Announcement PDF 1 Atomos Limited Annual Report 2023 2 Chair’s Message Dear Shareholders I am pleased to present the FY23 Annual Report for Atomos Limited (ASX: AMS). As you may know, I was appointed non-executive Director and Chair on 15 February 2023. Since that time, I have been heavily involved with the executive team to improve the business operations and improve shareholder value. At its core, Atomos is one of the world’s leading video technology companies that has been instrumental in connecting the imaging and computer worlds via a suite of innovative products and technologies. However, at various times over the past 18 months, impacted by internal and external factors, we have fallen short of the high standards to which we hold ourselves. In saying this, the Board and Senior Management have taken steps to rectify several operational and financial challenges within the business including: • • • • • • • • Reducing operating costs by 45% including a headcount reduction from circa 150 in April 2022 to 94 as of October 2023 Reducing inventory by over 45% from a peak of $30.8m in September 2022 to $16.8m as of October 2023 Reducing debt from $12m in July 2022 to $2.9m as of October 2023 Release of the new Ninja and Shogun (which have been well received by the market) Appointment of new auditors Reduction in the number of Board members A temporary reduction of Board fees Improved the terms and conditions of our borrowings Despite the above, the financial results for the 2023 year are still unacceptable. Disappointingly, revenue was materially down from where we expected it to be, which developed from an unexpected difficult trading environment. Further restructure initiatives have been identified to rebalance the business with current trading and to ensure future profitability at revenue levels materially below FY23. To effect part of the restructure plan, the Company will require additional financing and is well progressed in discussions with funding providers. We expect to provide further updates in respect of the restructure and financing arrangements prior to the end of the year. I would like to thank my fellow board directors, Trevor, Sir Hossein, and the entire Atomos team for your hard work, diligence, and significant contributions in what has been a very challenging period. Finally, I’d like to thank our shareholders for their support and patience throughout the year. Kind Regards, Paul Greenberg Chair 3 CEO’s Address Dear Investor, Firstly, I’d like to thank you all for your support and patience throughout FY23; it has been a challenging year on many fronts, and while outwardly at times it may have appeared the business has not been making much progress, I can assure you that within the business, we have been working tirelessly to ensure that value is returned to you all. I cannot deny the fact that as a business, we are not pleased with the performance for FY23. We hold ourselves to high standards, and by those standards, we have failed to deliver the outcomes we expect, and you deserve. While some of the factors that have influenced performance have been external (softening global economy, actors’ and writers’ strikes in Hollywood), we are striving for material improvement. As difficult as FY23 has been, there has been a lot of positive progress made. Significant costs have been taken out of the business in a broad-ranging rightsizing initiative which has sought to align the costs and capabilities with current trading conditions. We have reduced fixed costs by around 45% from AUD $31.1m per year down to a current run-rate of around $17m, with a second stage to follow soon subject to additional funding which is currently being negotiated. This second stage of rightsizing will see the business operating at a break-even revenue of around $36m – which is about 16% lower than FY23 revenue. We also substantially reduced our debt position. Starting the year with $12m of debt, at the time of this note that debt is now down to $2.9m. And we’ve also reduced our substantial inventory holding from $30.8m at the start of the year to the $16.8m of inventory we are currently holding. While there is still a little more work to do with the second stage of rightsizing, the business is now on a much better footing, both to deal with the current challenging economic conditions, but also to take advantage of the enormous added potential our new products and services hold. Regarding new products and services, we have recently launched a new line of flagship products, replacing our ageing 5-inch Ninja V and V+, as well as an update to our Shogun Connect 7-inch product. These new Ninjas and Shoguns showcase our all-new Atomos 11 operating system which provides several great new features for offline more traditional customers, as well as a host of exciting new features for our cloud-connected customers. We’ve also made good inroads with our cloud strategy with the official launch of Atomos Cloud Studio. We now have more than 7,000 user accounts on the system, and have seen steady growth in the number of devices being used with the cloud, and a more-than-proportionate growth in the amount of video uploaded. This indicates that users are making permanent use of the platform, which gives us great encouragement for the future. In closing, despite challenges encountered throughout the year, I remain confident that Atomos products will continue to drive growth and scalability. I would like to thank the entire team for their commitment and continued execution of key strategic initiatives during the year, as we close out FY24. I would also like to extend thanks to all staff and our shareholders for their ongoing support as we strive to become a major player in the global video industry. 4 Kind Regards, Trevor Elbourne CEO 5 Directors’ Report The directors of Atomos Ltd (‘Atomos’ or ‘the Company’) present their report together with the financial statements of the consolidated entity, being Atomos and its Controlled Entities (‘the Group’) for the year ended 30 June 2023. Directors The names of the directors in office at any time during or since the end of the year are: Sir Hossein Yassaie Mr Christopher John Tait (up to 28 February 2023) Mr Stephen John Stanley (up to 29 September 2022) Ms Megan Brownlow (up to 30 June 2023) Ms Lauren Williams (up to 29 September 2022) Mr Trevor Elbourne (effective 30 September 2023) Mr Paul Greenberg (effective 15 February 2023) The above-named directors held office during and since the end of the financial year unless otherwise stated. Principal activities During the year the principal activities of the Group consisted of: • • The design, manufacture and sale of video equipment; and The development and sale of software applications to enhance its physical products. There have been no significant changes in the nature of these activities during the year. Business strategy and prospects The Company has identified additional restructure initiatives to further reduce the cost base in order to ensure future profitability at revenue levels materially below FY23. To effect part of the restructure plan, the Company will require additional financing and is well progressed in discussions with funding providers. The recapitalisation will also enable the completion of a number of new products which have been on hold due to working capital constraints. These products will build on our recent move into cloud-based software and solutions and the ‘connected’ content creation eco-system. 6 Review of Results and Operations Consolidated Statement of Profit or Loss and Other Comprehensive Income Revenue Cost of sales Gross profit Gross Margin % Operating expenses EBITDA Finance costs Depreciation and amortisation Impairment of non-financial assets (Loss)/Profit before income tax Income tax expense (Loss)/Profit for the year Normalised Consolidated Statement of Profit or Loss and Other Comprehensive Income Revenue Gross profit Gross Margin % Operating expenses Normalised EBITDA 2023 2022 Change $ $'000 42,763 (38,050) 4,713 11% (30,232) (25,519) (2,120) (2,973) (30,676) (61,288) 227 (61,061) $'000 73,282 (44,502) 28,780 39% (33,858) (5,078) (527) (3,874) (9,479) (884) (10,363) $'000 (30,519) 6,452 (24,067) 3,626 (20,441) (1,593) 901 (30,676) (51,809) 1,111 (50,698) (42%) (14%) (84%) (28%) (11%) 403% 302% (23%) N/A 547% (126%) 489% 2023 2022 Change $ Change % $'000 42,763 4,713 11% (30,232) (25,519) $'000 73,282 30,643 42% (30,059) 584 $'000 (30,519) (25,930) (173) (26,103) Change % (42%) (85%) (31%) 1% (4470%) Revenue of $42.8 million was down $30.5 million, or 42%, from $73.3 million. During the year the Company experienced very weak sales as a result of a deterioration in economic conditions in the industry and slower than anticipated momentum from the Company’s most recently released products. The Company also experienced lower gross margins attributed by higher cost of sales from promotional pricing and higher inventory obsolescence provisioning. Key Drivers of Performance Revenue Revenue was severely impacted by the global economic downturn, the consequent de-stocking in our channel and the slower than planned momentum of our new products. Sell through analysis obtained from our channel partners demonstrates that the underlying fall in demand was much less than our own decline in sales. Once the channel de-stocking was complete, we began to see an improvement in sales, however demand remains well below 2021 and 2022. Gross Margin Gross margin of 11% is significantly lower than in previous years. Atomos began 2023 carrying much higher inventory levels than desirable, this was as a result of component stockpiling during the COVID induced period of semi-conductor component scarcity and the resultant expansion in lead times, combined with a sharp decline in demand. With our channel partners expressing the need to de-stock, we used aggressive pricing to drive end user demand. We also made significant provisions against finished goods inventory which is slow-moving and excessive levels of component inventory. 7 Operating Costs We took prompt action to address the weaker sales performance by reducing our cost base, predominantly through a reduction in headcount, marketing expenditure as well as other operating expenses. These actions result in a fixed cost base for FY23 of $25.2m, 19% lower than in FY22 and is expected to result in an annualised cost base of $17m in FY24 (a 44% reduction overall). During the year, Atomos continued to invest in R&D, particularly in development of its cloud-based ecosystem. The details of items that were significant and/or not considered to be in the ordinary course of business are adjusted as per the table below to provide a view of the underlying trading result. $’000 Revenue Cost of sales Gross profit Gross Margin % Operating Expenses – ongoing Operating Expenses – one-off EBITDA Depreciation and amortisation Impairment charge Finance costs Loss before income tax Income tax expense Loss for the year 1 2023 Items that were significant and/or not in the ordinary course of 1 business Underlying Result 42,763 (38,050) 4,713 11% (28,131) (2,101) (25,519) (2,973) (30,676) (2,120) (61,288) 227 (61,061) - 42,763 (38,050) 4,713 11% (28,131) (23,418) (2,973) (2,120) (28,511) 227 (28,284) 2,101 2,101 30,676 32,777 32,777 $’000 Items that were significant and/or not in the ordinary course of business (2023) Operating Expenses Redundancies (restructuring) CEO separation and legal claim Impairment charge Operating Expenses 339 1,762 30,676 32,777 Total Items not in the ordinary course of business 32,777 8 Cash flow Financial position Summary of Balance Sheet ($A'000) Cash and cash equivalents Trade and other receivables Inventories Other assets Intangible assets Total assets Trade and other payables Lease liabilities Other liabilities Borrowings Total liabilities Net assets Issued capital Reserves Accumulated losses Equity 2023 2,943 5,166 15,366 13,700 2022 5,001 20,654 28,831 16,640 - 28,939 100,065 (24,453) (6,575) (2,774) (12,021) (45,823) 54,242 102,492 3,260 (51,510) 54,242 37,175 (15,239) (6,178) (2,629) (3,359) (27,405) 9,770 119,301 3,040 (112,571) 9,770 At 30 June 2023, Atomos had: • $2.9m of cash on hand • Drawn $3.4m debt facility • $80.2m of tax losses and R&D tax credits unrecognised and available to offset future tax Cash flows from operating activities (Loss)/Profit for the year Non cash items Movements in working capital Net cash (used in) / generated by operating activities Capital expenditure Financing and investing activities Net change in cash and cash equivalents Cash and cash equivalents at the beginning of the period Exchange differences on cash and cash equivalents Cash and cash equivalents at the end of the period 2023 (61,061) 40,111 18,388 2022 (10,363) 4,088 (20,170) (2,562) (3,123) 3,547 (2,138) (26,445) (5,925) 11,387 (20,983) 5,001 25,984 - 80 2,943 5,001 Key cash flow movements: • Net cash used in operating activities of $2.7m was driven by EBITDA losses of $25.5m largely offset by a reduction in working capital • Investing activities consumed $4.9m via capital expenditure of $3.1m and an investment in MAVIS of $1.8m • Net proceeds from the capital raise of $16.8m were offset by repayment of borrowings $9.4m and lease and interest payments of $2.1m 9 Significant changes in the state of affairs During the financial year ended 30 June 2023 the Company announced an $18 million underwritten capital raise via institutional placement and an accelerated entitlement offer. The funds raised under the offer were applied towards: • • • • • Strategic investment in MAVIS Marketing of new revenue streams Sensor commercialisation Debt reduction Balance sheet flexibility There were no other significant changes in the state of affairs of the Group during the financial year. Events arising since the end of the reporting period Since the end of the reporting period: • • The Company’s debt facility with Arrowpoint has been novated to Doma, a substantial shareholder and long-term supporter of Atomos on considerably more favourable terms; and the Company has commenced a further reduction in the cost base of the business which will further reduce the annual breakeven revenue level to approximately $36m There are no further matters or circumstances that have arisen since the end of the year that have significantly affected or may significantly affect either: • • • the entity’s operations in future financial years the results of those operations in future financial years; or the entity’s state of affairs in future financial years Legal Matter In relation to the legal dispute with Atomos’ former CEO, the Company notes that there are two matters: • • the former CEO’s claim brought in the United States which the Company will vigorously defend as appropriate when the matter comes before the courts; and a claim brought by the Company in Australia relating to nonpayment of a loan extended to her. This matter is currently before the courts. Future developments Atomos will continue to develop the types of products it is known for today to grow the existing business. This will include physical devices as well as software and cloud-based services. Given the challenging economic conditions, the Company has commenced a further reduction in the cost base of the business which will reduce the annual breakeven revenue level to approximately $36m. Additionally, the Board is actively considering a number of options for recapitalising the business. 10 Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. Environmental legislation Atomos’ operations are not subject to any particular or significant environmental regulation under a law of the Commonwealth or of any State or Territory in Australia. Dividends During or since the end of the financial year, no dividends have been paid or declared. 11 Principal Risks Risk Area Risk & Impact Mitigation & Monitoring Launch of new products fail to meet market expectations Atomos always aims to produce products that meet the expectations of customers. Atomos faces a broad range of factors that impact the success of new product launches, including: pricing, changes in customer “user” preferences; competition; our ability to design, develop and deliver products or to support technology changes; delays to product launches affecting reputation and customer confidence, as well as the effectiveness of marketing efforts. Atomos is continually innovating and developing its strategy for effectively managing the product life cycle and by ensuring upgrades of new product features and technologies are brought to market in a timely manner. A new series of products are anticipated to be deployed in FY24. A structured product roadmap is maintained which includes the introduction of new products for new segments and customer demands specifically around connectivity and workflow solutions in the highly changing video technology marketplace. Key ecosystem partners in camera manufacturing are rapidly rolling out new innovations and our integrations to support their new products is critical for ensuring Atomos becomes a stronger and more resilient business. Insufficient investment in R&D Atomos operates in a rapidly changing competitive environment and must ensure continuous efforts are maintained in the improvement of existing products and development of new products. Insufficient attraction and retention of talented development staff and under-allocation of resources hinder these efforts. Atomos has continually focused on high quality products and adding new products to the range. Development research and investment are key to remaining at the leading edge of providing feature rich, affordable products with high user demand. We constantly monitor market and competitive trends in all parts of the ecosystem, building strong relationships with end user ambassadors and influencers. Continuous investment is required in the base product range as well as to bring new products and solutions to market for new and existing market segments. Supply chain disruptions Atomos sources components globally for the product range and actively manages component cost to ensure margin retention across the mix of products. A supply shortage in key components can lead to significant cost increases in sourcing alternatives and can negatively impact margin. Atomos procurement processes include the review of supplier arrangements and component sourcing constraints prior to including a particular component in a product as well as on an ongoing basis. Other key strategies include the development of alternative supplier strategies and stock-piling of key components with longer lead times. Dependence on key distributors Atomos markets and sells its product range predominantly through an international high profile video technology distributor network. This network is a key supportive sales and marketing channel. While Atomos has a wide end customer user base, the loss of a key distributor could materially impact Atomos’s sales efforts. Atomos is in constant communication and regularly monitors distributor performance. At the same time Atomos evaluates additional distributors for new and existing markets and products to ensure an effective sales and marketing channel. Atomos is increasing its investment in digital platforms as a means to market directly to end customers. 12 Ineffective sales and marketing strategy Atomos continues to adopt a growth strategy supported by a sales and marketing plan. Atomos’ growth is dependent on the ability to reach target customers and capitalising on strategic opportunities. Attracting and retaining talented executives and staff, unclear business strategies, and competitors seizing such opportunities undermine Atomos ability to retain and grow the business and its market share. Atomos implements various methods to ensure that strategic opportunities are not missed. Atomos ensures that there are sufficient resources allocated to marketing and promotional efforts taking into consideration Atomos’ longterm growth potential. Atomos also continuously works with its global channel partners in promoting and increasing the brand awareness of Atomos and its product range. Ineffective product lifecycle management Atomos operates in a rapidly changing competitive environment and inherently Atomos products remain at constant risk of being rendered unattractive by competitive offerings. New Atomos product launches also bring the potential risk of making existing Atomos products unattractive. Atomos ensures that the lifecycle management of its products are monitored closely supported by production plan. The product management team also performs analysis on competing products prior to the investment and development of new products and gives Atomos the opportunity to implement improvements to existing products where required to meet the needs of customers. Higher costs of production Atomos sources components globally for the product range and manufactures products from select key partners to supply the range of hardware products that Atomos sells. Economic pressures and the scarcity of key components give way to the potential of higher costs of production. Atomos consistently monitors the cost of components and the quantum of inventory held ensuring that sufficient components are maintained. Reputational damage Atomos are required to consistently provide products and product support that meets the expectations of its customers. Atomos must also ensure that key partnerships held with its suppliers and channel partners are well maintained. Atomos continuously aims to provide and improve its product range and support to meet the expectations of customers. Atomos also invests in our people and culture with the aim of attracting and retaining a talented and effective workforce that help to fulfil customer expectations. Talent – attract and retain Atomos’s operating and financial performance is dependent on the ability to attract and retain top talent in a competitive environment, particularly in technology roles. Investment in our people and culture enables Atomos to attract and retain key talent and maintain a motivated and effective workforce. External hiring addresses gaps in experience and capability for more technical roles. The senior management remuneration structure is designed to retain key managers and focus them on Atomos’s long-term growth potential. In addition, fostering a work environment of high engagement and high performance is also critical to attracting top talent and promoting employee retention. Product warranty Atomos products can be susceptible to design flaws which Atomos are liable to replace where the product is under warranty. Products which fail can result in a significant cost to Atomos. Atomos performs extensive product testing preproduction and also maintains quality control processes during production to minimise faulty products. 13 Cyber security During FY2023, Atomos announced the introduction of Atomos Cloud providing customers with cloud-based workflow capabilities. Atomos are cognisant of the possibility of data breaches of customers personal information and the resulting impacts. Atomos Cloud remains in the early stages of adoption and Atomos plan to engage with external professionals to assist in the identification and implementation of mitigants to ensure that customer information remains protected. 14 Board of Directors Paul Greenberg, age 63 Non-Executive Director since February 2023, Chair February 2023. Skill and Experience Board Committee Non-executive director with expertise in memberships founding and growing technologyenabled businesses. He was previously the Chair of MyDeal.com.au (ASX:MYD), which was acquired by Woolworths Group (ASX:WOW) in late 2022. He was also on the advisory boards of Afterpay (acquired by Block), Culture Kings (acquired by A.K.A Brands) and was the Chair Elect of Selz.com (acquired by Amazon). He currently sits on the advisory boards of technology businesses Refundid, AirRobe and StyleArcade. • Member Audit & Risk Qualifications BA. (Psychology), MBA Sir Hossein Yassaie, age 66 Non-Executive Director since September 2016 Skill and Experience Sir Hossein has over 35 years of experience in specialised research and development and semiconductors. Founder of Imagination Technologies Plc holding position of Chief Executive Officer for 18 years. Sir Hossein received a knighthood in 2013 in recognition of his services to technology and innovation in the United Kingdom. Board Committee memberships • Member Audit & Risk Qualifications BSc., Phd. Trevor Elbourne, age 52 CEO from August 2022 and Executive Director from September 2022 Skill and Experience Board Committee Trevor has over 25 years’ experience in the memberships electronics design industry with a particular focus on IC chip design, working with some of the world’s leading technology companies including a stint at Canon’s Australian research centre. He joined Atomos in 2012 as one of the Company’s founding employees and was elevated to Chief Technology Officer in 2017. Qualifications BEng. 15 Christopher Tait, age 56 Non-Executive Director from September 2017 – 28 February 2023, Chair September 2017 – May 2020 and from September 2021 – 28 February 2023, Executive Chair May 2020 – September 2021 Skill and Experience Board Committee Chris has over 25 years of experience memberships advising private and public companies on general strategic advice, mergers and acquisitions and raising capital. He has also held senior executive roles in a major public company, WHSmith PLC. Chris is also a Director of Henslow Pty Ltd, an independent advisory firm and Corporate Adviser to the Company. • Member Audit & Risk Qualifications BSc. (Econ), Chartered Accountant (ICAEW) Stephen Stanley, age 65 Non-Executive Director from January 2018 – 29 September 2022, Deputy Chair from October 2020 – 29 September 2022 Skill and Experience Board Committee Stephen has over 25 years of experience as memberships a senior Executive and CEO in the Logistics sector in Australia, Asia, Europe and North America. He has extensive Board experience, strategy, operational, organic growth, mergers and acquisition and investment experience with a proven track record of delivering operational benefits and growth to create superior value for shareholders. • Member Audit & Risk Qualifications B.Bus. AICD. (Accountancy), Megan Brownlow, age 59 Non-Executive Director from July 2022 – 30 June 2023 Skill and Experience Megan has more than 25 years’ experience in media, marketing and managing digital disruption, most recently as a partner with PwC and National Leader for Technology, Media and Telecommunications. Board Committee memberships • Chair, Audit & Risk (from February 2023) Qualifications BA (hons), MBA, GAICD Prior to PwC, Megan held senior executive positions at PBL, ecorp and the Nine Network. 16 Lauren Williams, age 44 Non-Executive Director from July 2022 until 29 September 2022 Skill and Experience Lauren is an experienced digital executive and business builder with a passion for consumer facing online businesses. Lauren is an NED of online business Constructiv Technologies Group. Lauren has held positions at Fairfax Media and BBC Worldwide and launched Getaway Lounge. Lauren’s most recent executive role was as the CEO of CarsGuide. Board Committee memberships Qualifications BA (Econ, Hons) & GAICD 17 Directors’ meetings The number of directors’ meetings (including meetings of Committees of Directors) held during the year, and the number of meetings attended by each director is as follows: Remuneration Board Audit & Risk & Nomination meetings Committee Committee 1 Director Eligible Attended Eligible Attended Eligible Attended Chris Tait 14 14 3 3 2 2 Paul Greenberg 4 4 1 1 Hossein Yassaie 18 18 3 3 1 1 Megan Brownlow 18 18 4 4 1 1 Trevor Elbourne 8 8 2 2 Stephen Stanley 10 10 1 1 1 1 Lauren Williams 10 10 1 1 1 During the year, the Board absorbed the Remuneration & Nomination Committee. Company Secretary During the financial year, the Group announced the resignation of Ms Maria Clemente and appointment of Ms Vanessa Chidrawi as Company Secretary effective from 20th January 2023. Vanessa Chidrawi Vanessa is a highly experienced governance professional, having held leadership and executive management roles in companies listed on ASX, TSX, Nasdaq and JSE over the past seventeen years. She obtained degrees in law and commerce and then practised as an attorney for twelve years before entering the corporate world. Vanessa has acted as company secretary to a range of companies listed on ASX and TSX and brings with her a wealth of experience in governance management, board advisory, corporate structuring and capital raising in the listed company space. She currently acts as company secretary and governance advisor to a portfolio of companies listed on ASX, including Wisr Limited (WZR) and Income Asset Management Group Limited (IAM). Maria Clemente Prior to accepting company secretarial appointments, Maria was a senior listings adviser at the ASX where she had extensive involvement in the oversight of listed entities primarily in the technology sector. Maria is admitted as a lawyer in New South Wales and spent a decade in corporate restructure and turnaround, with specialist experience in conducting formal insolvency appointments. Board skills & composition The Company reviewed the mix of skills and attributes desired within the Board composition of Atomos in l