Full Year Financial Statement And Dividend Announcement 2021
Condensed Consolidated Interim Statements of Profit or Loss and Other Comprehensive Income for the Six Months and Years Ended December 31
Condensed Consolidated Statements of Financial Position as at December 31
* No par value
Review of Performance
During 2021 the diamond industry recovered significantly from the Covid-19 pandemic disruption of 2020. Though some pandemic-related disruptions continued throughout 2021 (e.g., travel restrictions), for the most part the industry value chain activity returned to normal, and then some. Please refer to section 8 below for a fuller discussion of industry conditions throughout the year.
On the backdrop of these overall positive business conditions for most of FY2021, the Group reported in H2 2021, revenues of US$ 26.2 million, profit from operations of US$ 5.2 million, and net profit of US$ 3.9 million, as compared to revenues of US$ 18.6 million, profit from operations of US$ 2.6 million, and net profit of US$ 1.2 million reported in H2 2020. For the year ended December 31, 2021, the Group recorded revenues of US$ 62.1 million, profit from operations of US$ 19.2 million and net profit of US$ 16.5 million, as compared to revenues of US$ 41.0 million, profit from operations of US$ 4.8 million, and net profit of US$ 2.4 million for the year ended December 31, 2020.
The strong resurgence of manufacturing activities in H2 2021 and FY2021 versus the comparable periods of 2020, resulted in a significant increase in revenues in H2 2021 and FY2021- both increased capital equipment sales and higher recurring revenues, primarily from Galaxy® inclusion scanning. Profitability in H2 2021 and FY2021 was significantly higher than in H2 2020 and FY2020, respectively, having benefited from higher gross profit margins due to both sales volumes and product mix. The increase in the gross profit was offset, somewhat, by increased operating expenses as the Group returned to "normal" spending, reversing the aggressive cost containment measures which were implemented commencing March 2020 at the onset of the Covid-19 pandemic.
The increased midstream diamond polishing activity in H2 2021 resulted in an approximate 22% increase in recurring revenues (mainly from Galaxy® inclusion scanning) as compared to H2 2020 (an approximate 46% increase for FY2021 as compared to FY2020). Overall recurring revenues for H2 2021 (including Galaxy® inclusion scanning, Quazer® services, polished diamond related services, annual maintenance contracts, etc.) were approximately 55% of our overall revenue (approximately 46% for all of FY2021). Overall rough and polished diamond wholesale and retail related ("Trade") revenues, mostly from digital tenders, the Sarine Profile™ and the Sarine Diamond Journey™ were approximately 11% of our overall revenue for H2 2021 and approximately 8% for all of FY2021. We expect Trade revenues to continue growing in FY2022 from new customers and broadened adoption of our technologies.
The Group delivered 32 Galaxy®-family inclusion mapping systems in H2 2021 comprising three Galaxy® Ultra models, two Galaxy® models, 6 Meteor™ models and 21 Meteorite™ models. About 40% of the Meteor™ and Meteorite™ 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, 2021, our installed base was 711 systems.
Balance Sheet and Cash Flow Highlights
As at December 31, 2021, cash, cash equivalents, short-term investments (bank deposits) ("Cash Balances") increased to US$ 36.4 million as compared to US$ 27.6 million as of December 31, 2020. The increase in Cash Balances was primarily due to the Group's significantly improved profitability in FY2021, offset somewhat by increased trade receivables of US$ 23.8 million as at December 31, 2021 (US$22.8 million as at December 31, 2020), due primarily to increased revenues in FY2021 and credit terms offered to customers, the payment of US$ 7.0 million in dividends (an interim US$ 5.3 million interim dividend in September 2021 and a US$ 1.7 million final FY2020 dividend in May 2021), and the repayment in full of all, US$ 3.4 million, Covid-19 related Israel government sponsored bank loans.
Revenues for H2 2021 of US$ 26.2 million, increased by 41%, as compared to revenues of US$ 18.6 million reported in H2 2020. The increase in revenues across most geographies was due to an approximate 73% increase in capital equipment sales and an approximate 22% increase in recurring revenues, resulting from the return to more normal manufacturing activities in H2 2021 as compared to H2 2020, which was plagued with uncertainties from the Covid19 crisis, offset somewhat from the subsequent strong recovery in diamond polishing activities in the midstream starting in late 2020, leading up to the yearend holiday season.
Revenues for the year ended December 31, 2021 of US$ 62.1, increased by 52%, as compared to US$ 41.0 million for the year ended December 31, 2020. The year-over-year increase in revenues across most geographies was due to an approximate 57% increase in capital equipment sales and an approximate 46% increase in recurring revenues, resulting from the strong resurgence of manufacturing activities in 2021, especially in India, following the recovery in the global diamond industry in FY2021, as compared to the depressed revenue results in FY2020, resulting from the onset of the Covid-19 pandemic in late Q1 2020.
Cost of sales and gross profit
Cost of sales for H2 2021 of US$ 7.2 million, increased by 31% (on an increase in revenues of 41%), as compared to US$ 5.5 million in H2 2020, with a gross profit margin of 73% in H2 2021 compared to 71% in H2 2020. The increase in cost of sales in H2 2021 was primarily due to increased capital equipment sales. The increase in gross profit and the corresponding increase in gross profit margin were primarily due to increased overall sales and product mix.
Cost of sales for the year ended December 31, 2021 of US$ 16.3 million, increased by 17% (on an increase in revenues of 52%), as compared to US$ 13.9 million for the year ended December 31, 2020, with a gross profit margin of 74% in FY2021 compared to 66% in FY2020. The increase in cost of sales in FY2021 was primarily due to increased capital equipment sales. The increase in gross profit and the corresponding increase in gross profit margin were primarily due to increased overall sales and product mix, and the sale of inventory previously written-off in prior periods.
Research and development expenses
Research and development expenses for H2 2021 of US$ 4.2 million increased by 24% as compared to US$ 3.4 million in H2 2020. Research and development expenses for the year ended December 31, 2021 increased by 19% to US$ 8.1 million as compared to US$ 6.8 million for the year ended December 31, 2020. The increase in research and development expenses was primarily due to higher employee compensation, following the winding down of cost containment measures initiated in 2020, to counter the Covid-19 outbreak, which included temporary reductions in staff salaries.
Sales and marketing expenses
Sales and marketing expenses for H2 2021 of US$ 5.7 million, increased by 26%, as compared to US$ 4.5 million in H2 2020. Sales and marketing expenses for the year ended December 31, 2021 increased by 13% to US$ 11.0 million, as compared to US$ 9.8 million for the year ended December 31, 2020. The increase in sales and marketing expenses was due primarily to increased sales related expenses, due to higher employee compensation, following the winding down of cost containment measures lasting most of FY2020, increased sales commissions on higher revenues, increased advertising expenses, following the beginning of a returning to normalised pre-Covid-19 levels, and increased sales staffing in the Asia Pacific region, offset by fewer trade-shows and related expenses due to the ongoing pandemic-related travel restrictions.
General and administrative expenses
General and administrative expenses for H2 2021 of US$ 4.0 million, increased by 52%, as compared to US$ 2.6 million in H2 2020. General and administrative expenses for the year ended December 31, 2021 of US$ 7.8 million, increased by 35%, as compared to US$ 5.7 million for the year ended December 31, 2020. The increase in general and administrative expenses was primarily due to increased third-party professional fees, related to the trial phase of the copyright and patent litigations in India, increased incentive-based compensation accruals from significantly higher profitability in FY2021, as well as lower provisions for bad debts in FY2021. FY2020 expenses were constrained by cost containment measures initiated from April 2020 due to Covid-19.
Other income from lease termination
FY 2021 results benefited from a U$ 0.3 million, non-cash gain associated with the downsizing of leased office space at the Group's headquarters in Israel in April 2021.
Profit from operations
The Group reported significantly higher profit from operations of US$ 5.2 million in H2 2021, as compared to US$ 2.6 million in H2 2020, and US$ 19.2 million for the year ended December 31, 2021, as compared to US$ 4.8 million for the year ended December 31, 2020. The increase in profit from operations was mainly due to the significantly higher gross profit in FY2021, stemming from meaningfully higher sales and higher gross profit margins, as detailed above.
Net finance expense
Net finance expense for H2 2021 was US$ 0.3 million as compared to US$ 0.8 million in H2 2020. Net finance expense for the year ended December 31, 2021 was US$ 0.3 million as compared US$ 0.8 million for the year ended December 31, 2020. The decrease in net finance expense was primarily due to lower exchange rate expenses associated with the depreciation of the US dollar as compared to the NIS, and the corresponding revaluation of our NIS liabilities in FY2021.
Income tax expense
The Group recorded an income tax expense of US$ 1.0 million for H2 2021 as compared to income tax expense of US$ 0.6 million in H1 2020. The Group recorded an income tax expense of US$ 2.5 million for the year ended December 31, 2021, as compared to income tax expense of US$ 1.6 million for the year ended December 31, 2020. The increase in income tax expense was primarily due to increased profitability in FY2021, affected by the profitability being realised in various entities of the Group, each subject to different jurisdictions, applicable incentives, and income tax loss carryforwards.
Profit for the period
The Group reported significantly higher net profit of US$ 3.9 million in H2 2021, as compared to US$ 1.2 million in H2 2020, and US$ 16.5 million for the year ended December 31, 2021 as compared to US$ 2.4 million for the year ended December 31, 2020. The increase in net profit was mainly due to the significantly higher operational profit in FY2021, as detailed above.
We expect the following industry trends to continue influencing our business:
- Stating the obvious, there have been major developments in Europe, with the breakout of hostilities in Ukraine. It is yet too early to assess the ramifications of these developments. It should be noted, however, that the major Russian producer, Alrosa, has been put on the list of the sanctioned companies, though the details of the sanctions are not yet clear. There may be an impact on the rough, and by extension, the polished diamond trade.
- The Covid-19 virus and its mutations are still an issue that is affecting the global economy, but most countries have decided to adopt a strategy of living with Covid-19 rather than locking everything down. Underpinning this decision has been the widespread availability of vaccines as well as the advent of the Omicron variant, which has proven to be extremely contagious but of lesser potency for serious illness and death. Some experts have even opined that the Omicron variant may bring about the end of the pandemic. All this notwithstanding, and maybe even because of the syndrome often referred to as "Revenge Buying", the global personal luxury goods retail trade rebound dramatically in 2021 from the Covid-19 pandemic disruption by an unexpected 29%, exceeding forecasts, both for the scale of the recovery itself and the early return to pre-pandemic spending levels (2019 sales figures were actually exceeded in 2021 by 1%). Forecasts now predict sustained robust annual growth in luxury goods spending of between 6-8% through 2025. The diamond jewellery value chain has been one of the major beneficiaries of this recovery, as other competing channels of discretionary spending, such as travel and cruises, have not rebound from pandemic-related restrictions. Though economic growth is forecast to be slower in 2022 than in 2021, an expansion of a respectable 4% is expected, and, given the lingering impediments to experience-related luxury spending, we expect robust consumer demand for diamond jewellery to persist into at least the first half of 2022.
- The strong recovery in retail consumer demand for diamond jewellery, which is expected to continue so long as other avenues of spending remain less accessible, supported higher polished diamond prices and drove a surge in Indian manufacturing activity throughout 2021, with polishers benefitting from improved margins. Even during May, which typically shows reduced activity during the Indian summer break, polishing continued unabated, with most manufacturers foregoing their vacation shutdowns. Periodic surges in Covid19 incidence in India also had no major impact on rough diamond polishing activities. Though the Diwali Indian New Year break in October was celebrated, and the industry shut down as customary, a strong end-ofyear holiday season gave further impetus to midstream activity and supported another uptick in polished diamond prices going into 2022, especially for larger higher quality stones. Due to the surge in manufacturing activity, we have witnessed record-setting use of our Galaxy® inclusion mapping systems worldwide, setting new records of daily usage with peaks of 110,000 rough diamonds. Scanning throughout 2021 hit 33 million rough diamonds, a new record fully over 70% higher than pre-pandemic levels. We expect usage to hit a new record again in 2022, as both the installed base expands and the addressable segments of stone sizes and qualities broadens, due to enhanced technologies and new business models to be introduced in 2022
- On the backdrop of the above-noted surge in polishing activity, rough diamond sales rebounded strongly in 2021, with the major producers, Alrosa and DeBeers, reporting 50% and 71% increases year over year, respectively (21% and 16% as compared to 2019), with prices 23% higher on average for the year. The increase in the pricing of rough diamonds in 2021, which continued into January 2022, on the backdrop of increasing inventories of polished stones, eroded some of the polishers' margin gains realised in the earlier months of the year. However, the strong holiday season for jewellery in the closing months of the year, with retail sales of diamond jewellery in the U.S. increasing by an estimated 56% year over year 2020, and by an astounding 50% over pre-pandemic 2019, as personal luxury spending turned to goods in lieu of experiences, provided a strong finale for the year. Rough demand in the midstream remains cautiously bullish. We are, however, concerned that, if rough price increases continue at the current brisk rate, there will be mounting pressure on midstream profitability, which will not be viable. We hope that a new level of equilibrium is attained soon.
- Because of the still lingering travel restrictions prompted by the Covid-19 pandemic in 2021, Dubai-based rough diamond wholesalers in the secondary market, including Choron, Gem Auctions, Koin, Stargems and others adopted our technologies to enable digital tenders. Consequently, our revenues from our digital tender services expanded in 2021 fully by 243%(!). We expect in 2022 to continue to witness expansion in the utilisation of our digital tenders paradigm by both producers and wholesale tender houses, albeit at a less dramatic rate. The adoption of our digital tenders by producers also opens the door for additional collaboration, e.g., on our Sarine Diamond Journey™ provenance solution.
- Due to the recovery and higher profitability in 2021 and the ongoing robust demand for polished output, the diamond industry midstream manufacturing sector has significantly reduced its use of working capital from banks and is in a healthier financial condition than at any previous time in the past decade. However, as polished diamond inventories have returned to pre-pandemic levels, and as profitability has eroded somewhat due to the increases in rough diamond prices, lending has increased during 2021. Credit issues are not an issue at this time, and there is currently still ample liquidity. But the dynamics of rough vs. polished diamond prices may affect this going forward.
- Due to changes in lifestyles, especially common to younger consumers, both before the pandemic and accelerated by it, online sales of luxury items continued to expand significantly by 27% in 2021, on top of the dramatic growth of nearly 50% in 2020. Online sales account today for 22% of all personal luxury spending. The Sarine Profile™, the umbrella term for our digital paradigms providing "profiling" data pertaining to a polished diamond, including light performance and imaging techniques, continues to expand, with new programmes being initiated primarily, but not only, in the APAC market. European and U.S. customers have also launched programmes utilising out digital technologies.
- We are seeing expanding adoption of our Sarine Diamond Journey™ provenance and traceability solution by key industry players. To bolster our ongoing partnering with miners Alrosa, Lucara and Grib, and expand our cooperation to additional producers, we are shortly introducing into beta-testing a new system, the Sarine AutoScan™, for the high speed scanning of rough stones at the mine. The Sarine AutoScan™ is designed to robotically scan and weigh rough diamonds a half carat and up at speeds under 10 seconds per stone. This high throughput will avail their economical documentation for subsequent traceability, and thus broaden the addressable domain of our Sarine Diamond Journey™ service. This service will also address acute internal inventory control issues miners experience today, as the initial inventory control point will be moved back to the mine from today's practise of initial data collection at the producer's central sorting facility. Our broadening collaboration with producers, along with our existing formidable market-leading presence in the midstream polishing segment, will allow us to collate actual documentary traceability data throughout the pipeline flow, with minimal additional overhead or disruption to existing workflow patterns, making our Sarine Diamond Journey™ the only viably scalable solution for diamond provenance. As environmental, sustainability and governance (ESG) issues are becoming core considerations with consumers (see lead quote by Mr. Bruce Cleaver, CEO DeBeers, DeBeers Diamond Insight Report 2021-- https://www.debeersgroup.com/reports/insights/the-diamond-insight-report-2021), leading brands are increasingly seeking realistic ways of satisfying these demands. We are extremely pleased that leading luxury global brands have ascertained the unique attributes of our Sarine Diamond Journey™ and have adopted it as their sustainability solution of choice. Both the story-telling and the sustainability aspects of our solution have won them over to our paradigm. As announced earlier this year, Maison Boucheron has adopted our Sarine Diamond Journey™ as their sustainability solution of choice as well as our AI-based 4Cs grading, as detailed below. Other high-end luxury brands are also in advanced stages of evaluating the adoption of our solution. We expect that the recognition by these global household-name brands, along with focused marketing to additional industry opinion leaders, will drive accelerated adoption of the Sarine Diamond Journey™ by additional retailers in 2022. We have targeted the key U.S. market this year, with the appointment of a new head of operations in New York, Mr. Matthew Tratner, a veteran retail diamond industry executive, previously responsible at the GIA for their traceability offering.
- e-Grading™ has essentially transitioned from beta-testing to initial broader introduction to midstream and downstream customers. During 2022 we will continue in parallel the further refining of the solution's capabilities, including the introduction of a second-generation Clarity system. The current in-lab implementation of our AI-based grading paradigm is continuing to gain traction with leading U.S. and European industry players. A leading U.S. wholesaler has launched a programme of self-branded diamonds graded by our AI-derived 4Cs grading solution. The seamless integration of our innovative grading solution with our Sarine Diamond Journey™, along with their recognition of its consistency's and objectivity's value to their customers, has led Maison Boucheron to also adopt our AI-derived 4Cs grading for its Etoile Paris line of bridal jewellery. Our AI grading has piqued the interest of additional luxury brands, as well. We intend to broaden the e-Grading proposition's acceptance in the midstream polishing segment dramatically in 2022, leveraging its clear value-added proposition (direct cost reduction, indirect cost elimination, dramatic time-to-market minimisation and operational flexibility), as well as its ability to offer polishers a viable solution for the grading of currently non-graded goods, as the cost benefits we offer avail the grading of smaller and lower quality polished diamonds - an extensive market.
- The market for lab-grown diamonds (LGD) continued to expand in 2021. Anecdotal reports by retailers offering LGD indicate anywhere from single digit growth to 50%, with some retailers reporting that a significant portion of their holiday season business was in LGD. We believe that at least half of U.S. retailers offered LGD products in their stores or online in 2021, alongside their natural diamond inventories. Reportedly, LGD are not widely adopted for bridal purchases, as we had argued the case would be in previous discourses on the LGD market, but are indeed gaining traction as a lower-priced complementing product for non-bridal giftings. Retailers often emphasise that the resale value of LGD is highly questionable, as their prices are expected to continuously erode as production worldwide, which currently does not meet demand, ramps up. The market acceptance of LGD jewellery has created, as we have in the past forecast, a new opportunity for the Group. Virtually all our technologies are applicable to LGD. This year we are introducing a Galaxy® inclusion mapping service, specifically adapted to LGD price points. Our Quazer® 3 laser system continues to be the most cost-effective offering for dicing the LGD wafer into the raw cubes, from which the gems are polished. Our Sarine Diamond Journey™ is also applicable to LGD, as it can document their responsible manufacturing and tell their story to that segment of the consumer market. Lastly, our AI-based e-Grading™ is especially applicable to LGD grading, as it allows the highest quality grading of the polished LGD at an affordable charge commensurate with LGD pricing, as opposed to the fees typically charged by principal gemmological laboratories for their grading services, which approach 10% of the value of the offered polished stone. In addition, e-Grading™ also lends itself conceptually to LGD grading. We believe our business from this growing segment will continue to expand in 2022..
We will focus our initiatives on the following objectives in 2022:
Focus the Group's research and development initiatives as follows:
- Upstream products:
- Launch our new Sarine AutoScan™ system for the high speed scanning of rough stones at the mine, both to avail their amenability to traceability from the source, as well as address internal inventory control issues;
- Explore additional implementation of our technologies in the rough diamond trade market, wherein our digital tools have already made significant inroads by way of the digital tenders paradigm;
- Midstream products:
- Continue rollout of our Advisor® 8.0 software, introducing enhanced features specifically for the costeffective planning of smaller rough diamonds under half a carat in weight;
- Introduce enhancements to our Meteorite™ system, so as to enhance its value proposition in the vast small stone segment of the midstream;
- Introduce automated algorithms to reduce Galaxy® use charges automatically for lower quality rough natural diamonds and for LGD raw material, so as to significantly expand our market to additional goods currently below the threshold for economically viable scanning, without any meaningful cannibalisation of our existing business;
- Further minimise overhead and enhance the ease of use of the Sarine Diamond Journey™ for midstream polishers, so as to broaden the available pool of traceable stones;
- Further refine our e-Grading™ AI-based technology - rollout the second generation Clarity system, integrate self-testing and calibration software into systems for remote quality assurance purposes and implement initial fine-sorting capabilities of Clarity and Color;
- Downstream products and services:
- Continue refining our already industry-leading Sarine Diamond Journey™ provenance offering, leveraging expanding cooperation with producers and introducing additional capabilities;
Focus the Group's marketing efforts on:
- The introduction of new business models for rough stone scanning;
- The continued rollout of our Sarine Diamond Journey™:
- Engage with additional luxury brands and leverage successes to other players, with special focus on the U.S. market;
- Offer it as an independent service or packaged with AI-based 4Cs grading (as with Maison Boucheron);
- Accelerate engagement with the upstream by introduction of the Sarine AutoScan™ for the high speed scanning of rough stones at the mine to enable a broader based application of traceability;
- The commercial rollout of our e-Grading™ innovation by implementing a four-pronged strategy::
- Broadening presence in the midstream polishing segment with a clear value-added proposition
(direct cost reduction, indirect cost elimination, dramatic time-to-market minimisation and
- Addressing the market of non-graded goods, as the cost benefits we offer avail the high quality
grading of smaller and lower quality polished diamonds - an extensive market;
- Engaging with key wholesalers, especially in the fragmented U.S. market;
- Engaging retailers with a continued focus on luxury brands and expansion to high-end independent retailers and regional retail powerhouses;
- The direct targeting of consumers, initially in the U.S., enhancing the Sarine brand recognition through targeted social media initiatives relating to the superior accuracy and consistency offered by automated AIderived grading and the enhanced confidence in the sustainability of the offered polished diamonds and the overall experience provided by the Sarine Diamond Journey™