October 14, 2011 / 12:45 AM / 8 years ago

UPDATE 1-Ubiquiti breaks US IPO drought amid Iran controversy

* IPO prices at $15 vs $15-$17 range - underwriter

* Sells 7,038,230 shares; raises $105.6 mln - underwriter

* Company violated U.S. law; sold to Iran, others

By Clare Baldwin

Oct 13 (Reuters) - Wireless equipment maker Ubiquiti Networks Inc broke a two-month drought in the U.S. IPO market on Thursday pricing shares in its initial public offering at the low end of the expected range.

The company and its owners sold 7.04 million shares for $15 each, raising $105.6 million. They had planned to sell 7 million shares for $15 to $17 each. Earlier on Thursday the company lowered its price range from $20 to $22 per share.

Prior to Ubiquiti, the U.S. IPO market had been shut for two months. It closed in August for a traditional summer holiday, but then failed to reopen as concerns about Europe’s debt crisis and a weak economic recovery in the United States made markets volatile.

Yet even as Ubiquiti has been successful in completing its IPO, it faces a big challenge in addressing concerns about its corporate governance.

Ubiquiti, whose shares will trade on Nasdaq under the stock symbol UBNT.O, makes wireless networking and video surveillance equipment. It said in its prospectus that certain of its products were sold to Iran, Cuba, Syria, the Sudan and North Korea and that some of its encryption components were sold without the appropriate export authorization.

A review of Ubiquiti’s sales to Iran by the Department of Commerce’s Office of Export Enforcement earlier this year resulted in a warning letter, but no criminal or administrative prosecution or other penalties — but Ubiquiti remains under review by the Department of the Treasury’s Office of Foreign Assets Control.

Depending on the outcome of that review, Ubiquiti could face fines, lose its ability to export and be referred for criminal prosecution, it said in its IPO prospectus.

Seventy percent of Ubiquiti’s fiscal 2011 revenue came from overseas. U.S. relations with Iran are particularly sensitive right now because of an alleged attempt by Iran to assassinate the Saudi Arabian ambassador in Washington.

“Our lack of sufficient familiarity was largely due to our lean corporate infrastructure, the inexperience of our management team in these matters and the fact that our products are manufactured outside the United States and most of our products never enter the United States,” the company wrote in its IPO prospectus.

The company said it did not mean to violate U.S. law. In fiscal 2010, it recorded an expense of $1.6 million for export compliance, which it said is its best estimate of its exposure to fines. It said its business could suffer if any actual fines are materially different.

Ubiquiti was not available for comment.

Nick Einhorn, an analyst at Connecticut-based IPO research and investment house Renaissance Capital, said Ubiquiti’s sales to countries such as Iran were unlikely to be a deal-breaker.

“The numbers that the company has shown so far are impressive and definitely enough to interest investors,” Einhorn said. “They’ve grown very quickly and have good operating margins.”

For the year ended June 30, Ubiquiti posted a net income attributable to common stockholders of $4.98 million on revenue of $197.87 million.

SMALL OPERATION

As of June 30, Ubiquiti had about 92 full time-equivalent employees in four offices globally. It has no direct sales force, but instead relies on distributors, resellers and original equipment manufacturers.

Chief Executive Robert Pera is a former wireless engineer at Apple Inc . Other company executives currently include former Cushcraft Corporation/Laird Technologies engineers and a lawyer. The Chief Financial Officer is a former CFO at digital printing company Electronics for Imaging Inc.

Ubiquiti said it first learned that its products could not be sold into Iran or other countries subject to U.S. embargo in March 2010, in connection with due diligence performed as part of a transaction with investor Summit Partners.

One Ubiquiti distributor continued selling products to Iran after it was told not to and another was discovered doing so. Ubiquiti also continued to use incorrect export authorizations for its encryption components for a time after discovering the problem because it did not understand how to comply.

Ubiquiti said it has since revised its distribution agreements, disabled software downloads in certain countries and obtained the appropriate paperwork for its encryption products.

Most of the shares sold in the IPO were expected to come from Ubiquiti’s owners. The company was only planning to issue 2.4 million new shares, the proceeds of which it said it would use to repay debt.

When Ubiquiti cut its price range on Thursday, it said Board member John Ocampo, who owned less than 1 percent of the company, had indicated he was interested in purchasing stock in the IPO. That indication was nonbinding.

The IPO’s underwriters were led by UBS Investment Bank, Deutsche Bank Securities and Raymond James. The shares are expected to begin trading on the Nasdaq on Friday under the symbol “UBNT.”

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