Announcement PDF 1 Atomos Limited Annual Report 2024 Atomos Limited | Annual Report 2024 2 Contents Chair’s Message 3 CEO’s Address 5 Directors’ Report 7 Directors 19 Auditor’s Independence Declaration 24 Remuneration Report 25 Consolidated Financial Statements 39 Notes to the Consolidated Financial Statements 43 Consolidated Entity Disclosure Statement 82 Directors’ Declaration 83 Independent Auditor’s Report 84 ASX Additional Information 88 Company Directory 90 Atomos Limited | Annual Report 2024 3 Chair’s Message Dear Shareholders Financial Year 2024 has been landmark period for Atomos with all key areas of the business undergoing significant transformation and re-alignment which will result in a more streamlined, capital efficient and operationally resilient Company moving forward. Atomos is a unique business for its size, highlighted by the following key characteristics: • • • • • market-leading video creation products (both hardware and software) in key product segments; global sales distribution network with direct reseller relationships in the US market; tech integration and sales partnerships with major global players such as Apple, Adobe, Canon, Sony and Panasonic, among others; proprietary technology developed in-house via world-class engineering and design teams; and customer base leveraged to the video content creation market which is now the communication medium globally given the growth of social media, video advertising and virtual meetings. Whilst we recognise the poor performance of the business over the past few years, the team have worked incredibly hard to address those challenges and are now confident the necessary building blocks are in place to generate increased value for our shareholders into the future. One of the key catalysts for our transformation during the year was Atomos co-founder, Jeromy Young, returning to the business in January 2024 as Managing Director and CEO. Jeromy was joined in February 2024 by successful video entrepreneur (and co-founder of Blackmagic Design), Peter Barber, who was appointed as Executive Director and COO. Leveraging new management strategies and a refreshed product roadmap, Atomos successfully recapitalised the business in May 2024, raising $16.1m which was partially underwritten by major shareholder, Doma, and supported by Directors Jeromy Young and Peter Barber invested $2.0m each. Proceeds from the capital raise were used to repay all outstanding debt, on-going restructuring costs, invest in new product inventory and provided additional working capital flexibility. Following a 15-month period of suspension, Atomos returned to ASX trading on 21 May 2024 (post completion of the capital raise), one of the major milestones achieved during the year. Financially, Atomos underwent a material restructure during FY24, particularly during the second half under new management. While the annualised benefits of that restructure will be realised in FY25, initial key performance drivers are positive: • • • H2’24 revenue of $18.3m up 5% on H1’24 (FY24 sales: $35.7m) FY24 gross margins improved as constant product discounting ceased in H2’24; and Fixed costs reduction with permanent staff reduced to 70 as at 30 June 2024. Atomos Limited | Annual Report 2024 4 Chair’s Message (continued) The Company returned to its product-focused innovative heritage with the launch of two new products in late FY24 – Ninja Phone and SunDragon. Due to the timing of shipping those products, both had a negligible impact on FY24 sales, however we expect these products to make a material contribution to revenue in FY25. In September 2024, we announced the settlement of both the US and Australian legal cases between Atomos and the former Chief Executive Officer, Estelle McGechie. Whilst terms of the settlement remain confidential, the Company has sufficiently provided for all payments and future legal expenses relating to the matter in the FY24 accounts. This is a great outcome for the Company and removes one more negative distraction which will enable management to focus their time and resources on releasing groundbreaking products to existing and new markets. With the cost restructure expected to be complete by Q2 FY25 resulting in breakeven EBITDA at approximately $45m of sales and coupled with the launch of several new products, we are optimistic for the outlook heading into FY25. Lastly, I’d like to acknowledge the contributions of former Directors Sir Hossein Yassaie and Trevor Elbourne who stepped down from their director duties during the year. I’d also like to thank my fellow directors Jeromy and Peter, board advisors James Joughin, and Ben McAlister for their efforts during the year. In addition, I’d like to thank our shareholders for their ongoing support and patience as we seek to rebuild the significant latent value that sits within the Atomos business. Kind Regards, Paul Greenberg Chair Atomos Limited | Annual Report 2024 5 CEO’s Address Dear Shareholders, After several years away from the business, it’s a pleasure to be back as CEO of Atomos; a Company Ian Overliese and I co-founded over 15 years ago. Our initial vision for the business all those years ago was simple – to democratise video content creation by providing access to simple, intuitive and technologically advanced products that foster creativity irrespective of budget. This is the same vision we continue to employ today, with the recently launched Ninja Phone and Shinobi II providing a great example of our ability to translate this vision into something tangible and value accretive. As Paul mentioned in the Chair message, FY24 was transformational year for Atomos having delivered several key milestones that have removed various unwanted distractions from management, increasing the time and resources focused on high value growth opportunities. Following the appointment of Peter and myself as the COO and CEO, respectively, we subsequently completed the recapitalisation process critical to resetting the financial stability of the business and enabling the Company to resume trading on the ASX following a 15-month period of suspension. At an operational and financial level, we have implemented significant change in the business, particularly during the second half post our appointment, with several key areas highlighted below: Stabilised and subsequently returned to sales growth • FY24 revenue of $35.7m, down 16% on previous corresponding period (‘pcp’) which reflected: limited working capital to produce sufficient product to meet demand, ongoing deterioration in economic conditions and disruptions from the Writers Guild of America strike • However, we delivered revenue of $18.3m in H2 FY24, up 5.1% on H1 FY24 predominately due to reinvigorating the sales and marketing of the existing products and launching new innovative products which created demand across other product categories. Improving Gross Profit Margin • Higher gross margin in FY24 attributed to the cessation of product discounting • While reported gross profit margin improved from 11% in FY23 to 31% in FY24, Underlying gross margin improved from 20% to 34% • Gross profit margins in H2 FY24 gross profit margin of 36% compared to 31% in H1 FY24 • In addition, and perhaps a better reflection of the run-rate, despite it taking some months to unwind previous management’s strategies, in Q4 FY24 gross profit margins were consistently just under 40%, with June 2024 reaching 40%. Restructuring the cost base well advanced • The Company has implemented several cost saving initiatives during H2 FY24 which has resulted in permanent staff being reduced from 90 at December 2023 to 70 as of June 2024 • Excluding non-recurring costs, fixed operating costs (which includes capitalised R&D in FY23) were reduced by $5.9m in FY24 • The Company is expected to finalise the restructure program by the end of Q2 FY25 with the full run-rate benefit being seen in H2 FY25. In the second half of FY24, we returned to what we have become globally known for – launching innovative, groundbreaking products that converge expensive technologies into a simple form factor at a cost-effective price point. Atomos Limited | Annual Report 2024 6 CEO’s Address (continued) In April 2024 we announced the Ninja Phone – a video co-processor that enables users to use the latest iPhone models as a monitor whilst also providing recording functionality from professional cameras directly onto the iPhone’s storage. Concurrently, we also launched SunDragon - a unique ‘sun-spectrum’ range of LED lights, which expands upon Atomos’ exiting product portfolio into an adjacent segment of the video production ecosystem. In June we surprised the world with an update to the world’s most popular Photo Video Monitor, the Shinobi, launching and shipping the Shinobi II in July. The Atomos brand holds strong and has returned to its leadership position, the task at hand is to educate the rapidly growing younger content creators and bring them into the professional landscape, a task that Ninja Phone is well placed to achieve. Educating the masses on why they need to utilise the wonderful HDR screens on their phones and tablets by shooting 4K HDR and ensuring the traditional video market get the new tools they need to compete with the up and comers. The development pipeline for Atomos is strong and you can rest assured we are taking back out leadership position. Exciting times ahead. Lastly, I’d like to thank all our staff who have been nothing short of incredible over the past few years given the various internal and external challenges they have faced. It’s never easy when a Company is going through a restructure period, with most of the core building blocks now in place we firmly have light at the end of the tunnel to enable us to deliver improved financial performance moving forward. I am confident the tide has turned for the business, giving us the momentum we require into 2025 that will return Atomos to its rightful position in the video technology landscape, one that has exciting new frontiers! Kind Regards, Jeromy Young Managing Director & CEO Atomos Limited | Annual Report 2024 7 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 2024. Directors The names of the directors in office at any time during or since the end of the year are: Mr Paul Greenberg – Non-Executive Chairman Mr Jeromy Young – Executive Director, Managing Director (effective 4 January 2024) Mr Peter Barber – Executive Director (effective 14 February 2024) Sir Hossein Yassaie – Non-Executive Director (up to 16 May 2024) Mr Trevor Elbourne (up to 4 January 2024) 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. Review of Results and Operations FY24 revenue of $35.7 million was $7.0m or 16% lower compared to revenue of $42.8m in the PCP. Revenue was lower in FY24 due to the ongoing deterioration in economic conditions, working capital constraints prior to the capital raising in May 2024 impacting finished goods availability, supply chain challenges and disruptions from the Writers Guild of America strike. Pleasingly, revenue of 18.3m in H2 FY24 was 5.1% higher than revenue of $17.4m in H1 FY24. The improved H2 sales included only approximately $0.5m of sales from the Ninja Phone and no new sales from SunDragon (compared to our forecast of $2.5m based on launch of both products in June), highlighting strong H2 FY24 sales in the core existing product line. Management is focused on delivering the new products to market and further educating the Group’s customer base on the benefits of these new products in being able to enhance their creative offering whilst speeding up the workflow process. The Company experienced higher gross margins in FY24 attributed to improvements in the mix of margin across its product range, including higher margins from new products. Gross margin percentage improved by 20% points in FY24 from 11% in FY23 to 31% in FY24. On an underlying basis, gross margin percentage improved by 14% points in FY24 from 20% in FY23 to 34% in FY24. Further underlying margin improvements were achieved in the second half of FY24 with gross margin percentage of 36% in H2 FY24 compared to 31% in H1 FY24. Atomos Limited | Annual Report 2024 8 Summary of results for 2024 compared to prior period Consolidated Statement of Profit or Loss and Other Comprehensive Income Revenue Cost of sales Gross profit Gross Margin % Operating expenses Other income EBITDA Depreciation and amortisation Impairment of non-financial assets Fair value adjustment Finance costs Loss before income tax Income tax benefit / (expense) Loss for the year 2024 2023 Change $ $'000 35,721 (24,517) 11,204 31% (28,889) 349 (17,336) (1,610) 0 (1,798) (1,224) (21,968) (394) (22,362) $'000 42,763 (38,050) 4,713 11% (30,597) 365 (25,519) (2,973) (30,676) 0 (2,120) (61,288) 227 (61,061) $'000 (7,042) 13,533 6,491 1,708 (16) 8,183 1,363 30,676 (1,798) 896 39,320 (621) 38,699 Change % (16%) (36%) 138% 20% (6%) (4%) (32%) (46%) (100%) N/A (42%) (64%) (274%) (63%) Included in the FY24 and FY23 results were certain items which were significant and/or not incurred in the ordinary course of business and are fully detailed in the normalised earnings section on pages 10 and 11. The impact of excluding these items from the Consolidated Statement of Profit or Loss and Other Comprehensive Income is as follows: Revenue, Gross Profit and Gross Margin H2 FY24 compared to H1 FY24 – Underlying basis Underlying Basis Revenue, Gross Profit and Gross Margin Revenue Cost of sales Gross profit Gross Margin % 2HFY24 $'000 18,308 (11,724) 6,584 36% 1HFY24 $'000 17,413 (11,956) 5,457 31% Change $ $'000 895 232 1,127 Change % 5% (2%) 21% 5% FY24 Total $'000 35,721 (23,680) 12,041 34% Key Drivers of Performance Revenue FY24 revenue of $35.7 million was $7.0m or 16% lower compared to revenue of $42.8m in the PCP. Revenue was lower in FY24 due to the ongoing deterioration in economic conditions, working capital constraints prior to the capital raising in May 2024 impacting finished goods availability, supply chain challenges and disruptions from the Writers Guild of America strike. Atomos Limited | Annual Report 2024 9 The decline in revenue was stymied, with H2 FY24 revenue of $18.3m being 5.1% higher than revenue of $17.4m in the H1 FY24; due to higher demand of the Group’s core existing product line, management’s focus on delivering new products to market and management further educating the Group’s customer base on the benefits of ATOMOS products in being able to enhance their creative offering whilst speeding up the workflow process. Gross Profit and Gross Margin FY24 gross profit of $11.2m was $6.5m or 138% favourable to gross profit of $4.7m in FY23. FY23 gross profit was impacted by de-stocking and significant provisioning against finished goods inventory which was slow-moving and provisioning against excessive levels of component inventory which was a result of component stockpiling during the COVID induced period of semi-conductor component scarcity and the resultant expansion in lead times. The Company experienced higher gross margins in FY24 attributed to improvements in the mix of margin across its product range, including higher margins from new products. Gross margin percentage improved by 20% points in FY24 from 11% in FY23 to 31% in FY24. On an underlying basis, gross margin percentage improved by 14% points in FY24 from 20% in FY23 to 34% in FY24. Further underlying margin improvements were achieved in the second half of FY24 with gross margin percentage of 36% in H2 FY24 compared to 31% in H1 FY24. Operating Costs Operating costs were $1.7m or 6% lower in FY24 compared to FY23 on a reported basis. Excluding non-recurring costs, operating costs were $4.3m or 15% lower in FY24 compared to FY23. The Company is well progressed on its detailed cost restructure having already significantly reduced staff costs to under 70 permanent staff from 90 permanent staff in December 2023. The restructure is expected to be complete by the end of the second quarter in FY25, with the full financial benefit being realised from 2H25. EBITDA FY24 EBITDA loss of $17.3m was $8.2m or 32% favourable to EBITDA loss of $25.5m in FY23. The FY24 underlying EBITDA loss after adjusting for one-off/non-recurring items was $11.8m which was $7.6m or 39% favourable compared to FY23. Finance Costs Finance costs decreased by $0.9m to $1.2m in FY24 primarily due to the debt facility repayments and no debt remaining as at 30 June 2024, except for $0.1m related to credit card facilities. Depreciation, Amortisation and Impairment Depreciation and amortisation decreased by $1.4m in FY24 due to all intangibles being fully amortised as at 30 June 2023, reducing amortisation by $0.8m; and lower fixed asset acquisitions in FY24 further reduced depreciation by $0.6m. Fair value adjustment In 2022 the Company acquired a 10% interest in UK based Mavis Broadcast Limited. Mavis technology underpins the Atomos Cloud Studio suite of products. Whilst there has been an upward trajectory in Atomos Cloud Studio Subscription Revenue since launching in May 2023, the overall result has been below expectation. Costs to deliver revenues have Atomos Limited | Annual Report 2024 10 exceeded $1.0m, and almost all this amount was paid to Mavis for development and delivery services. These payments represent a major component of Mavis revenue. The Company has been advised that Mavis will undertake a capital raising in early 2025, which may result in substantial dilution of the Company’s interest in Mavis. On this basis, management have assessed that the Group’s investment of $1.8m in Mavis Broadcast Limited had a negligible fair value as at 30 June 2024. A resulting fair value adjustment was recognised in FY24. Income Tax Expense Income tax expense of $0.4m in FY24 relates to non-Australian 100% owned subsidiaries where a taxable profit was reported. Net Loss After Tax The consolidated loss of the Group for the financial year after providing for income tax amounted to $22.4 million (2023: loss $61.1 million). Reconciliation of underlying earnings for 2024 and the prior financial year Earnings before interest, tax, depreciation and amortisation (EBITDA) is a non-IFRS term which the Group uses to measure performance. Additionally, the reported 2024 and 2023 results included a number of items that were significant and/or not considered to be in the ordinary course of business and the tables below quantify these to provide a view of the underlying trading results. 2024 Revenue Cost of sales Gross profit Gross Margin % Operating expenses Other income EBITDA Depreciation and amortisation Fair value adjustment Finance costs Loss before income tax Income tax expense Loss for the year 1 $’000 35,721 (24,517) 11,204 31% (28,889) 349 (17,336) (1,610) (1,798) (1,224) (21,968) (394) (22,362) Significant items1 $’000 837 837 4,659 5,496 1,798 7,294 7,294 Underlying Result $’000 35,721 (23,680) 12,041 34% (24,230) 349 (11,840) (1,610) (1,224) (14,674) (394) (15,068) Items that were significant and/or not in the ordinary course of business (2024) Inventory Write-downs, Operating Expenses and Impairment Charges Employee restructure costs Ex-CEO separation and legal claim Debt facility novation and legal fees Fees related to strategic review Bad debts related to prior periods Provision for inventory obsolescence Provision for legacy purchase orders for component inventory Fair value adjustment Inventory Write-downs, Operating Expenses and Impairment Charges $’000 Total Items not in the ordinary course of business 7,294 773 1,145 259 134 291 837 2,057 1,798 7,294 Atomos Limited | Annual Report 2024 11 Financial Position Summary of Balance Sheet Cash and cash equivalents Trade and other receivables Inventories Other assets Total assets Trade and other payables Income taxes payable Lease liabilities Provisions Borrowings Total liabilities Net assets Issued capital Reserves Accumulated losses Equity Cash flow 2024 $'000 2,900 4,970 8,714 8,380 24,964 (11,306) (1,456) (5,030) (4,686) (136) (22,614) 2,350 134,037 3,246 (134,933) 2,350 As at 30 June 2024, Atomos had: •$2.9m of cash on hand. 2023 $'000 2,943 5,166 15,366 13,700 37,175 (12,990) (2,249) (6,178) (2,629) (3,359) (27,405) 9,770 119,301 3,040 (112,571) 9,770 Cash flows from operating activities Loss for the year Non cash items Movements in working capital Net cash used in operating activities Capital expenditure Financing and investing activities Net change in cash and cash equivalents Cash at the beginning of the period Exchange differences on cash Cash at the end of the period 2024 $'000 (22,362) 8,007 5,236 (9,119) (41) 9,144 (16) 2,943 (27) 2,900 2023 $'000 (61,061) 40,111 18,388 (2,562) (3,123) 3,547 (2,138) 5,001 80 2,943 Key cash flow movements in FY24: •Net cash used in operating activities of $9.1m • High inventory balance as at June 2023 was driven by EBITDA losses of $17.3m largely converted into cash with through review in FY24 offset by a reduction in working capital. resulting in a $0.8m increase in provision for inventory obsolescence. •Cash inflows from financing and investing activities of $9.1m comprise; net proceeds •No debt except for $0.1m at 30 June 2024 for from the capital raise of $14.7m after capital corporate credit cards, following completion of raising costs, less $3.2m of repayment of capital raise in May 2024. borrowings and $2.4m of lease and interest payments. Atomos Limited | Annual Report 2024 12 Significant changes in the state of affairs During the financial year ended 30 June 2024 the Company announced a $16 million (before costs) underwritten capital raise via institutional placement and a non-renounceable pro-rata entitlement offer to all eligible shareholders. The funds raised under the offer were applied towards: • • • • Debt reduction Restructuring of the business Marketing of new revenue streams Additional working capital for 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 announced on 13 September 2024, that it had settled the US and Australian cases between the Company and former Chief Executive Officer, Ms Estelle McGechie. Following mediation, both parties agreed and entered into a Confidential Settlement Agreement and Mutual Release (Agreement). Under the Agreement, neither party admitted liability and provided the other party mutual releases for all claims relating to the matters. While the settlement payment amount is confidential, a provision was recognised in the financial statements as at 30 June 2024 within current liabilities – trade and other payables. The amount of the provision recognised is sufficient to meet all payments relating to the settlement payment and legal expenses relating these matters. These two matters were noted in the FY23 financial statements as contingent liabilities. 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 Future developments Atomos will continue to develop the types of products it is known for today to grow the existing business. The Company expects increasing sales momentum in 1H FY25 with the launch of new products including the launch of the Shinobi II, Sun Dragon and Ninja Phone with a significant roadmap of innovative products in development. Management is continuing to restructure the fixed operating cost base and implemented several cost saving initiatives during H2 FY24 which have resulted in permanent staff being reduced from 90 at December 2023 to 70 as of June 2024. The restructure is expected to be complete by Q2 FY25 with targeted EBITDA breakeven around annual revenue of approximately $45m. 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. Atomos Limited | Annual Report 2024 13 Environmental legislation The Company’s 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 No dividends have been paid or declared during or since the end of the financial year. Atomos Limited | Annual Report 2024 14 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; effective education of and support from distributors; 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 FY25. 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 and failure to rapidly innovate for changing technology 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 of talented development and creative staff and under-allocation of resources hinder these efforts. A failure to innovate can damage perception with consumers. 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 Dependence on key distributors Atomos sources components globally for the product range and actively manages component cost to ensure margin retention across the mix of products. Supply chain interruptions such as shortages of key components, production difficulties, production certification challenges or customs/transportation delays can lead to significant cost increases and inventory shortages which can negatively impact sales and margins. 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, however Atomos has traditionally had no formal distribution agreements. While Atomos has a wide end customer use base, a dispute with (or the loss of) a key distributor could materially impact Atomos’ sales 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. 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 stockpiling of key components with longer lead times. 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. Atomos Limited | Annual Report 2024 15 Principal Risks (continued) Risk Area Risk & Impact Dependence on key distributors (continued) Additionally, a deterioration in the financial health of a distributor could lead to potentially material delays in cash collection and/or reduced sales. 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 deliver new products on time, to reach target customers and capitalise on strategic opportunities. Losing and being unable to attract talented executives and s