What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-26 compared with 2021-08-27 · 95 added, 83 removed, 242 unchanged (42% of the section changed)

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We categorize our solutions into three main categories:

high performance networking technology for service providers, enterprises and consumers.

We target the service provider and enterprise markets through our highly engaged community of service providers, distributors, value added resellers, webstores, systems integrators and

corporate IT professionals, which we refer to as the Ubiquiti Community.

high performance

networking technology for enterprises, service providers and consumers.

We target the enterprise and service provider markets through our highly engaged community of service providers, distributors, value added resellers, webstores, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community.

We target consumers through digital marketing, retail chains and, to a lesser extent, the Ubiquiti Community.

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We believe that our products are differentiated due to our proprietary software, firmware expertise, and hardware design capabilities.

We distribute our products through a worldwide network of over 100 distributors and on-line retailers and direct to customers through our webstores.

We distribute our products through a worldwide network of over 100 distributors and online retailers and direct to customers through our webstores.

COVID-19 Update - The 2019 novel coronavirus (COVID-19), which the World Health Organization (“WHO”) characterized as a pandemic in March 2020, continues to disrupt global economies, and has spread to the major markets in which we operate, including the United States, Asia, Europe and South America.

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We have taken and will continue to take precautionary measures intended to help minimize the risk of COVID-19 to our employees.

While we have not yet experienced a significant disruption to the productivity of our employees as a result of the COVID-19 pandemic, if the stay-at-home orders or work remote or from home conditions in any of our facilities continue for an extended period of time, or if we have an outbreak in any of our facilities, we may, among other issues, experience delays in product development, a decreased ability to support our customers, disruptions in sales and an overall lack of productivity.

While we have not yet experienced a significant disruption to the productivity of our employees as a result of the COVID-19 pandemic, if the stay-at-home orders or work remote or from home conditions in any of our facilities continue for an extended period of time, or if an outbreak occurs in any of our facilities, we may, among other issues, experience delays in product development, a decreased ability to support our customers, disruptions in sales and an overall lack of productivity.

We have experienced a disruption in our supply chain and production as a result of the COVID-19 related restrictions and the global shortage of components.

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For example, in fiscal 2022, we experienced reduced availability of components (including the chipsets) used to manufacture our products, which has impacted, and we expect will continue to impact our ability and costs to manufacture our products.

These supply shortages have resulted in increased component delivery lead times and increased costs to obtain components, particularly the chipsets, and may result in delays in product production.

We do not stockpile sufficient components to cover the time it would take to re-engineer our products to replace the chipsets used to manufacture or products.

These supply shortages have resulted in increased component delivery lead times and increased costs to obtain components, particularly the chipsets, and may result in delays in product production, which shortages may be further exacerbated by increasing global shipping lead times and delays.

We do not stockpile sufficient components, particularly the chipsets, to cover the time it would take to re-engineer our products to replace the chipsets used to manufacture our products.

While we are continuing to work closely with our suppliers and contract manufacturers to minimize the potential adverse impacts of the supply shortage, there are many companies seeking to purchase the limited supply of chipsets and other components, many of which have greater resources and larger market share than we have, which may limit the effectiveness of our efforts.

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Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of these factors and other risks.

Recent Developments

Russia-Ukraine Military Conflict - We are monitoring the military conflict between Russia and Ukraine, escalating tensions in surrounding countries, and associated economic sanctions.

While the impact on our operations in Ukraine and its surrounding countries has not been material to our business or results of operations as of the date hereof, the full impact of the military conflict

on our business and results of operations remains uncertain.

The extent to which the conflict may impact our business or results of operations in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, as well as its impact on surrounding countries, including its impact on our operations in Ukraine and its surrounding countries, and its impact on global supply chains.

Refer to “Part I – Item IA.

Risk Factors” for a discussion of these factors and other risks.

China-Taiwan Tensions - We are monitoring the escalating tensions between China and Taiwan, and associated tensions between the U.S.

While the impact on our operations in Taiwan has not been material to our business or results of operations as of the date hereof, the full impact of the escalating tensions and potential military conflict on our business and results of operations remains uncertain.

relations, including its impact on our operations in Taiwan, and its impact on global supply chains.

Refer to “Part I – Item IA.

Risk Factors” for a discussion of these factors and other risks.

Key Components of Our Results of Operations and Financial Condition

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We classify our revenues into two primary product categories:

Service Provider Technology and Enterprise Technology.

Enterprise Technology and Service Provider Technology.

• Enterprise Technology includes our UniFi platforms, including UniFi Network Wi-Fi, switching and routing solutions, UniFi Protect, UniFi Access, UniFi-Talk and our AmpliFi platform.

• Service Provider Technology includes our airMAX, EdgeMAX, UFiber, and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and CPE.

Additionally, Service Provider Technology includes antennas and other products primarily in the 0.9 to 6.0 GHz spectrum and miscellaneous products such as mounting brackets, cables and power over Ethernet adapters.

• Enterprise Technology includes our UniFi platforms, including UniFi enterprise Wi-Fi, UniFi Protect, UniFi Access, UniFi-Talk, UniFi switching and routing solutions and our AmpliFi platform

We sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors, and, to a lesser extent, through direct sales through our webstores.

We sell our products and solutions globally to enterprises and service providers primarily through our extensive network of distributors and through direct sales through our webstores.

Sales to distributors accounted for 65% and 83% of our revenues in the year ended June 30, 2022 and 2021, respectively.

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In addition, cost of revenues includes labor and other costs w hich include salary, benefits and stock-based compensation, in addition to costs associated with tooling, testing and quality assurance, warranty costs, logistics costs, tariffs and excess and obsolete inventory write-downs.

We currently operate warehouses located in the U.S.

and the Czech Republic.

We currently operate warehouses located in the U.S., Europe and Asia Pacific.

In addition, we outsource other logistics warehousing and order fulfillment functions located in China and to a lesser extent in other countries.

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To the extent that we establish a reserve, the provision for income taxes would be increased.

If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognizes a tax benefit during the period in which we determine that the liability is no longer necessary.

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.

We 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.

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Revenue consists of revenue from sales of hardware and the related essential software (“Products”) as well as related implied PCS.

We recognize revenue when obligations under the terms of a contract with our customers are satisfied, generally, upon transfer of control of promised goods or services to customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services.

We recognize revenue when obligations under the terms of a contract with our customers are satisfied, generally, upon transfer of

control of promised goods or services to customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services.

We apply the following five-step revenue recognition model:

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Our contracts with the majority of our distribution customers do not include provisions for cancellations, returns, inventory swaps, or refunds that materially impact recognize d revenue.

Internet or Web based sales include regulatory provisions which allow customers to return the goods, generally within 30 days and did not materially impact recognized revenue.

Internet or Web based sales include regulatory provisions which allow customers to return the goods, generally within 30 days.

We record a provision for returns related to this variable consideration based upon its historical returns experience with these customers.

We record amounts billed to distributors for shipping and handling costs as revenues.

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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 could also change.

Key factors considered by the Company in developing the estimated cost in the cost plus margin approach for PCS includes reviewing the activities of specific employees engaged in support and software enhancements to determine the amount of time that is allocated to the development of the undelivered elements, determining the cost of the development effort, and then adding an appropriate level of gross profit to these costs.

If the estimated life of the hardware product should change, the future rate of amortization of the revenues allocated to PCS could also change.

Key factors considered by the Company in developing the estimated cost in the cost plus margin approach for PCS include reviewing the activities of specific employees engaged in support and software enhancements to determine the amount of time that is allocated to the development of the undelivered elements, determining the cost of the development effort, and then adding an appropriate level of gross profit to these costs.

Inventory and Inventory Valuation

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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 NRV.

Write-downs are not reversed until the related inventory has been subsequently sold or scrapped.

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.

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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.

Accordingly, we must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss.

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

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Total stock-based compensation $ 3,516 $ 3,029

Total revenues increased $613.6 million, or 48%, from $1.3 billion in fiscal 2020 to $1.9 billion in fiscal 2021.

Total revenues decreased $206.4 million, or 10.9%, from $1,898.1 million in fiscal 2021 to $1,691.7 million in fiscal 2022.

The decline in revenue was primarily driven by a decrease in revenue in the Service Provider Technology platform.

During fiscal year ended June 30, 2022, there were no material price changes in our products sold.

However, we continue to introduce new products which may have average selling prices and margins different than our legacy products.

During fiscal 2021, we have and continue to experience limitations in our ability to secure products due to COVID-19 and the worldwide component shortage.

This has limited our ability to meet demand, caused us to delay introducing new products and significantly increased our backlog of orders.

While we have taken several steps to secure components and manufacturing capacity with our contract manufacturers, it is uncertain whether we will continue to be able to procure products at our current levels.

However, we have experienced an increase in webstore direct to consumer sales which has a higher average selling price compared to sales to our distribution partners and we continue to introduce new products which may have average selling prices and margins different than our legacy products.

During fiscal 2022 our revenues were negatively impacted by our inability to fulfill demand due to the global component supply shortage and the continued outbreaks of COVID-19 around the world.

These factors have limited our ability to meet demand, caused us to delay introducing new products, prioritize which products are manufactured, what regions receive products, and significantly increased our backlog of orders and we expect to continue during fiscal 2023.

Revenues by Product Type

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(in thousands, except percentages)

Service Provider Technology $ 623,163 33 % $ 442,023 34 %

Enterprise Technology 1,316,685 78 % 1,274,931 67 %

Service Provider Technology $ 375,007 22 % $ 623,163 33 %

Total revenues $ 1,691,692 100 % $ 1,898,094 100 %

Service Provider Technology revenues increased $181.1 million, or 41.0%, from $442.0 million in fiscal 2020, to $623.2 million in fiscal 2021, primarily due to increased revenue in all regions across all the platforms.

Enterprise Technology revenues increased $432.5 million, or 51.3%, from $842.5 million in fiscal 2020, to $1.3 billion in fiscal 2021 primarily due to product expansion and further adoption of our UniFi technology platform across all regions.

Enterprise Technology revenues increased $41.8 million, or 3.3%, from $1,274.9 million in fiscal 2021, to $1,316.7 million in fiscal 2022 primarily due to increased revenue from our UniFi technology platform across all geographic regions other than EMEA.

Service Provider Technology revenues decreased $248.2 million, or 39.8%, from $623.2 million in fiscal 2021, to $375.0 million in fiscal 2022, primarily due to decreased revenues in all of our product platforms across all geographic locations.

Revenues by Geography

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North America

Revenues in North America increased $264.1 million, or 46.2%, from $571.9 million in fiscal 2020 to $836.0 million in fiscal 2021.

The year-over-year increase was primarily due to increased revenues from both our Enterprise Technology and Service Provider Technology products.

South America

Revenues in South America increased $38.9 million, or 46.7%, from $83.3 million in fiscal 2020 to $122.2 million in fiscal 2021.

The year-over-year increase was primarily due to increased revenue from both our Enterprise Technology products and Service Provider Technology products.

Revenues in North America decreased $45.2 million, or 5.4%, from $836.0 million in fiscal 2021 to $790.8 million in fiscal 2022.

The year-over-year decrease was primarily due to decreased revenues from our Service Provider Technology products offset in part by increased revenue from Enterprise Technology products.

Europe, the Middle East, and Africa (“EMEA”)

Revenues in EMEA increased $268.2 million, or 51.9%, from $517.1 million in fiscal 2020 to $785.3 million in fiscal 2021.

The year-over-year increase was due to increased revenues from both our Enterprise Technology products and Service Provider Technology products.

Revenues in the Asia Pacific region increased $42.4 million, or 37.8%, from $112.1 million in fiscal 2020 to $154.5 million in fiscal 2021.

The year-over-year increase was due to increased revenues from both our Enterprise Technology products and Service Provider Technology products.

Revenues in EMEA decreased $110.0 million, or 14.0%, from $785.3 million in fiscal 2021 to $675.3 million in fiscal 2022.

The year-over-year decrease was due to decreased revenues from both our Enterprise Technology products and Service Provider Technology products.

Revenues in the Asia Pacific region decreased $19.5 million, or 12.7%, from $154.5 million in fiscal 2021 to $135.0 million in fiscal 2022.

The year-over-year decrease was primarily due to decreased revenues from our Service Provider Technology products offset in part by increased revenue from Enterprise Technology products.

South America

Revenues in South America decreased $31.6 million, or 25.9%, from $122.2 million in fiscal 2021 to $90.6 million in fiscal 2022.

The year-over-year decrease was primarily due to decreased revenues from our Service Provider Technology products offset in part by increased revenue from Enterprise Technology products.

Cost of Revenues and Gross Profit

Cost of revenues increased $36.1 million, or 3.7%, from $985.8 million in fiscal 2021 to $1,021.9 million in fiscal 2022.

The increase in fiscal 2021 was primarily due to cost increase associated with an overall increase in revenue, higher tariffs and shipping

costs, partially offset by lower indirect costs.

Gross profit margin increased to 48.1% in fiscal 2021 from 47.3% in fiscal 2020.

The increase in gross profit margin was primarily driven by favorable changes in product mix as well as other indirect costs being lower as a percentage of overall revenue, partially offset by higher shipping costs.

The increase in fiscal 2022 was primarily driven by higher shipping costs, increased component costs and increase in general operating expenses.

Gross profit margin decreased to 39.6% in fiscal 2022 from 48.1% in fiscal 2021.

The decline in GAAP gross margin for full fiscal 2022 versus full fiscal 2021 was primarily driven by higher shipping costs, increased component costs and an increase in general operating expenses.

General transportation costs have increased materially, and we continue to incur additional costs on top of these general costs to expedite shipments.

Operating Expenses

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Research and development (“R&D”) expenses increased $21.5 million, or 18.5%, from $116.2 million in fiscal 2021 to $137.7 million in fiscal 2022.

As a percentage of revenues, research and development expenses decreased from 7.0% in fiscal 2020 to 6.1% in fiscal 2021.

The increase in R&D expense in absolute dollars was primarily driven by higher-employee related expenses and general development activities.

As a percentage of revenues, research and development expenses increased from 6% in fiscal 2021 to 8% in fiscal 2022.

The increase in R&D expense for fiscal 2022 versus fiscal 2021 was primarily driven by higher employee related expenses, prototype testing expenses, software expenses, depreciation and amortization expenses and rent.

Sales, General and Administrative

Sales, general and administrative (“SG&A”) expenses increased $16.4 million, or 30.5%, from $53.5 million in fiscal 2021 to $69.9 million in fiscal 2022.

As a percentage of revenues, sales, general and administrative expenses decreased from 3.2% in fiscal 2020 to 2.8% in fiscal 2021.

The increase in SG&A in absolute dollars was primarily due to higher professional and service fee and higher depreciation expense, offset in part by a legal settlement received in the second quarter fiscal 2021 and a BEC recovery received in the third quarter fiscal 2021.

As a percentage of revenues, sales, general and administrative expenses increased from 3% in fiscal 2021 to

4% in fiscal 2022.

The increase in fiscal 2022 SG&A expenses as compared to fiscal 2021 was primarily driven by increased fees associated with webstore credit card processing, increased travel expense and donations to humanitarian relief organizations addressing the military conflict between Russia and Ukraine, offset in part by lower legal related costs.

Provision for Income Taxes

Our provision for income taxes increased 58.9% from $69.9 million for fiscal 2020 to $111.1 million for fiscal 2021.

Our provision for income taxes decreased 40.8% from $111.1 million for fiscal 2021 to $65.8 million for fiscal 2022.

Our effective tax rate decreased to 14.8% in fiscal 2022 as compared to 15.3% for fiscal 2021.

The decrease in the effective tax rate in fiscal 2021 is primarily due to certain discrete tax benefits recognized during the fiscal year, partially offset by an increase in overall taxable income in jurisdictions with higher tax rates.

The decrease in the effective tax rate in fiscal 2022 is primarily due to reduced domestic pre-tax income along with certain discrete tax benefits recognized during the fiscal year, partially offset by an increase in local taxes in foreign jurisdictions.

While our effective rate has remained relatively consistent, the rate can vary based upon changes in the mix of the taxable income earned in various tax jurisdictions and the timing of provisions related to discrete tax items.

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Net cash provided by operating activities in fiscal 2022 consisted primarily of net income of $378.7 million, partially offset by the changes in operating assets and liabilities that resulted in net cash outflows of $38.1 million.

This net change consisted primarily of $52.9 million decrease in inventory offset by $17.1 million increase in vendor deposit, $30.1 million increase in accounts receivable due to higher revenue for the period, a $30.5 million increase in prepaid and other assets, and a $27.8 million decrease in taxes payable due to the timing of federal tax payments, a $12.9 million increase in accounts payable and accrued liabilities.

Net cash provided by operating activities in fiscal 2020 consisted primarily of net income of $380.3 million, in addition to the changes in operating assets and liabilities that resulted in net cash inflows of $52.4 million.

This net change consisted primarily of $28.1 million increase in inventory offset by $3.1 million decrease in vendor deposits, $10.8 million increase in prepaid and other assets, and a $3.5 million decrease in taxes payable due to the timing of federal tax payments, partially offset by a $76.9 million increase in accounts payable and accrued liabilities and $13.9 million decrease in accounts receivable.

This net change consisted primarily of $29.6 million increase in inventory, $79.0 million increase in vendor deposits, and a $10.3 million decrease in taxes payable due to the timing of federal tax payments offset by $52.7 million decrease in accounts receivable due to lower revenue for the period, a $1.8 million decrease in prepaid and other assets, and a $29.9 million increase in accounts payable, accrued and other liabilities.

Net cash provided by operating activities in fiscal 2021 consisted primarily of net income of $616.6 million, partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $32.3 million.

This net change consisted primarily of $52.9 million decrease in inventory offset by $17.1 million increase in vendor deposits, $30.5 million increase in accounts receivable due to higher revenue for the period, a $30.5 million increase in prepaid and other assets, a $27.8 million decrease in taxes payable due to the timing of federal tax payments, and a $12.9 million increase in accounts payable and accrued liabilities.

Due to our inability to meet demand because of the supply chain constraints and general price increases, we expect that we will need to increase our investment in inventory and vendor deposits.

Cash Flows from Investing Activities

We used $11.2 million of cash in investing activities during fiscal 2022.

Our investing activities consisted primarily of $13.5 million of capital expenditures and purchase of intangible assets, offset by $2.3 million net proceeds from sales / maturities of our available-for-sale securities.

We used $19.3 million of cash in investing activities during fiscal 2021.

Our investing activities consisted primarily of $18.3 million of capital expenditures and purchase of intangible assets, and $0.9 million net purchases for our available-for-sale securities.

Net cash provided by investing activities during fiscal 2020 was $69.6 million.

Our investing activities consisted of cash inflows of $100.2 million net proceeds from our available-for-sale securities offset, in part by $30.6 million of capital expenditures.

Cash Flows from Financing Activities

We used $472.3 million of cash in financing activities during fiscal 2022.

During fiscal 2021, we used $161.3 million of net funds for repayments under the Facilities, $219.8 million related to repurchase of common stock, $100.8 million related to dividends paid on our common stock and $3.3 million of debt issuance costs related to the amended and restated credit agreement.

During fiscal 2022, we used $618.1 million for repurchase of common stock, $148.1 million for dividends paid on our common stock and received net proceeds from our borrowings of $295.0 million.

See Note 8 - Debt of the Notes to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for additional information regarding the Facilities.

We used $486.0 million of cash in financing activities during fiscal 2021.

During fiscal 2020, we generated $157.5 million of net funds from borrowing and repayments under our credit facilities, which were more than offset by financing cash outflows of $700.1 million related to the repurchase of our common stock, $78.7 million related to dividends paid on our common stock and $3.1 million of debt issuance costs.

We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds under our Facilities will be sufficient to meet our working capital, future stock repurchases, dividends, and capital expenditure needs for the next twelve months, including known contractual obligations of $76.3 million , excluding off-balance sheet arrangements as discussed below, for other obligations.

However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated or need to rely more heavily on our Facilities or other sources of liquidity to continue to meet our needs.

Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, pricing inflation for the components (including chipsets) to manufacture our products, the timing and extent of spending to support development efforts, the timing of new product introductions, market acceptance of our products, the availability of additional funds under our Facilities and overall economic conditions.

See Note 8 - Debt of the Notes to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for additional information regarding the Facilities.

We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds under the Facilities will be sufficient to meet our working capital, future stock repurchases, dividends, and capital expenditure needs for the next twelve months, as well as long-term liquidity requirements.

However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated or need to rely more heavily on the Facilities or other sources of liquidity to continue to meet our needs.

Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development efforts, the timing of new product introductions, market acceptance of our products, the availability of additional funds under the Facilities and overall economic conditions.

The COVID-19 pandemic and resulting global disruptions have caused and may continue to cause significant volatility in financial markets and the domestic and global economy.

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For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, refer to “Part I-Item 1A.

Risk Factors – Risks Related to Our Business and Industry - Our contract manufacturers, logistics centers and certain administrative and research and development operations, as well as our customers and suppliers, are located in areas likely to be subject to natural disasters and public health problems, which could adversely affect our business, results of operations and financial condition” for additional information.

Risk Factors – Risks Related to Our Business and Industry - Our contract manufacturers, logistics centers and certain administrative and research and development operations, as well as our customers and suppliers, are located in areas likely to be subject to natural disasters, public health problems, military conflicts and geopolitical tensions, which could adversely affect our business, results of operations and financial condition” for additional information.

We expect to continue to maintain financing flexibility in the current market conditions.

However, due to the rapidly evolving global situation, it is not possible to predict whether unanticipated consequences of the pandemic are reasonably likely to materially affect our liquidity and capital resources in the future.

Warranties and Indemnifications

Our products are generally accompanied by a twelve to twenty-four month warranty from date of purchase, which covers both parts and labor.

Generally, the distributor is responsible for the freight costs associated with warranty returns, and we absorb the freight costs of replacing items under warranty.

In accordance with the Financial Accounting Standards Board’s (“FASB’s”), Accounting Standards Codification (“ASC”), 450-20, Loss Contingencies, we record an accrual when we believe it is reasonably estimable and probable based upon historical experience.

We record a provision for estimated future warranty work in cost of goods sold upon recognition of revenues, and we review the resulting accrual regularly and periodically adjust it to reflect changes in warranty estimates.

We have entered and may in the future enter into standard indemnification agreements with certain distributors as well as other business partners in the ordinary course of business.

These agreements may include provisions for indemnifying the distributor, OEM or other business partner against any claim brought by a third-party to the extent any such claim alleges that a Ubiquiti product infringes a patent, copyright or trademark or violates any other proprietary rights of that third-party.

The maximum amount of potential future indemnification is unlimited.

The maximum potential amount of future payments we could be required to make under these indemnification agreements is not estimable.

We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain

limits, while such persons are or were serving at our request in such capacity.

We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination.

The maximum amount of potential future indemnification is unlimited.

We have a Directors and Officers insurance policy that limits our potential exposure for our indemnification obligations to our directors, officers and certain other employees.

We believe the fair value of these indemnification agreements is minimal.

We have not recorded any liabilities for these agreements as of June 30, 2022 or 2021.

Based upon our historical experience and information known as of the date of this Annual Report on Form 10-K, we do not believe it is likely that we will have material liability for the above indemnities as of June 30, 2022.

Contractual Obligations and Off-Balance Sheet Arrangements

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We subcontract with third parties to manufacture our products and have purchase commitments with key component suppliers.

During the normal course of business, our contract manufacturers procure components and manufacture products based upon orders placed by us.

If we cancel all or part of the orders, we may still be liable to the contract manufacturers for the cost of the components purchased by the subcontractors to manufacture our pr oducts.

We periodically review the potential liability, and as of June 30, 2021, we have recorded a purchase obligation liability o f $8.0 million relat ed to component purchase commitments.

D uring the normal course of business, our contract manufacturers procure components and manufacture products based upon orders placed by us.

If we cancel all or part of the orders, we may still be liable to the contract manufacturers for the cost of the components purchased by the subcontractors to manufacture our products.

We periodically review the potential liability, and as of June 30, 2022, we have recorded a purchase obligation liability of $7.8 million related to component purchase commitments.

There have been no other significant liabilities for cancellations recorded as of June 30, 202 2.

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We have obligations of $76.4 million as of June 30, 2022, related to transition tax.

Payment of these obligations are expected to be $9.0 million for fiscal 2022, $9.0 million for fiscal 2023, $16.9 million for fiscal 2024, $22.5 million for fiscal 2025 and $28.1 million for fiscal 2026.

Payment of these obligations are expected to be $9.0 million for fiscal 2023, $16.9 million for fiscal 2024, $22.5 million for fiscal 2025 and $28.0 million for fiscal 2026.

These obligations are included within Income tax payable and Long-term taxes payable on our Consolidated Balance Sheets.

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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.

Warranties and Indemnifications

Our products are generally accompanied by a twelve to twenty-four month warranty from date of purchase, which covers both parts and labor.

Generally, the distributor is responsible for the freight costs associated with warranty returns, and we absorb the freight costs of replacing items under warranty.

We have entered and may in the future enter into standard indemnification agreements with certain distributors as well as other business partners in the ordinary course of business.

The maximum amount of potential future indemnification is unlimited.

The maximum potential amount of future payments we could be required to make under these indemnification agreements is not estimable.

We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity.

We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to

events occurring prior to the effective date of termination.

The maximum amount of potential future indemnification is unlimited.

We have a Directors and Officers insurance policy that limits our potential exposure for our indemnification obligations to our directors, officers and certain other employees.

We believe the fair value of these indemnification agreements is minimal.

We have not recorded any liabilities for these agreements as of June 30, 2021 or 2020.

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 material liability for the above indemnities as of June 30, 2021.

Off-Balance Sheet Arrangements

As of June 30, 2021 and 2020, we had no off-balance sheet arrangements other than those mentioned above.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis