Interim report (2024092416560271011377527 en)

CHIEF EXECUTIVE

OFFICER'S STATEMENT

We will continue to reinforce our

leading position in the digital asset landscape and further expand our digital asset business through continuous innovation with an aim to become the top- ranked compliant digital asset trading group in Asia-Pacific within the next 3 years.

Dear Shareholders,

Looking back at the past six months, the development of Hong Kong's digital asset industry as a whole has been positive. The first batch of spot digital asset exchange-traded funds ("ETF") has been launched, while the Hong Kong government's regulatory policies on stablecoins and other digital assets are continuously improving. It is believed that more diversified investment options will be available for investors in the digital asset sector in Hong Kong. Digital assets are becoming increasingly important in the global financial landscape and are also more accepted by investors in the traditional finance industry. OSL will continue to reinforce its leading position in the digital asset landscape and further expand its digital asset business through continuous innovation with an aim to become the top-ranked compliant digital asset trading group in Asia-Pacific within the next 3 years.

Changes after strategic investment by BGX

After receiving strategic investment from BGX, we have undergone a series of positive changes. Leveraging on the rich resources, expertise, and network synergies brought by BGX, we introduced outstanding talents, adjusted our strategic positioning, and upgraded our products and services in the first half of the year. I am honored to take on the role of CEO of OSL Group Limited, a key step towards strategically expanding our leadership team and driving the next phase of our growth. Drawing on my extensive experience from leading Bybit, a global digital asset platform, I am committed to bringing foresight to the digital asset sector. Together, we will guide OSL in making significant strides in compliance, security, and user experience, ultimately enhancing our competitiveness in the industry.

As the only listed company focusing on digital assets in Hong Kong, OSL has been included in the MSCI Global Small Cap Index since May 2024, underscoring our business growth and our important role in the global financial market. The management focuses on business optimisation and strategic adjustments. Through adjustments and internal resource integration in the first half of the year, our operation as a whole has been significantly improved. The optimisation of internal processes and the improvement of resource allocation come into play. Meanwhile, the global partner network brought by BGX has also provided us with more business cooperation opportunities. It is believed that it will create favourable conditions for our global development and expansion of our diversified customer base.

Strategic Layout and Expansion in the Asia-Pacific Region

Asia-Pacific is the most active region in the global digital asset industry with tremendous growth potential, and is expected to continue leading the development of the global digital asset industry in the future. We will focus on the digital asset market in the Asia-Pacific region in our development, and accelerate business expansion by investing in high-quality targets, thereby rapidly increasing our market share and enhancing our competitiveness. We will prioritize collaboration with companies with development potential as well as significant advantages in technology and innovation in the local market.

Continuous market expansion and enhancement of shareholders' returns

We plan to foster our business development based on our existing foundation and strive to achieve significant growth. By strengthening compliance management and technological innovation, we aim to achieve continuous business growth and market expansion. We are confident in the future and committed to creating greater value for shareholders and investors. I would like to extend my deepest gratitude to all investors, clients, partners, and staff. Looking ahead, we will continue to uphold the business philosophy of compliance and innovation, and strive tirelessly to become the leader in the Asia as well as global digital asset market.

Cui Song

Chief Executive Officer

OSL Group Limited

MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS OVERVIEW

In the first six months of 2024 the ("Period" or "1H2024"), Bitcoin's price reached a new high in mid-March, which boosted the optimism sentiment in the investment market and led to a significant increase in global digital asset trading volumes compared to last year. With the launch of spot digital asset ETF and a stablecoin sandbox, Hong Kong's digital asset industry has taken a solid step towards becoming a world-leading digital asset trading center. As a leading digital asset platform in Hong Kong, OSL Group Limited (the "Company") and its subsidiaries (collectively the "Group") has fully leveraged market opportunities in the first half of this year after obtaining strategic investment to reinforce its leadership position.

Spot Digital Asset ETF Business

On 15 April 2024, OSL Digital Securities Limited ("OSL DS"), a leading digital asset trading platform under the Group, was appointed by China Asset Management (Hong Kong) and Harvest Global Investments as the digital asset trading platform and sub-custodian for their first Bitcoin and Ethereum spot ETF. This support for Hong Kong's first spot digital asset ETF reflects the Group's comprehensive capabilities in financial innovation within the digital asset industry. The Group's robust infrastructure ensures a secure and reliable trading and custodial environment for digital asset ETF, safeguarding the underlying assets.

We believe that digital asset ETF will serve as foundational financial infrastructure linking the digital asset industry with traditional finance. Digital asset ETF provide traditional finance investors with a convenient way to participate in the digital asset market, introducing more liquidity and potential growth opportunities to Hong Kong's digital asset market. Additionally, the successful listing of digital asset ETF is expected to encourage more Hong Kong financial companies to innovate in the digital asset field and offer better services to investors, ultimately promoting Hong Kong's development into a global leading digital asset center and supporting the industry's long-term sustainable growth.

High Standards in Security and Compliance Services

In March 2024, the Group announced the extension of the validity period for its SOC 2 Type 2 report, transitioning to semi- annual releases. This demonstrates our mature information security management system and stringent internal control processes, highlighting our commitment to customer data protection, system stability, and transaction security, and underscoring our dedication to meeting the highest standards of security and compliance in the digital asset sector.

On 19 April 2024, OSL DS, the digital asset platform, was the first to be granted a license under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance AMLO in Hong Kong. This reflects the Group's proactive response to and support for a high-standard regulatory environment and is the results of our long-term commitment to creating a transparent, secure, and trustworthy digital asset trading environment. We understand that in the rapidly evolving digital asset industry, compliance is fundamental to sustainable development. Therefore, we always prioritize compliance, continuously optimize internal control processes, and strengthen our risk management system to ensure our operations meet Hong Kong's regulatory and compliance standards. In the future, we will continue to uphold the principle of compliance-first and steady development, setting a clear compliance benchmark in the digital asset field and leading the industry towards a healthy and orderly direction.

On 28 May 2024, the Hong Kong Securities and Future Commissions (the "SFC") announced that the transitional period under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) for virtual asset trading platforms (VATPs) operating in Hong Kong has ended on 1 June 2024. All virtual asset trading platforms operating in Hong Kong must be licensed by the SFC under the AMLO or apply as "deemed licensed" platforms.

MANAGEMENT DISCUSSION AND ANALYSIS

Inclusion in the MSCI Global Small Cap Index

Effective after the close of trading on 31 May 2024, the Group was added to the MSCI Global Small Cap Index, a globally recognized index, that marks the capital market's recognition of the digital asset industry's development and affirms the comprehensive strength and leading position of the Group as a leading digital asset platform. This inclusion will garner broader attention for the Group globally. We believe that by executing the Group's strategy, we will demonstrate our influence to global investors, leading the digital asset industry.

REVIEW OF RESULTS

Overall Performance

The Group's IFRS income was HK$123.8 million during the Period, representing an increase of HK$18.6 million from HK$105.2 million for the six months ended 30 June 2023 ("1H2023"). The Group's IFRS loss from continuing operations was significantly reduced to HK$9.6 million during the Period, representing a reduction by 90.2% from HK$98.9 million in 1H2023. The change in IFRS income was primarily attributable to net gain of digital assets used in facilitation of the OSL prime brokerage business of HK$64.9 million (1H2023: net gain of HK$28.5 million) and net fair value loss on digital assets of HK$6.8 million (1H2023: net fair value gain of HK$9.6 million), which are treated as part of trading gain/loss from the Group's principal activities. The overall Group's adjusted non-IFRS income as identified in "Non-IFRS Measures" below was HK$65.6 million for the Period, showing a slight decline of HK$1.5 million from HK$67.1 million in 1H2023.

Loss per share of the Group from continuing operations for the Period was HK$0.02 (1H2023: HK$0.23).

Non-IFRS Measures

To supplement the Group's unaudited condensed consolidated interim financial information which is presented in accordance with IFRS, the Group has provided adjusted non-IFRS income as additional financial measures, which are not required by, or presented in accordance with IFRS.

Income from digital assets and blockchain platform business principally represents (i) margin from trading digital assets;

1. net gain/loss of digital assets used in facilitation of prime brokerage business; (iii) net fair value gain/loss on digital assets; (iv) service fee from SaaS; (v) trading fee from automated trading service, and (vi) others.

The volatility and uncertainty generally characterizes the digital assets market, the Group recognised net gain of digital assets used in facilitation of prime brokerage business of HK$64.9 million for the Period (1H2023: net gain of HK$28.5 million) and net fair value loss on digital assets of HK$6.8 million for the Period (1H2023: net fair value gain of HK$9.6 million). As the price volatility of digital assets may cause significant impact to the Group's operating performance, the Group considers it appropriate to supplement the unaudited condensed consolidated interim financial information by presenting income from digital assets and blockchain platform business into (i) margin from trading digital assets and others; (ii) net gain/loss of digital assets used in facilitation of prime brokerage business; and (iii) net fair value gain/loss on digital assets. The Group considers that margin from trading digital assets and other, i.e., adjusted non-IFRS income, can better reflect volumes of the Group's digital assets trading business.

MANAGEMENT DISCUSSION AND ANALYSIS

The Group defines margin from trading digital assets and others, i.e. adjusted non-IFRS income from digital assets and blockchain platform business (unaudited), as the realised net gain/loss with reference to the transaction price of the daily trade transactions executed to facilitate the prime brokerage business before considering the fair value movements of the digital assets held. Net gain/loss of digital assets used in facilitation of prime brokerage business is a realized gain/loss from the fair value movement of the digital assets held. Net fair value gain/loss on digital assets is an unrealized gain/loss in nature and it is determined as the fair value movement of the Group's proprietary digital assets on hand which was remeasured at period-end market price as at 30 June 2024.

The Group believes that the addition of the non-IFRS measures facilitates comparisons of operating performance from period to period by providing more relevant financial information that management considers to be more illustrative of the Group's operating performance to the public, and that the non-IFRS measures provides useful information to its shareholders, investors and others in understanding and evaluating the consolidated results of operations in the same manner as it helps management. However, presentation of the non-IFRS measures may not be comparable to similarly titled measures presented by other companies. The use of the non-IFRS measures has limitations as analytical tools, and shareholders, investors and others should not consider it in isolation from, or as a substitute for analysis of, results of operations or financial condition as reported under IFRS.

The table below sets forth a reconciliation of the Group's IFRS income to the Group's adjusted non-IFRS income for the Period and 1H2023:

MANAGEMENT DISCUSSION AND ANALYSIS

The OSL Digital Assets Platform

The OSL digital assets platform comprises two main business sectors: a digital assets markets business (prime brokerage, exchange and custody), and a digital assets technology infrastructure business (SaaS).

The OSL digital assets services business generates income through trade commissions, fees or trading spreads from clients who trade digital assets through the platform. Current clients include high-net-worth-individuals, professional investors and retail clients.

The OSL digital assets platform's IFRS income was HK$123.8 million for the Period, representing an increase of HK$18.6 million from HK$105.2 million in 1H2023.

OSL prime brokerage adjusted non-IFRS income, which is the combined income from OTC and intelligent Request for Quote ("iRFQ") trading, amounted to HK$31.4 million, representing a decrease by HK$11.7 million YoY. Trading fee income decreased by HK$1.4 million YoY to HK$4.2 million. Others increased by HK$1.3 million YoY to HK$4.7 million, and service fee income from SaaS rose to HK$25.3 million, showing an increase by HK$10.3 million YoY.

The OSL digital assets platform's total trading volume was HK$58.3 billion for the Period, representing a decrease of 48.3% from HK$112.6 billion in 1H2023. Brokerage trading volume, which is the combined trading volumes from OTC and iRFQ, was down 59.4% YoY to HK$39.8 billion from HK$98.0 billion. Exchange trading volume was up 52.6% YoY to HK$13.6 billion from HK$8.9 billion. SasS trading volume decreased 15.5% YoY to HK$4.8 billion from HK$5.7 billion.

Disposal of Mainland China's Business Park Management Services

On 17 January 2024, the resolution of the disposal of 90% equity interest in Shanghai Jingwei which was engaged in provision for business park area management services in Mainland China was duly passed in the extraordinary general meeting. The disposal of Shanghai Jingwei was subsequently completed in March 2024.

Fee and Commission Expenses

The Group's fee and commission expenses was HK$3.7 million for the Period, representing a decline of HK$10.3 million from HK$14.0 million in 1H2023. The reduction was mainly due to the decrease in referral expenses during the Period. The intention of referral expenses is to introduce clients to the Group's trading platforms to create quantitative benefits to the Group in the form of trading commissions or revenues resulting from client transaction volumes.

IT Costs and Other Operating Expenses

The Group endeavored to control cost with the successful implementation of cost-saving measures during the Period. IT costs was HK$13.7 million, showing a decrease of HK$10.9 million YoY. Other operating expenses was HK$40.1 million, representing a decrease of HK$3.7 million YoY. IT costs related to establishing the corporate and technical infrastructure for the regulated institutional digital asset business, as the Group gradually reduced the technology related spendings after the successful completion of a number of technology upgrades.

Net Loss

Net loss of the Group from continuing operations for the Period was HK$9.6 million, a significant decrease by HK$89.3 million as compared with HK$98.9 million for 1H2023. This decrease underscores the Group's successful efforts in the moderation in staff cost and technology spending and gain of digital assets held by the Group used in facilitation of prime brokerage business.