robert J. Pera
Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
RULE 13A-14(A) AND 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Craig L. Foster, certify that:
1. I have reviewed this annual report on Form 10-K of Ubiquiti Networks, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a–15(e) and 15d–15(e)) over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
August 22, 2014
/s/ Craig L. Foster
Craig L. Foster
Chief Financial Officer and Director
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert J. Pera, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report of Ubiquiti Networks, Inc. on Form 10-K for the fiscal year ended June 30, 2014 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K
fairly presents in all material respects the financial condition and results of operations of Ubiquiti Networks, Inc.
Date: August 22, 2014
Exhibit 32.1
By:
Name:
Title:
/s/ Robert J. Pera
Robert J. Pera
Chief Executive Officer and Director
(Principal Executive Officer)
I, Craig L. Foster, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report of Ubiquiti Networks, Inc. on Form 10-K for the fiscal year ended June 30, 2014 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K
fairly presents in all material respects the financial condition and results of operations of Ubiquiti Networks, Inc.
Date: August 22, 2014
By:
Name:
Title:
/s/ Craig L. Foster
Craig L. Foster
Chief Financial Officer and Director
(Principal Financial Officer)