Financials

Full Year Financial Statement And Dividend Announcement 2023

Financials Archive

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Condensed Consolidated Interim Statements of Profit or Loss and Other Comprehensive Income for the Six Months and Years Ended December 31

Condensed Consolidated and Company Statements of Financial Position as at December 31



Review of Performance

Overview

During 2023 the diamond industry again faced significant macroeconomic headwinds, as well as disruption by the LGD segment.

Interest rates negatively affected the key U.S. market for much of the year, until positive inflation reduction data emerged, pausing the rate increases, reducing prospects of a subsequent recession and raising expectations for eventual easing. Indeed, consumer confidence was buoyed in the critical year-end holiday season, with overall holiday spending some 5% higher year over year. In the second most important market for diamond jewellery, China, ongoing negative macroeconomic conditions, relating primarily to the real-estate market, ensued. Related fears of possible banking insolvencies did, in fact, drive Chinese consumers to prefer spending on gold, the historical safe haven, rather than on diamond jewellery

On top of these issues the disruption caused by the rapid growth of the LGD segment in the U.S. market, which started in 2022, apparently peaked in 2023. Towards year's end the upwards trend of LGD adoption slowed significantly. We attribute this to the sustained drop in LGD production costs (down to US$ 100-150 for a one carat stone) and the propagation of this to the wholesale prices (US$ 300-400) and now to retail prices, as well – Walmart offered a one carat quality LGD for US$ 599, a 1.5 carat stone for US$ 699 and 2 carat stones also for under US$ 1,000 during the holiday season. If during 2022 and most of 2023 LGD sold at retail for about 50% of the cost of a natural stone, even though the wholesale price was already some 90% less, the disparity is, finally, closing. Though DeBeers had launched its Lightbox LGD for US$ 800 for a one carat stone, its retail presence was not sufficient to establish this price as the norm. Walmart offering LGD at these prices is much more significant, it being the second largest retailer of diamond jewellery in North America. We believe that this new retail price range, and the dramatic drop from previously touted pricing in the span of a year, may have affected consumer appetite for LGD, especially for bridal jewellery and engagement rings. Though it is still too early to assess if this is a new trend, or a temporary lull, this may indicate that the natural diamond and LGD segments of the diamond jewellery market are reaching a new equilibrium, as had been forecast by various industry analysts.

Polished natural diamond prices eroded for most of the year, commencing early in the year through to October, as the aforementioned combined headwinds and LGD disruption took their toll. Prices of rough natural diamonds for the most part stayed steady, as DeBeers did not reduce prices in 2023 (notably, at the DeBeers January 2024 sight, rough diamond prices were very significantly reduced by 15-20%). Firm rough prices and decreasing polished prices impaired margins for our midstream customers. Towards the end of 2023, Indian manufacturers declared a selfimposed two-month moratorium on the import of rough diamonds. The final two DeBeers sights in November and December 2023 were a scant US$ 86 and 137 million, respectively. For the year, DeBeers sales dropped a very significant 40%, which led to appropriately reduced midstream polishing activity, more significantly so in the second half of the year.

In May 2023 the Group closed its acquisition of the business and certain assets of the Gem Certification & Assurance Lab, Inc. (GCAL), pursuant to which the Group acquired a 70% stake in the gemmological laboratory business of GCAL, through GCAL USA LLC.

The Group reported in H2 2023, revenues of US$ 19.2 million, loss from operations of US$ 3.2 million, and net loss of US$ 3.8 million, as compared to revenues of US$ 27.6 million, profit from operations of US$ 3.5 million, and net profit of US$ 2.3 million reported in H2 2022. For the year ended December 31, 2023, the Group recorded revenues of US$ 42.9 million, loss from operations of US$ 1.8 million and net loss of US$ 2.8 million, as compared to revenues of US$ 58.8 million, profit from operations of US$ 11.0 million and net profit of US$ 8.8 million for the year ended December 31, 2022.

Overall revenues declined in H2 2023 and for the year in review, as compared to H2 2022 and FY2022, on decreased capital equipment sales following the aforementioned issues, partly offset by increased recurring revenues due to the acquisition of GCAL.

The decline in profitability in H2 2023 and for the year was due to lower sales and lower gross profit margin, offset somewhat by an overall decline in operating expenses.

Overall recurring revenues for H2 2023 (including Galaxy® inclusion scanning, polished diamond related services, annual maintenance contracts, etc.) were approximately 71% of our overall revenue (approximately 66% for all of FY2023). Overall rough and polished diamond wholesale and retail related (“Trade”) revenues, mostly from Grading, digital tenders, the Sarine Profile™ and the Sarine Diamond Journey™ were approximately 31% of our overall revenue for H2 2023 (approximately 23% for all of FY2023), the increase attributed mainly to the acquisition of GCAL. We expect Trade revenues to continue growing in FY2024 from expansion of our grading services and adoption of our new pay-per-use services for natural and LGD stones optimal planning.

The Group delivered 7 Galaxy®-family inclusion mapping systems in H2 2023, of which two systems were sold under the one-off paradigm with no follow-on per-use revenues to be generated from them in the future. As of December 31, 2023, our installed base was 830 systems.

Balance Sheet and Cash Flow Highlights

As at December 31, 2023, cash, cash equivalents, short-term investments (bank deposits) (“Cash Balances”) declined to US$ 23.0 million as compared to US$ 36.0 million as of December 31, 2022. The Cash Balances were primarily affected by the payment of US$ 4.4 million in dividends (an interim US$ 0.9 million dividend in September 2023 and a US$ 3.5 million final FY2022 dividend in May 2023), the acquisition of GCAL for US$ 5.7 million, the repurchase of US$ 0.4 million of Sarine shares in the open market, acquisition of fixed assets of US$ 1.5 million and the net cash used in operating activities of US$ 1.0 million.

Revenues

Our revenues for H2 2023 of US$ 19.2 million, declined by 30%, as compared to revenues of US$ 27.6 million reported in H2 2022. The overall decline in revenues, was due to an approximate 62% decrease in capital equipment sales due to aforementioned issues, offset by an approximate 4% increase in recurring revenues, due to the addition of GCAL, as discussed above. Revenues for the year ended December 31, 2023 of US$ 42.9 million, declined by 27%, as compared to US$ 58.8 million for the year ended December 31, 2022. The year-over-year decrease in revenues, was due to an approximate 50% decrease in capital equipment sales and an approximate 3% decrease in recurring revenues, due to negative industry conditions for most of FY2023, as discussed above.

Cost of sales and gross profit

Cost of sales for H2 2023 of US$ 8.1 million, declined by 12% (on a decline in revenues of 30%), as compared to US$ 9.2 million in H2 2022, with a gross profit margin of 58% in H2 2023 compared to 67% in H2 2022. The decline in the cost of sales in H2 2023 was primarily due to lower capital equipment sales offset by increased costs related to GCAL's operations. The decline in the gross profit margin were primarily due to lower capital equipment sales the revenue from GCAL at lower gross profit margins.

Cost of sales for the year ended December 31, 2023 of US$ 15.6 million, declined by 14% (on a decrease in revenues of 27%), as compared to US$ 18.1 million for the year ended December 31, 2022, with a gross profit margin of 64% in FY2023 compared to 69% in FY2022. The decrease in cost of sales in FY2023 was primarily due to lower capital equipment sales and product mix. The decrease in gross profit and the corresponding decrease in gross profit margin were primarily due to decreased overall sales and product mix, mainly the inclusion of GCAL.

Research and development expenses

Research and development expenses for H2 2023 of US$ 4.2 million were 6% less than the US$ 4.5 million in H2 2022. Research and development expenses for the year ended December 31, 2023 of $8.6 million were on par with the US$ 8.7 million for the year ended December 31, 2022.

Sales and marketing expenses

Sales and marketing expenses for H2 2023 of US$ 6.3 million, increased by 1%, as compared to US$ 6.2 million in H2 2022. Sales and marketing expenses for the year ended December 31, 2023 of US$ 12.8 million were increased by 3% as compared to US$ 12.4 million in year ended December 31, 2022.

General and administrative expenses

General and administrative expenses for H2 2023 of US$ 3.9 million, decreased by 9%, as compared to US$ 4.2 million in H2 2022. General and administrative expenses for the year ended December 31, 2023 of US$ 7.8 million, decreased by 9%, as compared to US$ 8.5 million for the year ended December 31, 2022. The decline in general and administrative expenses was primarily due to less incentive-based compensation and third-party legal and professional fees related to ongoing multiple patent and copyright litigations and related activities in India.

Profit from operations

The Group reported a loss from operations of US$ 3.2 million in H2 2023, as compared to US$ 3.5 million profit in H2 2022, and a loss of US$ 1.8 million for the year ended December 31, 2023, as compared to a profit of US$ 11.0 million for the year ended December 31, 2022. The decline in profit from operations in H2 2023 was mainly due to lower sales, resulting in a lower gross profit (gross profit margin impaired by lower capital equipment sales combined with the inclusion of GCAL), offset slightly by an overall decrease in operating expenses. The decline in profitability for FY 2023 was also impacted by overall lower sales in FY2023, as detailed above.

Net finance income/expense

Net finance income for H2 2023 was US$ 0.2 million as compared to US$ 0.3 million in H2 2022. Net finance income for the year ended December 31, 2023 was US$ 0.6 million as compared to US$ 0.3 million for the year ended December 31, 2022. The increase in net finance income was due to higher overall interest income during FY2023 as compared to FY2022.

Income tax expense

The Group recorded an income tax expense of US$ 0.7 million for H2 2023 as compared to US$ 1.5 million in H2 2022. The Group recorded an income tax expense of US$ 1.5 million for the year ended December 31, 2023, as compared to US$ 2.5 million for the year ended December 31, 2022. The Group’s income tax is affected by the profitability being realised in various entities of the Group, each subject to different jurisdictions, applicable incentives, and income tax loss carry forwards.

(Loss) Profit for the period

The Group reported a loss of US$ 3.8 million in H2 2023, as compared to a profit of US$ 2.3 million in H2 2022, and a loss of US$ 2.8 million for the year ended December 31, 2023 as compared to a profit of US$ 8.8 million for the year ended December 31, 2022. The decrease in net profit was mainly due to lower profit from operations, as detailed above.


Commentary

We expect the following industry trends to continue influencing our business:

  1. Macroeconomic headwinds have tempered with the economic situation in the diamond industry's primary North American markets improving substantially in late 2023 and going into 2024 (also being an election year in the U.S.). Having noted that, consumer spending in China, the diamond industry's second most significant market, remains impaired by economic concerns primarily related to the real-estate market.

  2. Israel has been involved in an ongoing war with the Hamas terrorist group in the Gaza strip, following its brutal 7 October 2023 attack on Israel. Less intense hostilities have since commenced with the Hezbollah terrorists in Lebanon. As of this writing, the impact on the Group has primarily been the calling up of certain of its employees for reserve duty, primarily from the R&D department. To date, the effect on the R&D programs has been minimal.

  3. In the upstream, at the DeBeers January 2024 sight rough diamond prices were very significantly reduced, by 15-20%, following a divergence between rough and polished prices throughout most of 2023. Together with the year-end holiday season recovery in polished prices and reduction in inventory, this decrease in rough prices should somewhat alleviate the issue of eroded margins in the key midstream manufacturing segment.

  4. Environmental, social and governance (ESG) issues continue to concern retailers, especially luxury brands. The AutoScan™ Plus and Sarine Diamond Journey™ combined solution provides a cost-effective means to address these matters and should continue to gain traction with customers in 2024.

  5. The U.S. and their G7 partners have set an aggressive timetable (in stages by September 2024) for the implementation of tighter sanctions on Russian-sourced diamonds. If the enforcement of these sanctions will indeed be premised on a "verifiable" source traceability system, we are confident that the AutoScan™ Plus along with our Sarine Diamond Journey™ can provide a scalable cost-effective means to meet the mandated requirements with minimal overhead or disruption to the diamond value chain. Market analyses indicate some 3 million stones of the sanction-relevant sizes (over half a carat) are polished annually.

  6. We recently launched our new Most Valuable Plan™ (MVP) paradigm for the optimal planning of rough diamonds 40 points and under, a segment in which our installed base of Meteorite™ Plus systems scanned some 27 million stones in 2023. MVP has already proven it creates a significant added value of over US$ 1.5 per stone in this segment of very small rough stones. The indicative value proposition to our existing customer base is some US$ 40 million, on a recurring annual basis. We are confident MVP will also drive additional Meteorite™ Plus and planning system sales and expand our TAM to additional customers. MVP will be extended to the next segment of small diamonds of up to 90 points in the second half of 2024, in which 9 million stones were scanned on our installed base of Meteor™ systems in 2023. The value proposition to our existing customer base in this segment is estimated at an additional US$ 15 million. Concurrent with the extension of the MVP technology to rough stones between 40 and 90 points, we will also release the Meteor™ Plus inclusion scanning system, which will implement all the advantages of the Meteorite™ Plus into the Meteor™ system. The launch of this new system, along with the MVP proposition, should drive both legacy planning and Galaxy®-family scanning systems capital equipment sales in this second segment and expand our customer base.

  7. Towards 2023 year's end the upwards trend of LGD adoption slowed significantly. We attribute this to the sustained drop in LGD production costs (down to US$ 100-150 for a one carat stone) and the propagation of this to the wholesale prices (US$ 300-400) and now to retail prices, as well – Walmart offered a one carat quality LGD for US$ 599 during the holiday season. If during 2022 and most of 2023 LGD sold at retail for about 50% of the cost of a natural stone even though the wholesale price was already some 90% less, this disparity is, finally, closing. We believe that it is this new retail price range, and the dramatic drop from previously accepted pricing in the span of a year, that may have affected consumer appetite for LGD, especially for bridal jewellery and engagement rings. Though it is still too early to assess if this is a new trend, or a temporary lull, this may indicate that the natural diamond and LGD segments of the diamond jewellery market are reaching a new equilibrium. We have facilitated the utilisation of our rough planning technologies on LGD. There is an estimated 20 million carats annual production of LGD, and our initial tests realised an average added value to the manufacturer of US$ 1.5 per carat. Commercial services have commenced with our launch customer, a major supplier of LGD, based on a pay per carat business model. We have similarly adapted our AI-derived grading technologies to LGD and have integrated them into GCAL's work procedures. Our LGD focused GCAL by Sarine grading lab in Surat, India, commenced operations in January. The total addressable market (TAM) for LGD grading is estimated as having been in excess of US$ 100 million in 2023. Our aim is to capture 8-10% of this market in 2024.