Chairman's Statement

Extracted from Annual Report 2020

Dear Fellow Shareholders,

Putting 2020 in Perspective while Looking Ahead to 2021

Well, 2020 certainly was not the year we expected it to be!

The year actually started with positive sentiment, following the challenges our industry had faced from the second half of 2018 through the third quarter of 2019. A sharp drop of some 40% in DeBeers' sights' volumes coupled with rough price reductions in late 2019 eased excess inventories, and the industry value chain stabilised during the fourth quarter holiday season of 2019. With the easing in inventory overhang, working capital issues in the midstream manufacturing segment of the diamond industry value chain also eased. The Group thus started 2020 on a positive note. Indeed, we realised increased revenues from all product lines, including delivery of a record 50 Galaxy® family systems in the first quarter of 2020, and finished the quarter very profitably.

And then the outbreak of the Covid-19 coronavirus started impacting business. Initially restricted to China, the lockdowns there somewhat disrupted supply of some of our components. More importantly, the efforts in China to contain the virus shut down retail activity, effectively eliminating the key Chinese New Year buying season, which in a normal year might have had a ripple effect throughout the value chain. But as the pandemic spread elsewhere, lockdowns became the norm globally, severely impairing retail activity on a rolling basis from east to west and all but shutting down entire economies worldwide in the second quarter. In India, lockdowns effectively shuttered all midstream polishing activity from late March through June, with lingering restrictions continuing into July. This, coupled with travel restrictions, effectively curtailed the usual cycles of rough stone buying for much of the year, reducing the number of rough stones entering the pipeline by some 30%. Towards year's end, governments eased restrictions and retail activity in general recovered, particularly so leading up to the year-end holiday season. This drove a very strong fourth quarter recovery in the diamond industry, especially so in the midstream, which went into overdrive in an effort to replenish depleted polished inventories and meet wholesale and retail demand. Notwithstanding this late-year recovery, for the first time since 2009, luxury spending in general decreased in 2020 by over 20%, including diamond jewellery sales, which retracted from sales nearing US$ 80 billion annually to an estimated US$ 62-63 billion.

Faced with these stark realities, the Group's management took decisive actions in the second quarter to significantly cut expenses, making avail of Israeli government support where possible. The main cost-cutting measures were the cessation of virtually all marketing and manufacturing activities (there was no one to sell anything to, anyway) and the furloughing of non-essential employees (the Israeli government paid them relief pay directly), along with staggered pay reductions for all other employees, compensated for by option grants. Though the second quarter resulted in a very substantial burn of cash and a less substantial loss, due to the inertia of the business cycle (e.g., taking delivery of orders placed in the first quarter), the profit from the first quarter was sufficient to result in a profitable first half year. We also took advantage of Israeli government guaranteed Covid-19 relief loans on very favorable terms to augment our cash reserves. The third quarter played out quite well, bearing in mind the prevailing negative business conditions, ending with a very minimal loss and a still negative cash flow, but much less than in the second quarter. With the robust industry recovery in the fourth quarter, our business improved substantially and we returned to profitability and significant positive cash flow, even though our capital equipment sales were still lagging. We ended 2020 profitably, notwithstanding the challenging worldwide economic business conditions, for which our management deserves full credit!

During 2020, notwithstanding the 30% decrease in rough stones entering the pipeline, we scanned a new record of just under 19 million stones through our installed base of Galaxy® inclusion mapping systems, 5% more than our record performance in 2019. During 2020 we delivered 76 Galaxy® family systems to customers, mostly Meteor (15) and Meteorite (50) models, but also 6 Solaris systems and 5 Galaxy® machines. This is just over half the previous year's delivery of 145 systems, the decrease being directly attributable to the Covid-19 pandemic disruption. The Group had an installed base of 631 Galaxy® family systems as of 31 December 2020. Following the midstream's fourth quarter robust recovery, and carrying on into the initial months of 2021, we have seen utilisation of our installed base of scanning systems surge 40% over pre-pandemic usage to a run rate equating, on an annualised basis, 27 million stones, with daily peaks of 100,000 stones. To further fuel this growth in 2021, we have launched aggressive marketing offerings with exceptionally attractive terms targeted for specific sub-segments of the midstream. Our new marketing promotions are aimed at enabling smaller businesses to acquire our systems on extremely cost-effective terms - e.g., a package specifically offered to polishers of very small stones a tenth of a carat rough and under. We expect these promotions will drive significant sales of our Meteorite and Meteor systems. We are also launching an aggressive new initiative aimed at reestablishing substantial demand for our Solaris model for mid-sized rough stones (from 1 to 2 carats in weight).

We estimate that during 2020, again close to a hundred million stones were planned utilising our DiaExpert® family of planning platforms and our Advisor® software, of which over 60 million stones were planned on systems running the online Advisor® 6.0/7.0 software. This is key as these systems provide the data, which are directly retrievable for our unique Sarine Diamond Journey verifiable provenance/traceability offering. We will continue to leverage our technological lead and widen the gap between the older discontinued planning software (Advisor® 5.x), which is that being infringed upon by the illicit competition. The new Advisor® 8.0 with enhanced features and superior infringement protection will be launched during the year. In addition, we are leveraging our best-in-class provenance/traceability solution, the Sarine Diamond Journey, and its expanding adoption by producers and retailers alike, as detailed below, to induce midstream players to upgrade to our newer solutions. All these steps should continue to contribute to the curtailment of the IP piracy in India.

In 2020 we broadened our cooperation with the mining/producing upstream of the diamond industry. Our cooperation with Dominion Diamond Mines ULC ("Dominion"), Canada's largest independent diamond producer, who were first to adopt our Sarine Diamond Journey for their enhanced CanadaMark, has, regrettably, not expanded, due to their having sought bankruptcy protection as their financial condition worsened during the pandemic. However, our collaboration with Lucara, a Canadian miner operating in Botswana, renowned for their finds of extremely large rough diamonds, has broadened. Beyond providing the rough diamond evaluation technology on which the supply side of their Clara initiative is based (technology also adopted by Grib, a smaller Russian producer), in 2020 Lucara also adopted our Sarine Diamond Journey to provide verifiable provenance documentation for their Clara diamonds. Most importantly, our relationship with Alrosa has bloomed. Alrosa's digital tenders initiative, based on our Galaxy® and Advisor® technologies, was launched late in 2019, uncannily timely right before the pandemic outbreak all but prevented the sales of rough diamonds through conventional channels. This initiative significantly expanded in 2020, both in the quantities and in the size ranges of rough stones tendered by Alrosa, and is expected to double in volume in 2021. During 2020 Alrosa partnered with Sarine in offering retailers and midstream polishers alike the Sarine Diamond Journey, as a preferred solution for provenance and traceability. We have initiated dialogs with additional producers, who are now in various stages of evaluating both our rough diamond evaluation / digital tenders technology and our unique provenance/traceability solutions, some already having run successful pilot programmes. We expect to be able to announce more on these collaborations as 2021 unfolds.

The Sarine Diamond Journey is indeed gaining recognition as the industry's most robust solution for polished diamonds provenance and traceability documentation. Leveraging on our aforementioned growing partnering with producers, as well as on the near-ubiquitous utilisation of our industry-leading technologies in the diamond industry's midstream, wherein the rough stone is transformed into a polished one, we have the unique ability to provide an actual verifiable testimonial of the polished stone's derivation, with no need to resort to subjective declaratory input. Critically, this is done with minimal disruption to the work-flow, causing virtually no indirect additional cost and overhead, making it a winning proposition. The Sarine Diamond Journey concurrently provides a captivating video imagery paradigm for showing the consumer the entire actual process that his/her very own diamond underwent. It can optionally be augmented with a real 3D-printed model of the original rough stone for the consumer's fascination. High-end retailers with a global presence and regional market leaders have expressed interest in our unique offering, and successful pilot programmes were, indeed, concluded in 2020. Unfortunately, additional pilot tests were delayed by the pandemic, though we fully expect them to come to fruition in 2021. Retailers in China, Japan, other APAC markets and the U.S. have adopted the story-telling facet of our Sarine Diamond Journey paradigm. 2021 will see leading retailers offering the provenance and traceability aspects of the Sarine Diamond Journey as well. These developments are driving midstream suppliers to join our Sarine Diamond Journey Official Partner Program. They opt to enable us to collect the necessary data and imagery during the stone's manufacture and to store them in our cloud-based repository. This shortens their response time to a retail customer's request to adopt the Sarine Diamond Journey service. Notably, this process incurs no direct cost and virtually no indirect cost to our midstream partners, while creating new sales channel opportunities for them. We are remunerated when the actual Sarine Diamond Journey report is generated at the retailer's request. The Sarine Diamond Journey may be further augmented by our proprietary technologies for "fingerprinting" the polished stone, which can easily be ascertained in the retail outlet by our TruMatch device.

During 2020 we further refined our AI-based polished diamonds grading capabilities. We continued our long-term collaboration with China's leading gemmological institute, the National Gemstone Testing Centre (NGTC). This collaboration's initial outcome was the launch of a new light performance grading standard for China. In 2021 we intend to continue our cooperation as per the framework agreement signed in 2019, including issues pertaining to our automated AI-based 4Cs grading, our polished diamond fingerprinting and the general issue of digitising information relating to polished diamonds for more ubiquitous dissemination to consumers. Additional customers are also adopting our technology-driven 4Cs grading solution, including, as an example, Japan's major television retailer QVC. We are continuing our longer-term effort to be able to provide advanced fine-sorting of Clarity and Color per varied retailer-specific requirements. We expect an initial version of fine-sorting on a number of parameters to be launched later in 2021.

Most excitingly, in 2020 we announced our new e-Grading initiative - our intent to revolutionise the way polished diamond grading is done. e-Grading is a time-saving cost-cutting on-site solution for 4Cs grading, without necessitating the time-consuming and costly process of going offsite to a gemmoligical laboratory. The systems utilised for the grading process are all cloud linked and the grading results are automatically uploaded to the cloud. Thus, the 4Cs grading results are derived without any human intervention and immediately available for online B2B access and subsequent B2C consumer report generation. Our new grading paradigm enables truly objective and consistent grading at a fraction of the time currently required (measured in minutes to hours vs. days to weeks) and with none of the indirect costs of shipping, insurance, customs handling, etc. associated with having the grading done at an external lab. Furthermore, as our e-Grading paradigm is implemented by the manufacturer's own personnel, with no need for highly skilled gemmologists, most likely the direct cost will also be reduced compared to that commonly paid to a lab, today often on a par with the overall cost of polishing the stone(!). e-Grading also offers a completely new level of operational flexibility, as the polishers can prioritise their stones' sequence of grading to best meet their delivery schedules. Late in 2020 we began initial beta-testing of this new concept in India. The first half of 2021 will be dedicated to the ongoing refinement of the solution and implementation of the necessary operational cloud infrastructure. Broader introduction to midstream polishers is scheduled for later in 2021.

Lastly, the continued market acceptance of lab-grown diamond (LGD) jewellery in 2020, with nearly half of polled retailers in the U.S. intending to offer LGD jewellery alongside their natural diamond offerings in 2021, has created, as we have in the past professed, a new opportunity for the Group. We have demonstrated that the Galaxy® inclusion mapping and Advisor® planning technologies can contribute to the optimal utilisation of the manufactured LGD raw material. We are now complementing the Galaxy® software with pattern recognition capabilities, in order to automatically discern between natural and LGD rough material and automatically adjust the billing for the scanning service. Our Quazer® 3 has proven to be the most cost-effective offering for dicing the LGD wafer into the cubes from which the gems are polished. And our AI-based e-Grading is especially applicable to LGD grading, as it allows grading of the less expensive finished LGD gem at a much more affordable cost than that charged for grading services by common gemmological laboratories. In addition, e-Grading also lends itself conceptually to LGD grading – a stone created by technology should naturally be graded by technology. We will in 2021 extend our efforts to penetrate this rapidly growing market and are already evaluating possible partnering with leading players in this new industry segment.

Intellectual Property (IP) Infringement

Although the Covid-19 pandemic triggered closures of patent offices and courts in various geographies throughout the year, as well as causing periodic delays in administrative functions, the Company experienced only minor disruptions regarding its ongoing efforts to protect and enforce its intellectual property rights. The Company filed new patent and divisional applications in various countries including Israel, India and the United States, and received grants of already pending applications. The enforcement activities against the infringements of the Company's technology suffered only minor delays, and we were able to instigate new lawsuits in India and in Israel against infringing products. The courts in India widely adopted the use of video conferencing to hold hearings and move matters forward, and our primary lawsuits have progressed quite satisfactorily. We expect the courts to render decisions on several matters within a few months.

However, we are not only relying on judicial recourse or other third-party intervention. We are also leveraging the numerous technological and commercial advantages we have. The Advisor® version that the infringing parties are using is over five years old, while as the newer Advisor® 7.0 release, soon to be replaced by Advisor® 8.0, offers incomparably better planning, especially critical for larger, high-value stones. We are also leveraging our expanding relationships with major producers and retailers, primarily as relating to the digital tenders and the Sarine Diamond Journey, to include in the Official Partner Program only suppliers who have upgraded to Advisor® 7.0 and are not involved in IP infringement. As a further impediment to our illicit competition, we are continuing and broadening our aggressive sales promotions of the Solaris, Meteor and Meteorite systems, so as to tailor cost-effective business models to all sizes and types of polishers.


The Board of Directors has recommended that a final dividend of US 0.5 cent per ordinary share (approximately US$ 1.75 million) be distributed for FY2020. This sum is in line with our net profit generated this year and demonstrates the Board's and Management's faith in the Group's business recovery and the new initiatives' potential as future growth drivers.


On behalf of the Board of Directors, I would like to first and foremost thank our truly devoted management team and employees for their ongoing support of and commitment to the Group. Without this commitment we could not have weathered the Covid-19 pandemic afflicted 2020 as successfully as we have. We would also like to thank our loyal customers and business partners who enhanced their level of partnership with us this past year, as well as our conscientious suppliers, who worked with us during these trying times, often spreading the pain between our Group and themselves. We believe that these long-term relationships will continue to foster the means by which we will bring innovation and value to the global rough and polished diamond trade in 2021 and beyond, as we strive to continue to launch initiatives that benefit all the industry's value chain and its global consumers. Lastly, I thank our loyal shareholders for the continued trust they extend to Sarine and its management.

Respectfully Yours,

Daniel Benjamin Glinert
Executive Chairman of the Board