K33 AB (publ) (K33) Earnings Call Transcript & Summary

All right. Good morning, everyone, and welcome to SME Play, the channel dedicated to small and medium-sized Nordic enterprises. And today, Arcario has released it's earnings for Q2 and the first half of 2023, and we have the privilege to welcome back Michael Jackson, Chairman of the Board, to discuss their report and future prospects. And also joining us via Lynk from Norway, we have company's CEO, Torbjorn Bull Jenssen, who's here to shed some more light on the state of the crypto market, and we'll be wrapping up with a brief Q&A session. So let's get into it. Michael, good to see you.

Good to see you. Thank you.

Since your last visit here in June, could you provide us with an update on what's been going on?

Sure. Well, we've been very busy in Arcario. We've had robust growth across all of the portfolio of companies. Our reorganization has gone well. And we've got some great news for everybody.

All right. Excited to hear about that. But to back it up first, just for the people who might not be so familiar with everything that's been going on in the company. Arcario, formerly known as Arcane Crypto, has been going through a transformation. What are the different parts of Arcario today?

Yes. Well, Arcario is now an investment company. All the operations are separate operations. Before this quarter, we had 4 companies within the portfolio, and now we have 5.

Okay. So from your perspective, what is the most exciting news coming out of Arcario today?

I think the most exciting news is the news we announced yesterday, which is our U.S. listing. U.S. listing, OTCQB.

And have you seen a lot of interest from U.S. investors? Or why are you doing this?

This is exactly why we're doing it. We're doing it to capture U.S. interest. We're seeing U.S. interest in Arcario, and we need to capture that. Of course, we want to do that.

You mentioned the plans for OTC listing, so you haven't mentioned, but the company has mentioned the plans for a listing in the U.S. before. Why now?

Why now? Because we can see that there's a chaos in the U.S. now within the regulatory environment. U.S. investors who want to invest into the crypto space, into the digital asset space, really have very few choices, very few choices at all. The regulatory framework there doesn't permit them to do it. Arcario is a licensed regulated operation. and being able to offer that product in the U.S. increases our liquidity, of course, but hopefully satisfies a lot of this investor demand that we're seeing.

Okay. So they are looking at Nordic or European companies to invest in that's active in the crypto space.

Absolutely. I mean the European environment now has stabilized. We have a lot of regulation that's finally fallen into place. You can be very certain if you're operating a crypto-based business, a digital asset business within Europe, there are a lot of well-established companies, licensed companies, licensing framework here, something which is completely different to what you see in the U.S. And this is actually where we believe that the European environment is very favorable for once for crypto and early-stage investments.

Okay. Well, that's exciting news. And if you want to get into more of what's been happening within the existing portfolio companies in Arcario?

Absolutely. Yes. Well, should we go through them one at a time?

Let's do it.

Okay. So as I just said, we have 5 portfolio companies in Arcario. We have K33, Green Data, Pure, LN Markets, and Finpeers. Maybe I'll start with K33.

Yes, let's do it.

I mean, K33 is our flagship asset, if you like. It's the asset that Torbjorn is the CEO and it was the -- before the research operation, the trading operation, the assets operation. And it's been going really well. The research has bedded down super well. We launched it -- rebranded it and launched it in the spring, doubled the number of subscribers in the last quarter. So that's great news. Anybody who wants to join, please join. It's a different model now, free to sign up, and then a premium model from there. And Markets is probably the most exciting thing we have within that. It's launching now, very, very soon indeed. We're onboarding the first test clients. You don't really do test clients in Markets, but the initial clients are on there. And we'll be opening it up for full access really, really soon. And of course, the third thing is we announced we've got some financing directly into the portfolio company of K33 from Liquid Mercury, an American operation, again, reinforcing the fact that American investors are interested in European assets for once.

Okay. Yes. And what's been going on in the other subsidiaries?

So in Green Data, mining operation. We've seen this turn profitable again after a spring which was weak because of electricity prices and low Bitcoin prices. These have recovered. That's back there. Merger and acquisitions within that space, so -- are everywhere. So let's see. Pure Digital, they're now up to -- they are real tailwinds in Pure Digital now. The institutional side we see is gaining traction, particularly in the U.S., the U.S. investors, the U.S. banks, the big ones are in there. Pure have got 7 letters of intent with these U.S. investors, these big U.S. banks. And so their interbank market is ready to go. And again, hopefully, some good news on that.

LN Markets?

LN Markets is the Lightning Network trading platform. We have 3x as much volume in Lightning -- in LN Markets in the first half year than from the second half of last year. So it's grown 3x in that period. So the Lightning Network's doing well, and they're doing well within that environment. So that's great news as well.

And then you have a new addition.

We have the new addition, Finpeers, Swiss operation. Again, moving into digital assets, the tokenization of digital assets. And as you know, there are many people talking about the tokenization of assets, tokenization of real-world assets as being the huge market, the thing of the future. And we think we found a great team there to be building that company up. So that's fantastic as well.

That's lots of information in a short time, but I think that people can go into their report and read more about these different subsidiaries. If you want to get in a little bit more into today's report, what were the financial highlights from your point of view?

Well, I think from my point of view, the first thing is, it was completely in line with expectations, in line with the budget we produced internally, everything was exactly as it should be. That's always good news. First of all, no surprises, right? I mean we continue to make the cost savings. Arcario is changing structure. It doesn't have operations within itself any longer. So now it's much leaner. Very few people involved with Arcario and paid by Arcario, you can say it's all in the portfolio companies, which I think is the right place to be. So when we look at the financial performance, we see the income side is flat. It stays the same. It's more a technicality because an investment company doesn't really have any income as such. And so you should be focusing on the EBITDA, on the gross margin of the company going forward. And of course, the performance of the portfolio companies because that's where, in the end of the day, the value lies.

Okay. And for Q3, what's the outlook? Are you providing one?

Well, we're not providing any financial guidance just now, no, but we're certainly providing some operational guidance with the launch of the K33.

It seems like something that you're very excited about.

I'm very excited about it. I think it's amazing. It's -- we've worked very hard on K33. The team has been extremely -- done so much work on it over the last year.

It seems things are coming together.

Yes, they are. Exactly. And the product that we dreamt about a year ago or something is actually what I can see, when I look at it on the screen, when I see how people interact with it. But also how the back office and how the custody and how the security and all of these things are going to work. I think it just looks like a product that's best in class, certainly best-in-class in -- it's the best I've ever seen in the Nordics, and I think it's the best I've seen globally here. So I'm really looking forward to that. And then from the Arcario side, of course, the U.S. listing is going to be super important, I think for everybody and everybody who's listening here, hopefully.

Yes. So lots of exciting things going on there. So with that cliffhanger then of -- that there is more to come, thank you, Michael. And let's turn to Torbjorn in Norway for a deep dive a little bit into what's going on in the crypto market. Can you hear me, Torbjorn?

Yes, I can hear you loud and clear. Great to be here, although I wish I could be on ground [indiscernible].

Yes. Well, we'll do it this way instead. It works now fine with the digital channels going on. So the crypto market has seen some big changes in Q2, especially since your last appearance here in June. Could you comment a little bit on recent developments?

Yes, absolutely. In many ways, it's actually been mimicking what Michael said about Arcario where the spot market, the trading activity has been very flat. The Bitcoin price has been very flat, although we had some recent volatility. However, underneath this kind of calm surface, there's been some major news. Most notably, BlackRock has announced that they are applying for an ETF, or not even announced, they've actually applied for a spot ETF in the U.S. And this is massive. BlackRock is the largest asset manager in the world. And when they are applying for a spot ETF, it's most likely that they will be able to get it done, but also it signals that there is underlying demand. They wouldn't put resources on this unless they saw institutional demand. We have also other major news like Deutsche Bank applying for a custody license. We have Societe Generale obtaining a custody license. We have PayPal launching a stablecoin on the public Ethereum blockchain. And this is just a tip of the iceberg. So what we're seeing is this massive news flow of real institutional adoption, while at the same time the market is calm. So this mimics very much what we saw after the bubble crash in 2017, where we first had a year of wipeout, which was last year -- in this cycle. And then a year of accumulation, where the market regained strength. But it isn't until kind of even a year after that again. In this cycle, in '24, you really start to see the bullish momentum from the news that we identify and see now.

And if we speak about Bitcoin in particular, it's been a pretty good development in terms of the cryptocurrency's price during the first half of 2023. What's the outlook now for the second half?

Yes. No, absolutely. I mean Bitcoin regained a lot from the bottom at the end of last year, appreciated almost kind of 80% from kind of the start of the year until just before the summer. Has now been flat and kind of recently fell back a little bit. I think for the rest of the year, I don't anticipate any large movements. Of course, there will be ups and downs, but I don't see any trend shifts. I do, however, really kind of anticipate those kind of changes to occur more towards second half 2024. And the reason for this is that retail interest continues to be suppressed. High interest rates and high electricity bills kind of makes it hard for retail to find a lot of money to allocate to this sector. The counteracting force of growing institutional demand will eventually take over and really drive the next cycle. Right now, those 2 forces are balancing out, and it will take time before the full momentum and full force of institutions kind of set in and affect the prices.

What are some of the triggers that investors should be looking for when it comes to us turning into seeing a potential bull market again for cryptocurrencies and Bitcoin, in particular?

Yes. So I mean, obviously, there will be triggers around the different decision dates on ETF applications and BlackRock are not alone, there's a lot of other applications. That said, however, I don't think there's like certain triggers that you should really look for. What you should look for is the continued investment in building out the missing infrastructure. So what you should look for is these initiatives like the one pushed by BlackRock, by PayPal, by companies like Pure, because as long as you see the continued maturation of the infrastructure, combined with the regulation now coming in place, that will tell you that when the market sentiment turns, whether that is because the Bitcoin supply, kind of the mining of new coins getting half next year, or whether it's another trigger, the market conditions for a substantial bull run will be there. So this is similar to how -- it was really hard to say what started the bull run in 2017, but it was the infrastructure that has been built out for the -- sorry -- in 2020, but it was the infrastructure that was built out on the back of the 2017 bubble which enabled that wave of adoption. And we're seeing that again now with the new infrastructure being built out, enabling the next wave of adoption.

Okay. Thank you very much, Torbjorn. And we have received some questions to Arcario's Investor Relations inbox, so I want to leave some time to address those as well. So let me turn back to you, Michael, again. What does the financial situation look like right now, is one of the questions that we got.

Yes, sure. Well, I mean, I'm fully confident -- we are completely confident in the current financial position we're in, there's no problem there. But to grow, we need further financing. So we've got an offer in from some of our existing larger shareholders to do a financing round. We're considering it, and we look at it and negotiate it and make sure it's the best for everybody.

Okay. So there's been no decisions made yet, but you have several options on the table.

Absolutely. That's correct. Yes. No decisions, but decisions soon.

Okay. Another cliffhanger then. Another question that was e-mailed into us, where do you see the most cash flow being generated during Q3 and going forward?

Actually, that's an interesting question, because I think now Arcario is much more of an investment company, the cash flow sits within the operating companies themselves. So K33 has cash flow, the research department has a cash flow. But that's used within the individual entities. So the job of Arcario is just to manage this portfolio of companies. And that requires a very low amount of money, but it doesn't actually generate cash flow in itself. You have to look at the individual portfolio companies to look at the cash flow on that.

Okay. All right. I think that's all the time we have today, unfortunately. But thank you so much, Michael, for joining us today. Thank you Torbjorn, for joining us from Norway, and thank you to all of you watching this for joining us as well. We'll see you next time.