Announcement PDF Annual Report | Atomos Atomos Limited Annual Report 2022 1 2 Chairman’s Message 01 CEO’s Address 04 Directors’ Report 05 Auditor’s Independence Declaration 17 Financial Statements 37 Directors’ Declaration 81 Independent Auditor’s Report 82 ASX Additional Information 87 Company Directory 89 Annual Report | Atomos 3 CHAIRMAN’S MESSAGE Dear Investor, We present the FY22 Annual Report for Atomos Limited (ASX: AMS). I am writing this message to you on Sunday 2 October to ensure it is relevant to the events that have taken place over the last few days. Late Friday afternoon 30 September, our auditors Deloitte asked us to amend our draft financial statements for the year ended 30 June 2022 such that certain revenue initially recorded in June 2022 was recorded in July 2022. This has necessitated changes to the Annual Report and I want to acknowledge our CFO, James Cody, our Financial Controller, Dimple Shah and their team working tirelessly to ensure that we met our filing deadline. Looking forward, the board is pleased to have appointed Trevor Elbourne as Chief Executive Officer after four years as Chief Technology Officer and after serving as interim CEO following the departure of Estelle McGechie. Trevor was one of Atomos’ first employees and oversaw the development of Atomos’ core products the Ninja V and Shinobi. Trevor is a qualified systems engineer with over 25 years’ experience. He has been instrumental in the strategic plans for the Company’s product roadmap, which is core to the Company’s exciting future ahead. Trevor leads a strong and stable core team, with a laser focus on execution. The revenue deferral relates to products delivered prior to the year end on shipping terms that, with agreement from customers, had been changed so that they could be received several days earlier. Most of the products in question had been on backorder and subject to pandemic-related production delays. The change in terms, close to the year end, was the cause of this audit adjustment. It should be noted that shipping terms often change in the electronics industry and Atomos regularly adjusts its terms with customer agreement, especially in the current environment with disrupted supply chains. It was disappointing to have this matter raised at such a late stage. Our board and senior management have confidence in the future of Atomos under Trevor’s leadership. This confidence was demonstrated during the year when board members and senior management completed on market share purchases of approximately 3 million shares in the Company at an average price of circa 28c. I want to thank our recently departed directors, Stephen Stanley and Lauren Williams. Their contribution has been significant in what have been a very challenging and stressful time for the whole board, management and company and I wish them well with their future endeavours. It is important that I acknowledge the employment claim made by the former CEO and the adverse press that occurred consequently. I understand it is very unusual for an employment claim to be brought in California by an employee of an Australian company employed under an Australian contract. We are working through the legal process calmly and within the parameters allowed for an Australian listed company. We are committed to addressing the claim without letting it be too much of a distraction from executing our strategic plan for growing the business. I want to reinforce that we will refute the unfounded allegations made within the claim and we continue to investigate our own legal options. We will keep the market informed of any developments in this matter. 1 Finally, I want to apologise, to you our shareholders on what has been a most unsatisfactory year in terms of shareholder value, partly driven by macro events but mainly driven by our own missteps. We know that there has been a succession of bad news, we must do better, and we will. We now have the foundations in place to do so. Our board and management team are closely aligned. We have a clear plan and an exciting new ground-breaking product range with the Series 2 and associated cloudbased solutions. We have unique and special partnerships with global technology leaders such as Adobe, Apple, Sony, Panasonic, Nikon and Canon. We must not forget that despite our recent missteps, global geo-political challenges, rising inflation and cost of living challenges, demand for video content creation remains strong and continues to grow. Atomos remains uniquely well positioned to capitalise on the opportunities afforded to it being at the centre of all video production workflows. Annual Report | Atomos As we put FY2022 behind us we are excited by FY2023. We have a lot of work to do, and we start immediately from the board down. My fellow board directors, Sir Hossein Yassaie, Megan Brownlow and I intend to be more actively involved in the short term to support Trevor, James and the rest of the team. We have started the search for a new Chair and will have an orderly transition. I look forward to retiring in June 2023 with Atomos being in a muchimproved position. I would like to thank you, our shareholders, for your support and we look forward to delivering on the Company’s considerable and exciting opportunities, navigating the challenges and delivering long term shareholder value in the years ahead. Kind Regards, Chris Tait Chair 2 3 Annual Report | Atomos CEO’S ADDRESS Dear Investor, I am pleased to be addressing you in my first letter to shareholders since being appointed as the Chief Executive Officer (CEO) of Atomos after serving as Chief Technology Officer for four years and being appointed interim CEO in April 2022. I bring to Atomos 25 years’ experience in the industry and was one of Atomos founding employees after leading Canon’s product design. I oversaw the successful development of Atomos’ flagship Ninja V and Shinobi products and am deeply immersed in Atomos products and development. I look forward to executing our strategy in FY23 and leading the Atomos team globally. FY22 revenue for the year was $73.3m after the deferral of $8.7m of revenue. Gross profit margin in the year was hampered by one off item’s such as price drops on Ninja V / V+ to drive yearend sales and clear built-up inventory as we reignited proven marketing tactics after a difficult Q3 result. Our balance sheet was strengthened through replacing our $5m long term debt facility with a $12m facility to support growth and general working capital requirements. Today, Atomos is the only company with monitor/ recorders that can record to Apple ProRes RAW from enabled cameras, positioning it to benefit from a larger addressable market, as the Atomos ecosystem of external cameras supporting RAW over HDMI continues to expand. We have now expanded the number of cameras in the ProRes RAW ecosystem to 46, with the recent notable additions of a new 8K camera from Fujifilm, and highspeed 4K camera from Sony. On a product front, Atomos released the first of its Series 2 ‘connected’ products in June 2022 (Shogun Connect, Atomos Connect and Zato Connect), which have been well-received. These devices have the ground-breaking ability to connect to Atomos’ new Cloud Studio workflows and support live upload of footage directly from a camera on location anywhere in the world, directly to Adobe Camera to Cloud powered by Frame.io. This workflow will remove geographical barriers to collaborations, allowing people, wherever they are, to work together in real time. Live streaming to a range of online services, including Facebook Live, Twitch, and YouTube will also be available from these products, as well as many other new collaboration features as we continue to develop Atomos Cloud Studio. Our strategy to expand our revenue streams, products and customer segments is coming together and gaining momentum. We plan to launch new members of the Series 2 product family in the second half of FY23, which will see the entire Atomos product line-up refreshed, and offer all Atomos customers access to our new connected collaboration workflows. We’ll also introduce new avenues for customers to purchase Atomos products, with some innovative payment options, offering our customers unprecedented flexibility when purchasing our hardware and software. 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 embark on FY23. I would also like to extend thanks to all our shareholders for their ongoing support as we endeavour to become a major player in the global video industry. Kind Regards, Trevor Elbourne CEO 4 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 2022. Directors The names of the directors in office at any time during or since the end of the year are: Mr Jeromy Michael Young (up to 23 November 2021) Sir Hossein Yassaie Mr Christopher John Tait Mr Stephen John Stanley (up to 29 September 2022) Ms Megan Brownlow Ms Lauren Williams (up to 29 September 2022) Mr Trevor Elbourne (effective 30 September 2022) The above-named directors held office during and since the end of the financial year unless otherwise stated. Principal activities The above-named directors held office during and since the end of the financial year unless otherwise stated. • 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 Executing on strategy Atomos believes that the natural evolution of the content creation process will put a premium on connectivity of devices and ease of production, irrespective of physical location. FY22 saw Atomos begin to execute on this vision with the launch of our first three connected devices, Shogun Connect, Atomos Connect and Zato Connect. Additionally, the Company also introduced Atomos Cloud Studio, a collection of video production tools and services to be made available via subscription plans. This new generation of products and services leverages Atomos’ key strategic pillars of Deep Video Technology and Partnerships. The devices are the first to be launched on the new ‘Series 2’ technology platform developed in house over the last 18 months. Atomos Cloud Studio has been developed in partnership with UK based software company, MAVIS and the Company’s latest partnership with Frame.io (an Adobe company) enables our products to be part of their growing Camera to Cloud workflow, enhancing Atomos’ value to content creators collaborating remotely. Growing revenue and margins and getting closer to our customers FY23 will see Atomos begin to evolve its products into software and cloud services as well as beginning to sell its traditional products directly to customers. Atomos is targeting an improvement in revenue quality in FY23 through the introduction of subscriptions for device software and cloud services. Over time Atomos aims to grow these recurring revenue streams to become a meaningful proportion of its overall business. These initiatives will deliver higher margins than the traditional business but crucially, the direct engagement with our end customers will provide greater insight into how they use our products and how we can better meet their needs in the future. 5 Annual Report | Atomos Our Vision To democratise content creation and delivery by: combining our own deep video tech with that of other great video tech companies building products, services and an ecosystem Performance highlights Sales revenue EBITDA NPAT $73.3 million ($0.6 million) ($10.4 million) FY21 $78.6 million FY21 $8.2 million FY21 $4.2 million FY20 $44.7 million FY20 ($17.4 million) FY20 ($22.3 million) Cash on hand Earnings per share $5.0 million (3 cents) FY21 $26.0 million FY21 2 cents FY20 $18.8 million FY20 (12 cents) 6 Review of Results and Operations FY22 was impacted by several one-offs including temporary price drops/promotions, increases in headcount (not required and since removed), costs to establish cloud services and founder transition costs. The impact of excluding these items from the Consolidated Statement of Profit or Loss and Other Comprehensive Income is as follows: Revenue of $73.3 million was down $5.3 million. Atomos released the first of its Series 2 ‘connected’ products in June 2022 (Shogun Connect, Atomos Connect and Zato Connect), which have each been well-received. These devices have the ground-breaking ability to connect to cloud-based workflows and support live streaming to a range of online services, including Facebook Live, Twitch, and YouTube. Key Drivers of Performance Revenue Revenue of $73.3 million was 7% lower than 2021 primarily due to a poor Q3 trading result. This result is after an adjustment to defer $8.7m of revenue from Q4 FY22 to Q1 FY23. The deferred revenue relates to certain transactions which were subject to customer-approved alterations to shipping terms in June 2022. These alterations were required due to delays to production in the month resulting from supply issues and lockdowns in China limiting movement of goods. The Company notes that minor adjustments in shipping terms to accommodate unforeseen external circumstances are common in the electronics industry and Atomos regularly changes shipping terms with the approval of its customers. Customers agreed to the change as it meant they received their orders slightly earlier. Gross Margin Gross margin dropped to 40%, impacted by several one-off items, including temporary price drops/promotions on Ninja V / V+ to drive yearend sales, clearance of discontinued products, increased input costs and downward pressure on selling prices. When adjusted for one-off items, the gross margin stood at 42%. 7 Annual Report | Atomos Operating Costs Operating costs were impacted by increases in headcount (not required and since removed), costs to establish cloud services and founder transition costs. The operating costs adjusted for these one-offs was still higher as compared to FY21 primarily due to resumption of tradeshows. During the year, Atomos continued to invest in R&D, particularly in development of the Series 2 platform. 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. 8 Financial position Cash flow Key cash flow movements: At 30 June 2022, Atomos had: 9 • $5m of cash on hand • Drawn $12m debt facility • $51m of tax losses and R&D tax credits unrecognised and available to offset future tax • Net cash used in operating activities of $26.5m was predominantly driven by EBITDA loss of $5.1m; tax and non-cash items of $1.2m and increase in debtors and inventory of $20m • Capital expenditure of $5.9m predominantly related to Series 2 platform development costs • Draw down of $12m debt facility offset by lease and interest payments Annual Report | Atomos Significant changes in the state of affairs There were no significant changes in the state of affairs of the Company during the financial year. Events arising since the end of the reporting period Since the end of the reporting period the Company was made aware that a claim has been filed in the United States by its former CEO, whose employment was terminated earlier this year. Further details are set out under Legal Matter below. 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 claim which was recently filed by Atomos’ former CEO, the Company notes that: • the former CEO’s employment agreement was made under Australian law • the claim will be vigorously defended • it is very confident in its position and the legal processes • it believes that there is no basis for additional payments to be made and also notes there are legal constraints in Australia limiting the ability to make such payments The claim makes a number of allegations which the company takes seriously, and will take all steps that may be necessary to maintain the confidence it has that the claims are unfounded. 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 a growing contribution from software sales. Additionally, there will be an emphasis on connectivity of devices and cloud-based services. 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. 10 Principal Risks Demand for Atomos products The demand for Atomos products may be impacted by a range of factors, including: 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. 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. 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 product features are anticipated to be deployed in Q4 of FY22. A medium-term 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 market place. 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. Competition Atomos products compete in a global marketplace and face a number of competitors in different products, solutions and markets. Continued price pressure and existing and new product launches with new features are challenges. 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. Product Cost management 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. The global issue in sourcing semiconductors is challenging to all companies in the sector. 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. 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. 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. Dependence on key Customers While Atomos has a wide end customer user base, the loss of a key distributor could materially impact Atomos’s sales efforts. 11 Other key strategies include contracting of forward commitments to secure supply to lock-in cost, together with extended contract production management. Atomos is increasing its investment in digital platforms as a means to market directly to end customers. Annual Report | Atomos Supply Chain – reliance on key suppliers Atomos sources components globally for the product range and manufactures products from two key partners to supply the range of hardware products that Atomos sells. There is pressure globally on key components within the products that require carefully planning and sourcing to ensure Atomos has sufficient products to meet demand. Atomos has implemented a range of tactics, within its control, to ensure an adequate supply of components and ultimately end products are produced. This incorporates increased forward orders and inventory levels for raw materials and finished products on high demand lines as well as ‘design-outs’ for scarce components. 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. Laws and regulations Atomos is subject to a range of legal obligations in all countries we operate in and, as such, to legal risk. These include, without limitation, taxation, anti-bribery provisions, competition, intellectual property and government tariffs. Failure to comply with such laws could significantly impact Atomos’s reputation and expose Atomos to fines and penalties. Local and corporate management monitor economic indicators and changes to legislation. Atomos maintains strong relationships with key stakeholders in these markets and educates relevant employees. Atomos is exposed to macro-economic conditions such as slowing global economies, rising interest rates / cost of living Atomos is increasing its focus on targeted marketing collateral and channel communications to ensure a sales-driven emphasis. Economic Conditions In addition, having two key interchangeable production partners with deep strong relationships is strategically important. Atomos also considers further diversification of production and supply options as critically important for the future and actively reviews alternatives. Atomos continually evolves its products and services. Its agile approach to product development enables a fast response to changing regulatory circumstances. Atomos products represent value-formoney, i.e., they offer high-end functionality compared to similarly priced competitors’ products. 12 Board of Directors Christopher Tait - age 55 Non-Executive Director since September 2017, Chair September 2017 – May 2020 and since September 2021 Executive Chair May 2020 – September 2021 Chris has over 25 years of experience 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 where he was initially Director of Strategy and Acquisitions and then Chief Financial Officer of the Asia Pacific operations. Co-Founder and Managing Director of Henslow Pty Ltd, an independent advisory firm and Corporate Adviser to the Company. Board Committee memberships • Member Audit & Risk • Member Remuneration & Nomination Qualifications BSc. (Econ), Chartered Accountant (ICAEW) Stephen Stanley - age 64 Non-Executive Director from January 2018 – 29 September 2022, Deputy Chair from October 2020 – 29 September 2022 Stephen has over 25 years of experience as 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. Board Committee memberships • Member Audit & Risk • Chair Remuneration & Nomination Qualifications B.Bus. (Accountancy), AICD. Sir Hossein Yassaie- age 65 Non-Executive Director since September 2016 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. 13 Board Committee memberships • Chair Product & Technology Committee Qualifications BSc., Phd. Annual Report | Atomos Megan Brownlow - age 58 Non-Executive Director since July 2021 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 • Member Audit & Risk • Member Remuneration & Nomination Prior to PwC, Megan held senior executive positions at PBL, ecorp and the Nine Network. Qualifications BSc. (Econ), Chartered Accountant (ICAEW) Lauren Williams- age 43 Non-Executive Director from July 2021 until 29 September 2022 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 • Member Remuneration & Nomination Qualifications BA (Econ, Hons) & GAIC 14 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: Board meetings Director Audit & Risk Committee Remuneration & Nomination Committee Attended Eligible Attended Eligible Attended Eligible S. Stanley 18 19 4 4 10 10 C. Tait 19 19 4 4 10 10 J. Young 7 7 1 - 2 - H. Yassaie 18 18 2 2 9 8 Lauren Williams 18 18 2 - 8 8 Megan Brownlow 19 19 4 4 5 - Company Secretary – 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 line with good governance practice utilising the skills assessment criteria and gap analysis as an input. Directors’ shareholdings The following table sets out each director’s relevant interest in shares and rights or options in shares of the Company as at the date of this report: Remuneration of key management personnel Information about the remuneration of key management personnel is set out in the remuneration report section of this directors’ report. Share options granted to directors and senior management During and since the end of the financial year, no share options were granted. 15 Annual Report | Atomos Shares under option or issued on exercise of options Details of unissued shares or interest under option as at the date of this report are: The holders of these options do not have the right by virtue of the option, to participate in any share issue or interest issue of the Company or any other body corporate or registered scheme. 1,999,176 (2021: 612,990) shares were issued during the year as a result of exercise of options. No shares were issued since the end of the year as a result of exercise of options (2021: 257,732). Indemnification of officers and auditors During the financial year, the Group paid a premium in respect of a contract insuring the directors of the Company (as named above), the company secretary, and all executive officers of the Company and of any related body corporate against a liability incurred by such a director, secretary or executive officer to the extent permitted by the Corporations Act. The contract of insurance prohibits the disclosure of the nature of the liability and the amount of the premium. The Group has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify any current o