Earnings Call: Q3 2022

Nov 8, 2022

Good morning, and welcome to this Q3 presentation for Arcane Crypto. As most of you know by now, my name is Torbjorn Burjenssen, and I'm the CEO of Arkane Crypto. Looking at the market over the last quarter, it has been very calm and flat looking at crypto. In addition, the macro environment continues to be shaky. Interest rates are being hiked, and there's a lot of neurovarsity in the market. Still, we see a lot of positive development in the crypto sector, which is why we believe that this is really the time to build. And that's exactly what we're doing and I've been doing during the quarter in Arcane. Because every day we see major institutions embracing digital assets. There hasn't been a week where there hasn't been some big announcements. And they are beginning to offer their clients crypto exposure, crypto products. The challenge, of course, is that very few of these institutions are experts in crypto. And our clients want more. They want to learn from the best. They want to read the best. And some of those clients therefore come to us. Our clients really appreciate our expertise. We are crypto native. Our one to one approach to customer care, where we sit down with larger clients and work out their needs, we speak to them. They take meeting with us in person, and we help them handle their trades. They can sometimes be complex. They're onboarding of complex holding company structures, and we help them set up secure custody solutions tailored for their needs. And they really appreciate this. This hands on approach is really our edge today. And this is why we continue to see activity despite the bear market, from a small but very powerful group of premium clients. Very soon, though, we will augment this with cutting edge technology and ever improving customer experience. Unified across our platform, where we have research brokerage and investment services. And you'll see some of the illustrations in the presentation today, hinting at what's to come shortly, and which will also only be the start of what we're about to roll out as we're preparing for a more full launch of our Kain platform. But one step back first. I said that there's a bear market. Macro is shaky, But still, digital assets continue to be strong in this environment. We continue to see this news flow of traditional institutions rolling out services. And the reason why they're doing this is clear. There is still client demand. A big survey done by Fidelity, the 2nd largest asset manager in the world, serving more than 1,000 of their clients, revealed that cryptocurrencies and digital assets are now emerging as an asset class. Globally, around 81% of institutional investors believe that digital assets should be a part of a well diversified portfolio. And very interestingly, we see the highest percentage believing that digital assets is a portfolio allocation, or it belongs in a portfolio, in Europe, the market that we target. Also in the Fidelity survey, they revealed A substantial interest from financial advisors, high net worth investors and family officers to allocate to Bitcoin and other digital assets going forward. More than 88% of financial advisors are expecting to add allocations to digital assets in the future. If you look at high net worth, the number sits around 86% and for family offices, 76%. So this really shows some of the appetite that's out there and the potential flows that can come from this are massive. Globally, there's more than $500,000,000,000,000 in private wealth, half of which is in financial wealth. And only with a few percentages allocations to digital assets from These type of investors will see a 10x increase from inflow into this sector. And we in Arkane are really building out the services that will help the financial advisors, the high net worth investors and the family officers take their journey into the digital asset world. Which is why we have full focus on private wealth, because it's getting ready to get into the sector. And in this, we believe that the future lies in a multi exchange brokerage service, where we can execute across different venues, sourcing the best prices and the coins that are right for our clients. And as I said, we're targeting specifically high net worth and family offices. We're catering for their needs, not the broader retail market and not the broader trading market, but specifically private wealth. And we believe that with the MICA, The Pan European Regulatory Framework now being voted, well, it was supposed to be voted in during November, it looks like it's been pushed to February, but that will be rolled out during next year. We will really be in a position to expose our service effectively across all of Europe. So our focus is really on a pan European offering rather than a country specific one, which is a part of the reason why we, for instance, sold Trio, our Swedish retail exchange, last quarter. During the quarter, we also set up a U. K. Entity for a couple of different reasons. Most importantly perhaps, we are preparing to target private wealth managed out of London. So London is one of the important hubs internationally for wealth management. And a lot of wealth, not only English wealth, but internationally is managed in London. By building up a stronger presence, we can prepare to tap into the pool of money over time. In addition, and what will be kind of utilized even before that, We intend to work with leading Fintech service providers like Stripe to deliver the best possible end user experience on our platform, specifically Stripe Identity, which you can only offer as a UK or a U. S. Entity to end clients. And by enabling Stripe Identity and Stripe Payments, we will Make sure that we are future proofed when it comes to ease of use on the platform. And finally, While the Mika license will be the most important for us to obtain as it gets rolled out or like the regulatory framework gets rolled out next year, We also anticipate to obtain an FCA license, a UK FCA license to complement the EU based Mika license in due course. During the quarter, we also done some changes to some of our products, specifically research, where we have done a fundamental overhaul. What we realized was that our research is on par, if not better, than what our competitors are pushing out from companies like Delphi and The Block. But looking at those competitors, we saw that they are charging between $100 $1,000 a month for what they are producing. So what we did is that we really worked with the research team. We launched a new market report called Ahead of the Curve. We prepared other products that are to come out shortly. And we're going to roll out a much more premium subscription package later this year, where we'll really accelerate the revenue streams we get from research. And the reason is because we are certain that we have a great opportunity to monetize our research. Yes, it's an important brand builder. It's a way for us to establish ourselves internationally. It's a way for us to be present on Bloomberg Refinitiv in Financial Times, where our users are. But also it's a great business opportunity. With subscriptions, we can secure monthly recurring revenue. And during next year, we anticipate building that into a strong and fast growing part of the arcane platform. That said, though, the core focus during the quarter was on the trading application, which is on its way. We continue to build out this brokerage and custody components and the trading components because we believe that Execution across a variety of venues is really what our clients want. And it's really what will enable us to give a superior product to high net worth and family offices. Also, it's The technology we're building up on the trading front, which will enable us to develop different investment products further down the line, Auto rebalancing portfolios, customized portfolios where an investor can say that they, for instance, want 54% Bitcoin, 40% ETH, 10% of some other coin and have that auto rebalanced and act as a portfolio. And lastly, of course, we continue to build out our trading application as we know that the market will come back. And we intend to be ready when that time comes. Actually, looking at the market right now, it's strikingly similar to what I saw back in 2018 following the bubble of 2017, where prices were in free fall, they flattened out, market activity calmed down, But where the underlying news flow in terms of infrastructure, in terms of new client types coming in was very positive. And it was that underlying news flow, all those new services being built out that paved the way for the wave that or for the kind of the bull market we had last year. And we see that yet again, where all of the infrastructure now being built out, all of those institutions announcing new products, The regulatory frameworks that are being rolled out is what is preparing the ground for the next bull market that we are also building for and preparing for. So these are the core things that we focused on during the quarter. And I'm really, really excited for what's to come and what we're going to roll out for the rest of the year and especially during next year. Looking at our financials, the quarter was very much shaped by the calmness in the market, and we saw a sharp drop in trading activity, reflected in a drop in our revenue. Our gross margin on the other hand recovered from Q2, where our mining was down due to high electricity prices in Southern Norway, but where we at the end of the last quarter was able to get our mining machines moved to Northern way and get them back up again, which is kind of the main reason for the improvement in gross margin. Mining continues to be challenging right now with high and increasing difficulty rates and a suppressed Bitcoin price. But with our operation out in Northern Norway, we also continue to have some of the lowest electricity prices in the world. For the result, that was back in line with our kind of reflecting our underlying operation after kind of a special one off last quarter. And going forward, we expect the next quarter to be similar to what we've seen this quarter before we anticipate seeing more growth building up as we roll out the new products and features, and as we anticipate that the market will regain momentum throughout next year. So to summarize, this quarter has really been a quarter where all our focus has been on building. And you'll soon see the first in the live some of that building coming out. And especially next year, you'll see more and more coming out, improving the end user experience and really bringing together our platform. I know it can be hard to be very optimistic during these times. Costs are up. Interest rates are up. Crypto prices are down. Share prices are down. But for us who are working in Arkane, for us to see this news flow every day, every week Over the more clients coming into the space, more services being built out, for us to engage with some of our clients today and See how happy they are about what we can deliver to them in a very hands on way today, and knowing that the technology we're building is going to enable us to scale that To 1,000 and eventually millions of users makes us extremely bullish. And I'm Actually, never been more of a mistake on what we're about to do here than right now. Thank you so much. Let's take some questions if there are any. Yes. Thank you, Torbjorn. We have two questions for you today. The first one is on the balance sheet And cash flow statement. And one question and people from the audience are asking if You only have 1 quarter left of cash burn. And how will you raise cash in this market? So looking at the balance sheet, we have at least 2 quarters left. And also for next quarter, we for Q3, we anticipate actually a somewhat lower cash burn or operational costs. And the main thing is that we are really building out some great services here. We have strong investors backing the company. So I'm confident that we will be in a good position to continue building as we go forward. Thank you. And there's also a question to Trio. And can you say something about The amount the company was sold for? So we did not disclose the amount that we sold 3 or 4, mainly because it didn't have any material impact on our operation. And therefore, the kind of way due to the desire for confidentiality from the purchaser. We have decided not to disclose that. Okay, that's all. Thank you. Thank you so much. And as always, feel free to send us emails with questions and reach out and please follow arcane. No for the weeks months to come to see when we roll out updates to the platform.