Arcane Crypto : Semi-Annual Report

Interim Report

Q2 & H1 2021 | January - June

2 | Highlights

Continued strong growth and development

Q2 has been a great quarter for Arcane Crypto on many fronts as we continue to deliver on our core strategy, to develop and invest in projects focused on bitcoin and digital assets. Our revenue saw strong growth and exceeded 100 MSEK in the quarter, with a gross margin on sales of 5.5 MSEK, for the first time in the Group's history. The revenue was mainly driven by our acquisition of Kaupang, while the gross margin on sales was also driven by a record quarter for Arcane Assets and Arcane Research.

From Torbjørn Bull Jenssen's CEO statement

Second quarter of 2021

(compared to second quarter 2020)

• • Group revenue increased to 100,372 kSEK (190)

• • EBITDA was -1,484 kSEK (-1,472)

• • The result for the period was -7,056 (-1,617)

• • Adjusted result for the period was -7,056 (-1,617)

• • Earnings per share before dilution were SEK -0.001

  (-0.003)

• • Earnings per share after dilution were SEK -0.001

  (-0.003)

First half year 2021

(compared to first half year 2020)

• • Group revenue increased to 102,529 kSEK (308)

• • EBITDA was -12,527 kSEK (-4,369)

• • The result for the period was -143,106* (-4,510)

• • Adjusted result for the period was -16,153 (-4,510)

• • Earnings per share before dilution were SEK -0.019

  (-0.008)

• • Earnings per share after dilution were SEK -0.017

  (-0.008)

* Accounting-wise the Group is seen as acquiring Vertical Ventures at market price at the time of closing (0.235 SEK per share). As there were no operations in Vertical Ventures before closing of the Reverse Takeover, the purchase price cannot be allocated to goodwill, hence the entire acquisition price is accounted for as Other financial costs, in the Group income statement. This is purely a technical accounting matter, has no cash flow effect and does not impact the operational strength of the operations of the Group. Hence, Arcane also presents an adjusted result for the period (excluding this cost item of 126,917 kSEK), which, according to the Company's opinion, better reflects the financial performance of the Group in the period.

Financial overview

kSEK

Total assets Total liabilities Equity

Revenue

Operating expenses EBITDA

Revenue by quarter

kSEK 125,000 100,000 75,000 50,000 25,000

Q2 2021	Jan-Jun 2021
100,372 -101,856 -1,484 97,370 18,325 79,045	102,529 -115,056 -12,527 97,370 18,325 79,045

0

Q3	Q4	Q1	Q2
2020	2020	2021	2021

Jan-Jun 2020

Full year 2020

308

2,103

-4,677 -19,915

-4,369 -17,812

20,152 41,243

10,897 9,042

9,255 32,202

The second quarter 2021 is the first quarter where Kaupang is fully consolidated as a subsidiary in the Group. Please note that neither Trijo, LN Markets, Alphaplate nor Puremarkets are consolidated into Arcane's accounts. These portfolio companies are instead accounted for in accordance with the equity method and Arcane's share of ownership.

3 | Main events

Main events

Main events during Q2 2021

After the end of the period

• • On 2nd April 2021, BlockFi and Arcane Research announced a collaborative partnership to provide a report for BlockFi's institutional clients every two weeks.

• • On 8th April 2021, Puremarkets Limited ("Pure Digi-tal"), a company where Arcane Crypto AB holds 37.5% through Arcane Crypto AS, announced that State Street was one of the banks that had signed an LOI with Pure Digital to explore trading of digital assets, and that Cur-renex, owned by State Street, would provide the trading infrastructure to the Pure Digital platform.

• • On 16th April 2021, Arcane Crypto AS, a subsidiary of Arcane Crypto AB, increased its shareholding in ITOAM, the owner of the Bitcoin Lightning Network based trad-ing platform LN Markets, from 7% to 16%.

• • On 20th April 2021, Arcane Crypto announced that its subsidiary Arcane Crypto AS had entered into an agreement to acquire the remaining outstanding shares in Ijort Invest AB, which operates the Swedish crypto exchange Trijo.

• • On 16th June 2021, Arcane Crypto's subsidiary Arcane Assets AS signed an LOI with Valour Structured Products Inc. with the intention to explore the issuance and listing of an Exchange-Traded Product based on Arcane's cryptocurrency fund.

• • On 24th June, 2021, Arcane Research published a report in collaboration with LMAX Digital titled "The Bit-coin Trading Ecosystem" which focuses on the emerging institutional infrastructure.

• • On 28th June 2021, Arcane Green Data Services AS signed a leasing contract for hosting bitcoin miners and thereby took the first steps in establishing a bitcoin mining business unit branded Arcane Green Data.

• • On 2nd July 2021, Arcane Crypto completed the acqui-sition of Ijort Invest AB ("Trijo").

• • On 21st July 2021, Arcane Crypto's London based associated company Puremarkets Limited (trading as Pure Digital) announced that Bank of New York Mellon has joined the consortium of banks working with the interbank wholesale marketplace to develop a platform to support the entire digital asset life cycle.

• • On 29th July 2021, Arcane announced that the Com-pany will be included in CoinShares Elwood Global Blockchain Index as of August 2, 2021.

• • On 30th July 2021, Arcane announced a collabora-tion between its fully owned subsidiary Ijort Invest AB ("Trijo") and the payment service provider Trustly.

• • On 9th August 2021, Arcane announced that the Company will be included in the Melanion BTC Equities Universe UCITS ETF.

Letter from the CEO

Q2 has been a great quarter for Arcane Crypto on many fronts as we continue to deliver on our core strategy, to develop and invest in projects focused on bitcoin and digital assets. Our revenue saw strong growth and exceeded 100 MSEK in the quarter, with a gross margin on sales of

5.5 MSEK, for the first time in the Group's history.

To support this growth, the team has expanded with sev-eral new key hires. In June, we took the first step in form-ing a bitcoin mining business unit within Arcane, branded Arcane Green Data and have secured the initial hosting capacity. Trijo has been fully consolidated into the Arcane family and has announced their partnership with Trustly, making it the first cryptocurrency exchange to offer its clients Trustly as a payment option in Europe. Pure Digital has signed up a total of 6 tier one banks. LN Markets, where we increased our ownership during the quarter to 16%, is seeing strong growth in its user base.

The market continues to grow

Despite volatility, the cryptocurrency market continued to mature during Q2. Bitcoin reached a new all-time high, with a market capitalization of 1.2 trillion USD. This is still tiny compared to other major financial assets, but substantial enough to matter. The relatively low market capitalization should be viewed as an opportunity of upside rather than a weakness. The capitalization must be low before it can become high, and while the price of bitcoin fell sharply again towards the end of the quarter, the interest in the sector remains as high as ever. This is both reflected in the price having regained substantial territory, and in the continuation of new players coming into the sector.

One set of such players is large investment banks. During the quarter Bank of New York Mellon, announced its involvement with the Pure Digital project, where Arcane Crypto is a 37.5% owner. They are joining State Street and 4 other tier one banks, that have yet to be disclosed, exploring the possibilities of a interbank marketplace for digital assets. Just a few years ago, this was seen as something that never would happen. Now, this is seen as a natural next step on a continued adoption of bitcoin and cryptocurrencies in society.

A new type of player entered the sector when El Salvador, announced they would be the first nation to introduce bit-coin as legal tender. To deal with scaling challenges asso-ciated with traditional bitcoin transfers, the apps used in El Salvador rely upon the Bitcoin Lightning Network for instantaneous transfers. This reflects the fast maturation of the Lightning Network, which currently is seeing expo-nential growth. For our portfolio company LN Markets, this is great news. They saw a record number of new users, up 41% from Q1.

While there has been a lot of positive news during the quarter, China caught many by surprise by finally doing what they have said they would do since 2013, clamping down on the crypto sector, specifically banning bitcoin mining almost overnight. Initially, many saw this as a neg-ative signal. However, the bitcoin network continued to run without any issues, proving its robustness. In addition, the China ban has turned out to be a positive develop-ment for bitcoin. Mining is now becoming more decen-tralized and greener. The price of machines has fallen, increasing the profitability of new mining ventures. As miners are moving to the West, the share of green energy usage is also increasing, and was recently estimated to be above 56%. In our new venture Arcane Green Data, announced just at the end of the quarter, we are going to use renewable energy to mine bitcoin. We have secured hosting capacity of 2.5 MW and are now in the process of ordering our first miners and refine the long-term strategy.

The volatility in the crypto market can be tough to deal with, especially from an asset management perspective, but our fund has weathered the storm well and continues to outperform bitcoin. We have now proven our ability to generate value for our fund investors over time and the next step is to push on distribution. In relation to that, it is very interesting to see the increased appetite for exchange traded products (ETP) linked to the crypto sec-tor. Arcane has itself been included in a few crypto and blockchain focused ETPs, and we expect to be included in more such products in the future. In addition, we are now working with Valour Structured Products to develop our own ETP tracking the fund. When launched, investors will be able to easily get exposure to the performance of the fund though their normal broker like Avanza or Nordnet.

Operationally in Arcane, we have now taken full control over both the Norwegian cryptocurrency broker Kaupang Krypto AS and the Swedish exchange Trijo (Ijort Invest AB). During the quarter Kaupang has launched a premium OTC offering and signed a partnership with Fireblocks to offer custody. Bringing Kaupang fully into Arcane has helped Kaupang achieve a record quarter and is what has brought Arcane's revenue above 100 million SEK for the first time, helped by a record quarter for both Arcane Assets and Arcane Research.

However, the journey will neither be easy nor straight-forward. Externally, we see the regulatory landscape changing in very meaningful ways, while internally, we are working on consolidating our holdings and extracting synergies from across our portfolio of companies.

Arcane is well positioned for the future

We believe Arcane, with our diverse portfolio of compa-nies, is well positioned to become the leading full service digital finance platform in Europe.

From a regulatory perspective, the blockchain ecosys-tem's continued growth has drawn increasing attention. American and European regulators now have several concrete proposals to tighten AML & KYC requirements.

While many fear that increased regulation will have a negative effect on the blockchain ecosystem, we are of the opposite view. As long as regulation is thoughtfully formulated and adapted to the specifics of the ecosystem, increased regulation helps build legitimacy. It is a natural part of a maturing sector and something we embrace at Arcane. We are following developments closely and are engaging directly with regulators, politicians and the tradi-tional financial industry, to share information and influence the discussions.

From an Arcane group perspective, we see great poten-tial in bringing our portfolio of companies even closer together. We believe the best place to start is by unifying our portfolio of companies under one common technology stack. While challenging, this will unlock many synergies and set a solid basis for product development and growth across the Arcane group into 2022.

We're just getting started. Join us as we build Arcane into Europe's leading platform to learn, trade, and invest in the blockchain ecosystem.

Torbjørn Bull Jenssen

CEO, ARCANE CRYPTO