Louis Edgar is a family-owned premier fine diamond house and bespoke jeweller headquartered in Melbourne, Australia. The business was established in 1964 by Louis Leblanc - who is an immigrant from Montreuil, France, and a third-generation jewellery design artisan - and his wife, Miriam Edgar. The business started from a small workshop in Bourke Street, Melbourne, but now has nine showrooms in metropolitan Melbourne, Sydney, Perth, Brisbane and Adelaide.

Louis Edgar's approach is to sell quality and ethically sourced diamonds to retailer jewellers and direct to the public.

Louis Edgar has been sourcing diamonds from dealers and certified diamond importers who are specialists in sourcing and importing diamonds directly. All the diamonds it acquires that are 0.5 carats and over are certified by the Gemmological Institute of America (GIA), are of premium grades (in terms of carat size, colour, clarity and cut) and sell at premium prices. As required by consumer law, Louis Edgar must ensure that its customers are aware whether the diamonds are GIA certified and, if so, that they are supported by the relevant documentation. All stones have been sourced from suppliers that have a good understanding of their supply chains and support sustainable procurement.

Louis Edgar is also an Authorised Partner for Rio Tinto's Argyle Pink Diamonds, which have soared in value following the closure of its Argyle mine in Western Australia in November 2020. A large proportion of Louis Edgar's purchases comprise loose diamonds that can be used to make bespoke pieces and are calibrated in size and shape for specific applications.

The business operates four workshops across Australia that are staffed by a team of 102 skilled artisans and master jewellers. When working within each of the Louis Edgar workshops, all artisans and jewellers must adhere to the safety rules that are posted on the main door and throughout the workshop.

To offer more personalised services and targeted marketing, Louis Edgar runs two e-commerce platforms - a businessto-business (B2B) platform and a business-to-consumer (B2C) platform, on which private customers can browse a wide range of stones and create shortlist before making an appointment for an obligation-free viewing.

In 2016, Louis and Miriam's son, Peter Leblanc, joined the business and was later appointed as the Chief Executive Officer (CEO) in 2018 when his parents retired.

The diamond industry has experienced significant shifts in recent years. Although industry performance and growth improved in 2022 from 2021 due to the recovery from the COVID-19 pandemic, the second half of 2022 was dominated by geopolitical tensions, high inflation and economic instability, which resulted in a squeeze on margins. Further, changing consumer preferences, higher costs and interest rates, and decreased savings have negatively impacted discretionary sales. These challenges are predicted to remain throughout 2023. To remain competitive and grow, the sector must find solutions to these issues and capitalise on new prospects. For one, the less-expensive, lab-grown diamond business is expected to grow, particularly in urban areas, and consumer source verification is also expected to become an increasingly relevant concern.

As a proactive measure to secure reliable supplies of quality diamonds and mitigate price volatility, Peter is negotiating an exclusive, three-year supply contract (exclusivity is restricted to Australia) with White Nile, a manufacturer and international supplier of polished diamonds, headquartered in New Delhi, India.

White Nile is a multi-generational family business headed by Ankita Rahman, whom Peter met at a diamond conference in Dubai in early 2022. White Nile sources rough diamonds from various producers in Botswana and has its manufacturing operation in Gaborone, Botswana. Its polished diamonds are sold through its service houses to wholesalers and retailers in New York, Dubai, Hong Kong and Shanghai. White Nile believes in sustainability and ethics and conducts its own due diligence over human rights at its manufacturing operation as well as over its supply chain annually. In July 2022, Ankita invited Peter to tour its manufacturing operation and Peter was impressed by the craftsmanship and technology employed at White Nile's factory.

In return for exclusivity of supply, except for Argyle Diamonds, Louis Edgar must not purchase from other sources without explicit approval from White Nile. This arrangement opens up a new market for White Nile, with minimal effort and cost. As with all international diamond trades, the diamonds will be paid for in US dollars (USD).

Louis Edgar does not employ any financial instruments to mitigate its exposure to fluctuations in the USD. Adrian Edgar, who is the Finance Director and Peter's maternal uncle considers them too expensive and complex to ever profit from such investments. Instead, he maintains a level in the USD account based on historical trade cycles. Due to the Australian dollar unexpectedly falling to 62 cents against the USD in October 2022, the business suffered substantial foreign exchange losses which hurt its working capital and forced Louis Edgar to increase its debt funding to levels just below its bank debt covenants.

Louis Edgar's debt structure changed dramatically when it successfully acquired 2 extremely rare diamonds at the final Argyle Signature Tender in October 2021 - a Fancy Intense Pink Diamond and a Fancy Vivid Purplish Pink Diamond. Although the acquisitions would raise Louis Edgar's debt levels to an all-time high and increase its debt-to-equity ratio to 0.72, Peter was persuaded by the potential profits from the sale of the investment-grade diamonds and opportunity to raise Louis Edgar's profile and convinced the Board to proceed with the tender. Furthermore, the Finance Director was confident that the business would be able to fund the interest payments since interest rates were at an all-time low.

As at December 2022, Louis Edgar had still been unable to sell the rare diamonds. The holding costs of the rare diamonds, especially following a series of interest rate hikes were becoming unmanageable. In response, Peter commissioned White Nile to tap into its deep networks and sell the diamonds. In April 2023, the diamonds were successfully sold at a silent auction in New York for a total of USD$16 million. However, the return net-of-cost was only 13%, which was too low to justify the transaction risks.

The cash from the sale of the rare pink diamonds has allowed Louis Edgar to consider new business opportunities. At the recent Board meeting, two ideas for opportunities were discussed:

1. Lab-grown diamonds

According to a report commissioned by the Antwerp World Diamond Centre (AWDC), the less-expensive lab diamond business is expected to grow as younger diamond buyers, who are the main purchasers of diamonds for engagement rings, are drawn to them by price and for environmental reasons. The growth is expected to continue as more jewellers start to sell lab diamonds. Further, technological advancements in this space have allowed producers to grow better quality diamonds more rapidly and more cheaply.

There are two methods of making lab diamonds:

1. The first method is via high pressure and high temperature (HPHT), where the diamonds are produced by simulating the conditions that form natural diamonds in the earth. Upon completion, a distinctively shaped, labgrown diamond crystal is created.

2. The second method is known as chemical vapour deposition (CVD). It incorporates the disintegration of molecules of a carbon-rich gas, like methane, into carbon and hydrogen atoms. Following, the atoms are deposited onto diamond seeds, resulting in a square, broad and flat diamond crystal.

The Board is considering acquiring a small lab diamond business called New Diamonds, owned by a Melbourne-based gemmologist couple since 2014. The business operates fully online and does not have any brick-and-mortar stores, and caters to customers in Australia, New Zealand and South Korea. New Diamond employs three jewellers, three designers, eight sales staff and an accounts person. The owners are responsible for sourcing lab diamonds from around the world and the business markets itself as providing more sustainable and ethical options to mined diamonds. The owners source diamonds based on quality of the stones and do not critically examine the origins of the diamonds.

The owners of New Diamonds are seeking to sell their business as they are planning to emigrate to Italy.

2. Tech-Trace app

During lunch with a friend, Peter learned of Tech-Trace, a leading Israeli technology and service provider that offers an app for tracing diamonds, both natural and lab-grown, from their origin and journey through the supply chain. The app tracks and stores diamond producers' inventory data and the movements of diamonds they produce. Given it is expected that consumers will increasingly prioritise sustainability and ethics alongside the traditional attributes of design, quality and price, Peter is keen to implement this app into Louis Edgar's supply chain.

The Finance Director (FD) recently presented the risk monitoring and review reporting pack to the Board. The paper, among other matters, addressed misalignments in Louis Edgar's risk culture, evaluated the risks and opportunities that Louis Edgar could face in relation to the potential New Diamonds acquisition and considered the adoption of the TechTrace software to verify diamond origin.

As a result of the paper, Louis Edgar's CEO met with Ankita Rahman, who agreed to pilot test the Tech-Trace application to prove its viability for White Nile's supply chain.

The FD has asked you, as a qualified Chartered Accountant working as a management accountant in Louis Edgar's finance department, to prepare response to generate insights into the impact of origin verification on business performance and the feasibility of the Tech-Trace software.

Review Appendix 1 - Tech-Trace High-level Data Integration Process Narrative

.. -'\\. . Louis Edgar Since l 964 Appendix 1: Tech-Trace High-level Data Integration Process Narrative The following is a documentation of a pilot study into the viability of the Tech-Trace software across White Nile's supply chain, including the data integration process thereof. Detailed process ow diagrams depicting the pilot study can be obtained from the Tech-Trace Traceability Solution Pilot Program le. Contact the Tech-Trace Support Team to request access. Please be aware that we at Tech-Trace are constantly looking to evolve and develop our product. If you require adjustments to our software to ensure that it meets your requirements, please contact our team. Note: Blockcnain is still a new technology with limited examples to refer to. lt is not possible to write product specications prior to development. This process was developed to accelerate the pilot testing of the Tech-Trace soliware. lt is currently under review to determine a tailored process traceability design for White Nile's supply chain. Supply chain data integration At the source, rough diamonds are recovered from open-pit mines and transported to a plant to begin the processes required to separate rough diamonds from the surrounding waste rock. Final measuring and sorting processes are then conducted by trained staff. Each stone is examined and grouped mainly according to colour, clarity and size. Only gem-quality stones are sold down the jewellery production chain. The rough miner uses the Tech-Trace App to create a unique blockchain-encrypted QR code, which incorporates a unique hash value at the time of its generation. The rough miner encodes details ofthe rough's origin, including name and geolocation of the mine, Kimberley Process certification details (Kimberley Process is an international process that reduces 'contlict diamonds', which are rough diamonds that are used to nance wars against governments around the world) and additional information, such as the environmental, industrial and social history of the rough, and stores the timestamped data on the tamper-proof blockchain, which returns a hash value. The rough miner prints the QR code with this hash value and attaches the QR code to the rough diamonds to be sold. Nodes (participants) in the pilot study have not agreed on what information to store on the blockchain due to concerns regarding privacy of the data. They have also not been able to agree with the format, access rights and the governance of the distributed ledger. The sheer volume and complexity of data stored in the distributed ledgers have necessitated signicant computing resources, which have caused some of the operations of the solution, such as reading from the blockchain, to be signicantly slower compared to traditional databases. Further, the distributed ledger function does not work when a network connection has been lost. Any tampering with data stored in loT devices during the ofine period will likely go undetected. As the mines are in remote areas, failed internet network connections have occurred. The rough diamonds are sold and transported to White Nile under an offtake agreement (or long-term contract) which obligates White Nile to purchase a portion of the mine's production. At White Nile's manufacturing facility, roughs are professionally cut and polished into diamonds. In the planning stage, the cutter determines the most appropriate shape of each diamond to minimise waste and maximise the yield of the stone, and accurate measurements are generated using mapping machines and three-dimensional models. The rough is then cleaved into separate pieces to allow the cutter to work on the pieces separately and use the rough most efciently. Mechanical sawing and laser technology are then applied to shape the diamonds. Through the process of girdling and polishing, smooth and reective faceted diamonds are produced. The diamonds are then inspected to ensure they meet specications and quality control standards, and then graded where appropriate. White Nile scans the QR code attached to the original roughs using the Tech-Trace App. When the blockchain- encrypted QR code is scanned, the Tech-Trace system verifies the hash value by comparing the hash value of the blockchain with the hash value of the QR code. If the two hash values match, then access to data is authorised. White Nile encodes information about the polished diamonds (such as cutting and polish support) and stores the information in the distributed ledgers and the hash value of the block, to which new data is added into the next block, which returns a unique hash value. This makes the system highly secure. White Nile then prints its own QR code with the unique hash value and attaches the QR code to the polished diamonds to be sold. To ensure that the diamonds are compliant with the information stored in distributed ledgers, White Nile photographs every diamond it processes, and the image les are stored as blockchain data. As some stones look identical and are difcult to differentiate in photographs (for example, melee diamonds, which are tiny diamonds that typically weigh less than 0.15 carat and are usually sold in parcels sorted according to their carat weight), some errors have occurred as the photographs are manually matched to the diamonds. As blockchain data is immutable, it has not been possible to correct any errors in diamond identication without making signicant changes to the data structure. Further, because White Nile already uses normal barcode technologies in its product management systems, the new-format Tech-Trace QR code has caused incompatibility issues and system problems. Signicant resources have been required to rectify the issues and signicant downtime has been required to maintain White Nile's systems. After being processed by White Nile, polished diamonds are sold and delivered to Louis Edgar based on the terms of their exclusive supply agreement. On receiving a diamond from White Nile, Louis Edgar scans the QR code using Tech-Trace App and encodes timestamped delivery details and stores the data on the blockchain. Data volumes on the blockchain are very large and frequently ovenwhelms Louis Edgar's systems. To safeguard sensitive supply chain data, only information about 3 diamonds origin, journey and gemological grading are produced onto the diamonds unique report using Tech-Trace's access restriction features. The report can be viewed by anyone via smartphone