6-K
XP Inc. (XP)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORTOF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2020
Commission File Number: 001-39155
XP Inc.
(Exact name of registrant as specifiedin its charter)
Av. Chedid Jafet, 75, Torre Sul, 30thfloor,
Vila Olímpia – SãoPaulo
Brazil 04551-065
+55 (11) 3075-0429
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
| Form 20-F | X | Form 40-F |
|---|
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
| Yes | No | X |
|---|
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
| Yes | No | X |
|---|
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| XP Inc. | ||
|---|---|---|
| By: | /s/ Bruno Constantino Alexandre dos Santos | |
| Name: | Bruno Constantino Alexandre dos Santos | |
| Title: | Chief Financial Officer |
Date: November 9, 2020
EXHIBIT INDEX
| Exhibit No. | Description |
|---|---|
| 99.1 | Earnings Release dated November 9, 2020 – XP Inc. Reports 3Q20 Financial Results |
| 99.2 | 3Q20 Earnings Presentation |
| 99.3 | XP Inc. – Unaudited interim condensed consolidated financial statements for the nine months ended September 30, 2020 |
Exhibit 99.1
XP Inc. Reports 3Q20Financial Results
São Paulo, Brazil, November 9, 2020 – XP Inc. (NASDAQ: XP) (“XP” or the “Company”), a leading tech-enabled platform and a trusted pioneer in providing low-fee financial products and services in Brazil, today reported its financial results for the third quarter of 2020.
To our shareholders:
Today, we are reporting our fourth quarterly results since our IPO back in December 2019. Despite all the challenges imposed by the COVID-19 pandemic in 2020, we generated record revenue in 3Q20 (R$2.2 billion), representing 55% YoY growth, and well above our long-term target (+35%). More important than the most recent quarter’s results, we remain excited about the long journey we have ahead of us. As I have repeatedly emphasized in prior quarterly letters to shareholders, taking a long-term view is essential to how we view our business and the opportunities ahead.
Over the last 12 months, we generated Gross Revenue of R$8.0 billion, an increase of 148% when compared to R$3.2 billion for the full year of 2018. Despite the strong growth, we have captured a modest market share of the investments industry, where the incumbent banks still maintain a large majority (~90%). That said, we remain in the early stages of coming to market with additional services through our bank, including collateralized credit, margin loans, structures notes (COE) issuance, and credit cards, amongst others. This process of disruption likely continues for many years to come at an accelerating clip, mainly driven by swifter digitalization and low interest rates in Brazil.
With that scenario in mind, we stepped up the pace of investments in technology and people to further strengthen our platform to drive a differentiated customer experience. Our vision integrates an agile model with our strategic initiatives, utilizing more data analysis for decision making and driving greater scalability across our businesses.
Examples of recent technology initiatives that meaningfully enhanced the platform without a concurrent step up in related costs include Clear and the IFA tailor-made app Hub. Without meaningful headcount additions, Clear’s Active Clients were up 165% YoY and DARTs were up 141% YoY in 3Q20 reinforcing the stability of the platform. Furthermore, improvements in our Hub app, including the addition of CRM tools to Hub Web and Mobile, formed an integrated multi-channel platform that has substantially improved 2020 performance KPIs such as net inflows (+19%), portfolio diversification (+24%), NPS (+7%) and share of wallet (+3%).
Our unique ecosystem, scale across several markets, and financial strength enables us to fund key strategic initiatives, which are primarily expensed through the income statement (very few of these investments are capitalized), while maintaining a healthy level of profitability. While our margins may be modestly impacted in the short term as we continue to invest in technology, we remain focused on enhancing longer-term growth prospects as initiatives mature driving powerful economies of scale over time.
In addition to technology, we are intensifying investments to further strengthen our IFA network. By providing additional capital to the offices, they can accelerate hiring and training of new IFAs across Brazil. We maintain more than 659 commercial points that are well positioned to capitalize on opportunities to continue to take market share from the incumbent banks, which continue to close branches, particularly as a result of expanding digitalization during the pandemic. For example, in October alone, we on-boarded more than 500 new IFAs, the highest monthly total on record.
Finally, I would like to highlight our key differentiating factor over the long-run: our culture.
Ensuring the right people, in the right positions, with challenging goals, long-term alignment with the company and, above all, adhering to our culture (Dream Big, Open Mind and Entrepreneurial Spirit) is what allows us to continue transforming the financial market to improve more people's lives, and build an enduring enterprise.
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Highlights
| 1) | Gross Revenue growth of 55% YoY, reaching R$2.2 billion; |
|---|---|
| 2) | Direct Channel Active Clients’ growth; |
| --- | --- |
| 3) | New businesses: Expansion of Collateralized Credit and Structures Notes’ issuance. |
| --- | --- |
3Q20 KPIs
| Total AUC<br><br> <br><br><br> <br>R$563 bn<br><br> <br>+61% YoY | Active Clients<br><br> <br><br><br> <br>2,645 k<br><br> <br>+72% YoY | ||||
|---|---|---|---|---|---|
| IFAs<br><br> <br><br><br> <br>7,000+ | NPS<br><br> <br><br><br> <br>70 | ||||
| Gross Revenue<br><br> <br><br><br> <br>R$2,245 mn<br><br> <br>+55% YoY | Adjusted Net Income<br><br> <br><br><br> <br>R$570 mn<br><br> <br>+119% YoY | ||||
| 3Q20 | 3Q19 | YoY | 2Q20 | QoQ | |
| --- | --- | --- | --- | --- | --- |
| Operating and Financial Metrics (unaudited) | |||||
| Retail – AUC (in R$ bn) | 563 | 350 | 61% | 436 | 29% |
| Retail – active clients (in '000s) | 2,645 | 1,536 | 72% | 2,360 | 12% |
| Retail – gross total revenues (in R$ mn) | 1,698 | 944 | 80% | 1,475 | 15% |
| Institutional – gross total revenues (in R$ mn) | 239 | 173 | 38% | 333 | -28% |
| Issuer Services – gross total revenues (in R$ mn) | 169 | 143 | 18% | 65 | 160% |
| Digital Content – gross total revenues (in R$ mn) | 32 | 35 | -8% | 46 | -30% |
| Other – gross total revenues (in R$ mn) | 107 | 158 | -32% | 123 | -13% |
| Company Financial Metrics | |||||
| Gross revenue (in R$ mn) | 2,245 | 1,453 | 55% | 2,041 | 10% |
| Net Revenue (in R$ mn) | 2,101 | 1,356 | 55% | 1,921 | 9% |
| Gross Profit (in R$ mn) | 1,395 | 911 | 53% | 1,342 | 4% |
| Gross Margin | 66.4% | 67.2% | -79 bps | 69.8% | -345 bps |
| Adjusted Net Income (in R$ mn) | 570 | 261 | 119% | 565 | 1% |
| Adjusted Net Margin | 27.1% | 19.2% | 790 bps | 29.4% | -228 bps |
¹ See appendix for a reconciliation of Adjusted Net Income.
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Operational Performance
Assets Under Custody(in R$ bn)
Total AUC reached R$563 billion at September 30, 2020, up 61% year-over-year. The R$212 billion increase over the last twelve months is shown on the bridge chart below and was driven by: (1) R$195 billion of cumulative net inflows and (2) R$18 billion of market appreciation.
Net Inflow, adjusted by extraordinary equity inflows/outflows, was R$134 billion over the last twelve months, or R$11 billion per month on average, and accelerating to R$13 billion for 3Q20. For both periods, flows were strong across all channels and brands, with the ongoing shift away from fixed income and savings into higher-yielding products continuing to gain momentum due to low interest rates combined with an underpenetrated market.
Active Clients (in 000’s)
Active clients grew 72% in 3Q20 vs 3Q19. Growth was strong across all channels led by our Rico and Clear brands.
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Retail Equity DARTs¹(million trades)
¹Daily Average Revenue Trades
Retail Equity DARTs increased 189% in 3Q20 vs 3Q19. The number of individuals investing on the stock exchange continues to grow, and we see further room for strong growth ahead as investors in Brazil maintain a relatively low equity penetration rate.
Net Promoter Score (NPS)
NPS, a widely known survey methodology used to measure customer satisfaction, reached 70 in 3Q20. Maintaining a high NPS score is a priority for XP since our business model is built around client experience. The NPS calculation as of a given date reflects the average scores in the prior six months.
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3Q20 Revenue Breakdown
Note: Other Revenue represented 5% of Total Gross Revenues in 3Q20.
Total Gross Revenue (inR$ mn)
Total Gross Revenue increased 55% from R$1.5 billion in 3Q19 to R$2.2 billion in 3Q20, mainly driven by strong growth of the Retail business. Over the first nine months of 2020, gross revenue expanded 66% vs. the same period of the previous year.
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Retail
Retail Revenue (in R$mn)
Retail revenue grew 80% from R$944 million in 3Q19 to R$1.7 billion in 3Q20. The main growth drivers included, in order of contribution: (1) Equities and Futures, reflecting resilient trading volumes and growing participation of retail investors at B3; (2) Financial Products, represented by COEs (structured notes) and equity-linked derivatives and (3) Fixed Income.
LTM Take Rate (LTM RetailRevenue / Average AUC)
The Take Rate (or Revenue Yield) for the last 12 months was stable in 3Q20 vs. 3Q19 as higher Equities and Futures’ trading volumes and rising distribution of Financial Products offset the lower average Selic rate year-over-year and the impact from the recent extraordinary equity inflow. This custody mandate has a marginal contribution to Retail revenue but generates several cross-selling opportunities across our ecosystem, particularly for Private Banking and Issuer Services.
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Institutional
Institutional Revenue(in R$ mn)
Institutional gross revenue totaled R$239 million in 3Q20, up 38% from R$173 million in 3Q19. Higher equity trading volume was the main driver in addition to higher Fixed Income secondary trading.
Issuer Services
Issuer Services Revenue(in R$ mn)
Issuer Services revenue expanded 18% year-over-year from R$143 million in 3Q19 to R$169 million in 3Q20. Key highlights for the quarter included: (1) REITs, with eighteen executed deals vs eleven in 3Q19 and (2) the Equity Capital Markets (ECM) division, with participation in fourteen deals vs four in 3Q19.
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Digital Content and Other
Digital Content Revenue
Gross revenue totaled R$32 million in 3Q20, down 8% from R$35 million in 3Q19, mainly driven by the absence of in-person events and courses compared to the year-ago quarter.
Other Revenue
Other revenue decreased 32% in 3Q20 vs. 3Q19, from R$158 million to R$107 million, primarily driven by a lower average Selic rate.
COGS
COGS (in R$ mn) and GrossMargin
COGS rose 59% from R$445 million in 3Q19 to R$706 million in 3Q20 driven by product mix and higher investments recently made in the IFA network through incentives, which are capitalized and amortized over the life of the signed contracts, in addition to the increase in Active Clients, which for some products drives higher clearinghouse fees. Furthermore, gross margin contracted to 66.4% in 3Q20 from 67.2% in 3Q19.
Investments in the network enhance one of our key distribution channels and provide additional capital to our offices for them to attract more professionals, expand operations to new geographies and accelerate net inflow and client acquisitions.
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SG&A Expenses
SG&A Expense ex-ShareBased Compensation (in R$ mn)
SG&A expenses totaled R$669 million in 3Q20, up 39% from R$481 million in 3Q19. As a percentage of net revenue, SG&A expenses represented 31.9% in 3Q20 vs. 35.5% in 3Q19, as the expansion in personnel expenses, due to the 67% year-over-year growth in headcount, and in data processing, as a consequence of technology investments, was more than offset by efficiency gains in Marketing and Third-Party Services and Other Administrative Expenses, which were net positive in 3Q20. The latter was impacted by three main factors: (1) higher revenue related to incentives from Tesouro Direto, B3, Visa and other parties; (2) higher losses on write-offs and disposal of assets related to XP Inc.’s recent headquarter footprint reduction in São Paulo; and (3) a one-time fine payable to BSM (B3’s self-regulatory entity) from a disciplinary administrative proceeding started in 2015 which concluded in 2020.
As a high-growth company operating in a massive and concentrated market, we are constantly looking for investments that can accelerate our initiatives and strengthen our platforms and infrastructure to support our business’ expansion. Hence, although we remain focused on enhancing efficiency and operating leverage, several near-term expenses including technology across all fronts (headcount, infrastructure, data processing, among others), and the digital bank and trading platforms are expected to drive accelerating revenue growth over the next years. In the last twelve months, these expenses represented approximately 80% of SG&A growth, paving the way for future growth and potential margin improvement in the long term, as we reap the benefits from the enhanced scalability of our business model.
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Adjusted Net Income
Adjusted Net Income¹(in R$ mn) and Margin
In 3Q20, Adjusted Net Income grew 119% vs 3Q19 and reached R$570 million. The adjusted net margin expanded from 19.2% in 3Q19 to 27.1%, reflecting: (1) strong growth in Retail Revenue, which was mainly driven by Equity, Derivatives, Financial Products and Fixed Income and (2) a lower effective tax rate.
¹ See appendix for a reconciliation of Adjusted Net Income.
Cash Flow
| Cash Flow Data | 3Q19 | 2Q20 |
|---|---|---|
| (R mn) | ||
| Income before income tax | 382 | 610 |
| Adjustments to reconcile income before income tax | 53 | 127 |
| Income tax paid | (162) | 130 |
| Contingencies paid | (0) | (0) |
| Interest paid | (1) | (17) |
| Changes in working capital assets and liabilities | 37 | (21) |
| Adjusted net cash flow (used in) from operating activities | 308 | 828 |
| Net cash flow (used in) from securities, repos, derivatives and banking activities | (98) | (369) |
| Net cash flows from operating activities | 210 | 459 |
| Net cash flows from investing activities | (33) | (37) |
| Net cash flows from financing activities | (38) | (95) |
All values are in US Dollars.
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Net Cash Flow Used inOperating Activities
Our net cash flow used in Operating activities represented by Adjusted net cash flow (used in) from operating activities (which in management’s view is a more useful metric to track the intrinsic cash flow generation of the business) decreased to R$1,174 million for 3Q20 from R$308 million in 3Q19, and decrease from R$828 million in 2Q20 to R$1,174 million in 3Q20 driven by:
| · | Higher<br>balance of securities and derivatives that we hold in the ordinary course of our business as a Retail investment distribution<br>platform and as an Institutional broker dealer (with respect to the sale of fixed income securities and structured notes); |
|---|---|
| · | Our<br>strategy to allocate excess cash and cash equivalents from treasury funds, from Floating Balances and from private pension balances<br>to securities and other financial assets. These balances may fluctuate substantially from quarter to quarter and were the key<br>drivers to the net cash flow from operating activities figures; |
| --- | --- |
| · | Increased<br>in our banking activities from loans operations, deposits mainly derived from time deposits, structure operations certificates<br>(COEs) and other financial liabilities which include financial bills as a result of our expected growth in new financials services<br>verticals. |
| --- | --- |
| · | Growth<br>of our omni-channel distribution network through our network of IFA partners; |
| --- | --- |
| · | Our<br>income before tax of R$761 million in 3Q20 combined with non-cash expenses consisting primarily of (i) share based plan of R$32<br>million (ii) depreciation and amortization of R$36 million, (iii) Losses on impairment and write-off of property, equipment, intangible<br>assets and leases of R$30 million. The total amount of adjustments to reconcile income before income taxes for 3Q20 was R$128<br>million. |
| --- | --- |
Net Cash Flow Used inInvesting Activities
Our net cash used in investing activities increased from R$33 million in 3Q19 to R$302 million in 3Q20 and R$ 37 million in 2Q20 from R$302 million in 3Q20, primarily affected by:
| · | Our<br>acquisitions of FinTech’s, investments in associates and joint ventures of R$ 260 million in 3Q20; |
|---|---|
| · | the<br>investment in intangible assets, mostly IT infrastructure and capitalization software development which increased from R$22 million<br>in 3Q19 to R$35 million in 3Q20 and from R$24 million in 2Q20 to R$35 million in 3Q20. |
| --- | --- |
Net Cash Provided byFinancing Activities
Our net cash flows from financing activities increased from R$38 million in 3Q19 to R$478 million in 3Q20 and from R$95 million in 2Q20 to R$478 million in 3Q20, primarily due to:
| · | R$400<br>million related to principal payments of the first series of non-convertible debentures in 3Q20; |
|---|---|
| · | R$66<br>million related to a partial repurchase of the second series of non-convertible debentures<br>in 2Q20; |
| --- | --- |
| · | R$78<br>million in 3Q20, R$27 million in 2Q20 and R$30 million in 3Q19 related to Payments of borrowings and lease liabilities. |
| --- | --- |
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Floating Balance andAdjusted Gross Financial Assets (in R$ mn)
| Floating Balance (=net uninvested clients' deposits) | 3Q20 | 2Q20 |
|---|---|---|
| Assets | (1,484) | (1,949) |
| (-) Securities trading and intermediation | (1,484) | (1,949) |
| Liabilities | 15,160 | 14,851 |
| (+) Securities trading and intermediation | 15,160 | 14,851 |
| (=) Floating Balance | 13,676 | 12,902 |
| Adjusted Gross Financial Assets (=cash and equivalents, net of floating) | 3Q20 | 2Q20 |
| Assets | 83,061 | 55,384 |
| (+) Cash | 642 | 346 |
| (+) Securities - Fair value through profit or loss | 38,702 | 26,453 |
| (+) Securities - Fair value through other comprehensive income | 9,589 | 5,252 |
| (+) Securities - Evaluated at amortized cost | 1,366 | 1,226 |
| (+) Derivative financial instruments | 13,149 | 15,589 |
| (+) Securities purchased under agreements to resell | 18,244 | 6,142 |
| (+) Loan Operations* | 1,369 | 377 |
| Liabilities | (61,514) | (33,570) |
| (-) Securities loaned | (1,112) | (473) |
| (-) Derivative financial instruments | (12,730) | (15,005) |
| (-) Securities sold under repurchase agreements | (35,254) | (10,118) |
| (-) Private Pension Liabilities | (9,649) | (7,194) |
| (-) Deposits* | (1,627) | (142) |
| (-) Structured operations certificates* | (1,142) | (639) |
| (-) Floating Balance | (13,676) | (12,902) |
| (=) Adjusted Gross Financial Assets | 7,871 | 8,913 |
*Banking activities added due to increased relevance in 3Q20
We present Adjusted Gross Financial Assets because we believe this metric captures the liquidity that is in fact available to us, net of the portion of liquidity that is related to our Floating Balance (and therefore attributable to clients). We calculate Adjusted Gross Financial Assets as the sum of (1) Cash and Financial Assets (comprised of Cash plus Securities – Fair value through profit or loss, plus Securities – Fair value through other comprehensive income, plus Securities – Evaluated at amortized cost, plus Derivative financial instruments, plus Securities (purchased under agreements to resell), plus Loans, less (2) Financial Liabilities (comprised of the sum of Securities loaned, Derivative financial instruments, Securities sold under repurchase agreements and Private pension liabilities), Deposits, Structured Operation Certificates and (3) less Floating Balance.
It is a measure that we track internally on a daily basis, and it more intuitively reflects the effect of the operational profits we generate and the variations between working capital assets and liabilities (cash flows from operating activities), investments in fixed and intangible assets (cash flows from investing activities) and inflows and outflows related to equity and debt securities in our capital structure (cash flows from financing activities).
Our management treats all securities and financial instrument assets, net of financial instrument liabilities, as balances that compose our total liquidity, with sub line items (such as, for example, “securities at fair value through profit and loss” and “securities at fair value through other comprehensive income”) expected to fluctuate substantially from quarter to quarter as our treasury manages and allocates our total liquidity to the most suitable financial instruments.
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Other Information
Web Meeting
The Company will host a webcast to discuss its second quarter 3020 financial results on Monday, November 9, 2020 at 5:00pm ET (7:00pm BRT). To participate in the earnings webcast please subscribe at: 3Q20 Earnings Web Meeting. The replay will be available on XP’s investor relations website at https://investors.xpinc.com/
Investor Relations Team
Carlos Lazar
André Martins
Natali Pimenta
ir@xpi.com.br
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Important Disclosure
IN REVIEWING THE INFORMATION CONTAINED IN THIS RELEASE, YOU ARE AGREEING TO ABIDE BY THE TERMS OF THIS DISCLAIMER. THIS INFORMATION IS BEING MADE AVAILABLE TO EACH RECIPIENT SOLELY FOR ITS INFORMATION AND IS SUBJECT TO AMENDMENT.
This release is prepared by XP Inc. (the “Company,” “we” or “our”), is solely for informational purposes. This release does not constitute a prospectus and does not constitute an offer to sell or the solicitation of an offer to buy any securities. In addition, this document and any materials distributed in connection with this release are not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction.
This release was prepared by the Company. Neither the Company nor any of its affiliates, officers, employees or agents, make any representation or warranty, express or implied, in relation to the fairness, reasonableness, adequacy, accuracy or completeness of the information, statements or opinions, whichever their source, contained in this release or any oral information provided in connection herewith, or any data it generates and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. The information and opinions contained in this release are provided as at the date of this release, are subject to change without notice and do not purport to contain all information that may be required to evaluate the Company. The information in this release is in draft form and has not been independently verified. The Company and its affiliates, officers, employees and agents expressly disclaim any and all liability which may be based on this release and any errors therein or omissions therefrom. Neither the Company nor any of its affiliates, officers, employees or agents makes any representation or warranty, express or implied, as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any.
The information contained in this release does not purport to be comprehensive and has not been subject to any independent audit or review. Certain of the financial information as of and for the periods ended December 31, 2019, 2018 and 2017 has been derived from audited financial statements and all other financial information has been derived from unaudited interim financial statements. A significant portion of the information contained in this release is based on estimates or expectations of the Company, and there can be no assurance that these estimates or expectations are or will prove to be accurate. The Company’s internal estimates have not been verified by an external expert, and the Company cannot guarantee that a third party using different methods to assemble, analyze or compute market information and data would obtain or generate the same results.
Statements in the release, including those regarding the possible or assumed future or other performance of the Company or its industry or other trend projections, constitute forward-looking statements. These statements are generally identified by the use of words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others. By their nature, forward-looking statements are necessarily subject to a high degree of uncertainty and involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company. Such factors may cause actual results, performance or developments to differ materially from those expressed or implied by such forward-looking statements and there can be no assurance that such forward-looking statements will prove to be correct. These risks and uncertainties include factors relating to: (1) general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business; (2) fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future; (3) competition in the financial services industry; (4) our ability to implement our business strategy; (5) our ability to adapt to the rapid pace of technological changes in the financial services industry; (6) the reliability, performance, functionality and quality of our products and services and the investment performance of investment funds managed by third parties or by our asset managers; (7) the availability of government authorizations on terms and conditions and within periods acceptable to us; (8) our ability to continue attracting and retaining new appropriately-skilled employees; (9) our capitalization and level of indebtedness; (10) the interests of our controlling shareholders; (11) changes in government regulations applicable to the financial services industry in Brazil and elsewhere; (12) our ability to compete and conduct our business in the future; (13) the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors; (14) changes in consumer demands regarding financial products, customer experience related to investments and technological advances, and our ability to innovate to respond to such changes; (15) changes in labor, distribution and other operating costs; (16) our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us; (17) other factors that may affect our financial condition, liquidity and results of operations. Accordingly, you should not place undue reliance on forward-looking statements. The forward-looking statements included herein speak only as at the date of this release and the Company does not undertake any obligation to update these forward-looking statements. Past performance does not guarantee or predict future performance. Moreover, the Company and its affiliates, officers, employees and agents do not undertake any obligation to review, update or confirm expectations or estimates or to release any revisions to any forward-looking statements to reflect events that occur or circumstances that arise in relation to the content of the release. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented and we do not intend to update any of these forward-looking statements.
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Market data and industry information used throughout this release are based on management’s knowledge of the industry and the good faith estimates of management. The Company also relied, to the extent available, upon management’s review of industry surveys and publications and other publicly available information prepared by a number of third-party sources. All of the market data and industry information used in this release involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although the Company believes that these sources are reliable, there can be no assurance as to the accuracy or completeness of this information, and the Company has not independently verified this information.
The contents hereof should not be construed as investment, legal, tax or other advice and you should consult your own advisers as to legal, business, tax and other related matters concerning an investment in the Company. The Company is not acting on your behalf and does not regard you as a customer or a client. It will not be responsible to you for providing protections afforded to clients or for advising you on the relevant transaction.
This release includes our Floating Balance, Adjusted Gross Financial Assets, Adjusted EBITDA and Adjustments to Reported Net Income, which are non-GAAP financial information. We believe that such information is meaningful and useful in understanding the activities and business metrics of the Company’s operations. We also believe that these non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s business that, when viewed with our International Financial Reporting Standards (“IFRS”) results, as issued by the International Accounting Standards Board, provide a more complete understanding of factors and trends affecting the Company’s business. Further, investors regularly rely on non-GAAP financial measures to assess operating performance and such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with IFRS. We also believe that certain non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in the Company’s industry, many of which present these measures when reporting their results. The non-GAAP financial information is presented for informational purposes and to enhance understanding of the IFRS financial statements. The non-GAAP measures should be considered in addition to results prepared in accordance with IFRS, but not as a substitute for, or superior to, IFRS results. As other companies may determine or calculate this non-GAAP financial information differently, the usefulness of these measures for comparative purposes is limited. A reconciliation of such non-GAAP financial measures to the nearest GAAP measure is included in this release.
For purposes of this release:
“Active Clients” means the total number of retail clients served through our XP Investimentos, Rico, Clear, XP Investments and XP Private (Europe) brands, with an AUC above R$100.00 or that have transacted at least once in the last thirty days. For purposes of calculating this metric, if a client holds an account in more than one of the aforementioned entities, such client will be counted as one “active client” for each such account. For example, if a client holds an account in each of XP Investimentos and Rico, such client will count as two “active clients” for purposes of this metric.
“Assets Under Custody (AUC)” means the market value of all client assets invested through XP’s platform and that is related to reported Retail Revenue, including equities, fixed income securities, mutual funds (including those managed by XP Gestão de Recursos Ltda., XP Advisory Gestão de Recursos Ltda. and XP Vista Asset Management Ltda., as well as by third-party asset managers), pension funds (including those from XP Vida e Previdência S.A., as well as by third-party insurance companies), exchange traded funds, COEs (Structured Notes), REITs, and uninvested cash balances (Floating Balances), among others. Although AUC includes custody from Corporate Clients that generate Retail Revenue, it does not include custody from institutional clients (asset managers, pension funds and insurance companies).
Rounding
We have made rounding adjustments to some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
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Unaudited Managerial IncomeStatement (in R$ mn)
| 3Q20 | 3Q19 | YoY | 2Q20 | QoQ | |
|---|---|---|---|---|---|
| Managerial Income Statement | |||||
| Total Gross Revenue | 2,245 | 1,453 | 55% | 2,041 | 10% |
| Retail | 1,698 | 944 | 80% | 1,475 | 15% |
| Institutional | 239 | 173 | 38% | 333 | -28% |
| Issuer Services | 169 | 143 | 18% | 65 | 160% |
| Digital Content | 32 | 35 | -8% | 46 | -30% |
| Other | 107 | 158 | -32% | 123 | -13% |
| Net Revenue | 2,101 | 1,356 | 55% | 1,921 | 9% |
| COGS | (706) | (445) | 59% | (579) | 22% |
| As a % of Net Revenue | (33.6%) | (32.8%) | -0.8 p.p | (30.2%) | -3.5 p.p |
| Gross Profit | 1,395 | 911 | 53% | 1,342 | 4% |
| Gross Margin | 66.4% | 67.2% | -0.8 p.p | 69.8% | -3.5 p.p |
| SG&A | (669) | (481) | 39% | (638) | 5% |
| Share Based Compensation | (44) | - | n.a. | (40) | 10% |
| EBITDA | 681 | 430 | 58% | 664 | 3% |
| EBITDA Margin | 32.4% | 31.7% | 0.7 p.p | 34.5% | -2.1 p.p |
| D&A | (36) | (23) | 55% | (38) | -4% |
| EBIT | 645 | 407 | 59% | 626 | 3% |
| Share of profit or (loss) in joint ventures and associates | (1) | - | n.a. | - | n.a. |
| Interest expense on debt | (12) | (24) | -53% | (16) | -27% |
| EBT | 632 | 382 | 66% | 610 | 4% |
| Income tax expense | (91) | (121) | -25% | (69) | 32% |
| Effective Tax Rate | (14.4%) | (31.8%) | 17.3 p.p | (11.4%) | -3.1 p.p |
| Net Income | 541 | 261 | 108% | 540 | 0% |
| Net Margin | 25.8% | 19.2% | 6.5 p.p | 28.1% | -2.4 p.p |
| Non Recurring Items | 29 | - | n.a. | 24 | 18% |
| Adjusted Net Income | 570 | 261 | 119% | 565 | 1% |
| Adjusted Net Margin | 27.1% | 19.2% | 7.9 p.p | 29.4% | -2.3 p.p |
17
Accounting Income Statement(in R$ mn)
| 3Q20 | 3Q19 | YoY | 2Q20 | QoQ | |
|---|---|---|---|---|---|
| Accounting Income Statement | |||||
| Net revenue from services rendered | 1,278 | 944 | 35% | 1,064 | 20% |
| Brokerage commission | 548 | 350 | 57% | 543 | 1% |
| Securities placement | 388 | 328 | 18% | 186 | 109% |
| Management fees | 274 | 207 | 32% | 280 | -2% |
| Insurance brokerage fee | 18 | 27 | -36% | 27 | -36% |
| Educational services | 25 | 33 | -22% | 44 | -43% |
| Other services | 155 | 85 | 82% | 85 | 82% |
| Taxes and contributions on services | (131) | (86) | 52% | (102) | 29% |
| Net income from financial instruments at amortized cost and at fair value through other comprehensive income | 190 | 27 | 615% | (93) | -303% |
| Net income from financial instruments at fair value through profit or loss | 633 | 385 | 64% | 951 | -33% |
| Total revenue and income | 2,101 | 1,356 | 55% | 1,921 | 9% |
| Operating costs | (706) | (445) | 59% | (579) | 22% |
| Selling expenses | (38) | (30) | 27% | (28) | 39% |
| Administrative expenses | (810) | (482) | 68% | (690) | 17% |
| Other operating revenues (expenses), net | 98 | 7 | 1229% | 1 | 9058% |
| Interest expense on debt | (12) | (24) | -53% | (16) | -27% |
| Share of profit or (loss) in joint ventures and associates | (1) | - | n.a. | - | n.a. |
| Income before income tax | 632 | 382 | 66% | 609 | 4% |
| Income tax expense | (91) | (121) | -25% | (69) | 32% |
| Effective tax rate | (14.4%) | (31.8%) | 17.3 p.p | (11.4%) | -3.0 p.p |
| Net income for the period | 541 | 261 | 108% | 540 | 0% |
18
Balance Sheet (in R$ mn)
| 3Q20 | 2Q20 | |
|---|---|---|
| Assets | ||
| Cash | 642 | 346 |
| Financial assets | 84,433 | 57,381 |
| Fair value through profit or loss | 51,850 | 42,042 |
| Securities | 38,702 | 26,453 |
| Derivative financial instruments | 13,149 | 15,589 |
| Fair value through other comprehensive income | 9,589 | 5,252 |
| Securities | 9,589 | 5,252 |
| Evaluated at amortized cost | 22,994 | 10,087 |
| Securities | 1,366 | 1,226 |
| Securities purchased under agreements to resell | 18,244 | 6,142 |
| Securities trading and intermediation | 1,484 | 1,949 |
| Accounts receivable | 251 | 346 |
| Loan Operations | 1,369 | 377 |
| Other financial assets | 280 | 47 |
| Other assets | 1,484 | 712 |
| Recoverable taxes | 170 | 225 |
| Rights-of-use assets | 182 | 245 |
| Prepaid expenses | 1,091 | 167 |
| Other | 41 | 75 |
| Deferred tax assets | 379 | 401 |
| Investments in associates and joint ventures | 697 | - |
| Property and equipment | 95 | 131 |
| Intangible assets | 670 | 567 |
| Total Assets | 88,399 | 59,537 |
19
| 3Q20 | 2Q20 | |
|---|---|---|
| Liabilities | ||
| Financial liabilities | 69,389 | 43,013 |
| Fair value through profit or loss | 13,841 | 15,478 |
| Securities | 1,112 | 473 |
| Derivative financial instruments | 12,730 | 15,005 |
| Evaluated at amortized cost | 55,547 | 27,536 |
| Securities sold under repurchase agreements | 35,254 | 10,118 |
| Securities trading and intermediation | 15,160 | 14,851 |
| Deposits | 1,627 | 142 |
| Structured operations certificates | 1,142 | 639 |
| Accounts payables | 655 | 325 |
| Borrowings and lease liabilities | 512 | 640 |
| Debentures | 339 | 777 |
| Other financial liabilities | 859 | 45 |
| Other liabilities | 10,299 | 8,379 |
| Social and statutory obligations | 380 | 583 |
| Taxes and social security obligations | 235 | 395 |
| Private pension liabilities | 9,649 | 7,194 |
| Provisions and contingent liabilities | 16 | 15 |
| Other | 19 | 192 |
| Deferred tax liabilities | 41 | - |
| Total Liabilities | 79,729 | 51,392 |
| Equity attributable to owners of the Parent company | 8,669 | 8,143 |
| Issued capital | 0 | 0 |
| Capital reserve | 7,022 | 6,990 |
| Other comprehensive income | 172 | 218 |
| Retained earnings | 1,476 | 935 |
| Non-controlling interest | 1 | 2 |
| Total equity | 8,671 | 8,145 |
| Total liabilities and equity | 88,399 | 59,537 |
20
Adjusted Net Income (inR$ mn)
| R$ million | 3Q20 | 3Q19 | YoY | 2Q20 | QoQ |
|---|---|---|---|---|---|
| Net Income | 541 | 261 | 108% | 540 | 0% |
| (+) Stock Based Compensation | 44 | - | n.a. | 41 | 9% |
| (+) Offering expenses | 2 | - | n.a. | - | n.a. |
| (+/-) Taxes | (18) | - | n.a. | (16) | 10% |
| Adj. Net Income | 570 | 261 | 119% | 565 | 1% |
Adjusted EBITDA (in R$ mn)
| 3Q20 | 3Q19 | YoY | 2Q20 | QoQ | |
|---|---|---|---|---|---|
| Net Income | 541 | 261 | 108% | 540 | 0% |
| (+) Income Tax | 91 | 121 | -25% | 69 | 32% |
| (+) Depreciation and Amortization | 36 | 23 | 55% | 38 | -4% |
| (+) Interest Expense on Debt | 12 | 24 | -53% | 16 | -27% |
| (+) Share of profit or (loss) in joint ventures and associates | 1 | - | n.a. | - | n.a. |
| (-) Interest Revenue on Adjusted Gross Financial Assets | (45) | (40) | 12% | (60) | -25% |
| Adjusted EBITDA | 636 | 390 | 63% | 603 | 5% |
21
Exhibit 99.2
3Q20 Earnings Presentation November 2020
2 Important Disclosure IN REVIEWING THE INFORMATION CONTAINED IN THIS PRESENTATION, YOU ARE AGREEING TO ABIDE BY THE TERMS OF THIS DISCLAIMER . THIS INFORMATION IS BEING MADE AVAILABLE TO EACH RECIPIENT SOLELY FOR ITS INFORMATION AND IS SUBJECT TO AMENDMENT . This presentation is prepared by XP Inc . (the “Company,” “we” or “our”), is solely for informational purposes . This presentation does not constitute a prospectus and does not constitute an offer to sell or the solicitation of an offer to buy any securities . In addition, this document and any materials distributed in connection with this presentation are not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction . This presentation was prepared by the Company . Neither the Company nor any of its affiliates, officers, employees or agents, make any representation or warranty, express or implied, in relation to the fairness, reasonableness, adequacy, accuracy or completeness of the information, statements or opinions, whichever their source, contained in this presentation or any oral information provided in connection herewith, or any data it generates and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information . The information and opinions contained in this presentation are provided as at the date of this presentation, are subject to change without notice and do not purport to contain all information that may be required to evaluate the Company . The information in this presentation is in draft form and has not been independently verified . The Company and its affiliates, officers, employees and agents expressly disclaim any and all liability which may be based on this presentation and any errors therein or omissions therefrom . Neither the Company nor any of its affiliates, officers, employees or agents makes any representation or warranty, express or implied, as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any . The information contained in this presentation does not purport to be comprehensive and has not been subject to any independent audit or review . Certain of the financial information as of and for the periods ended December 31 , 2019 , 2018 and 2017 has been derived from audited financial statements and all other financial information has been derived from unaudited interim financial statements . A significant portion of the information contained in this presentation is based on estimates or expectations of the Company, and there can be no assurance that these estimates or expectations are or will prove to be accurate . The Company’s internal estimates have not been verified by an external expert, and the Company cannot guarantee that a third party using different methods to assemble, analyze or compute market information and data would obtain or generate the same results . Statements in the presentation, including those regarding the possible or assumed future or other performance of the Company or its industry or other trend projections, constitute forward - looking statements . These statements are generally identified by the use of words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others . By their nature, forward - looking statements are necessarily subject to a high degree of uncertainty and involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company . Such factors may cause actual results, performance or developments to differ materially from those expressed or implied by such forward - looking statements and there can be no assurance that such forward - looking statements will prove to be correct . These risks and uncertainties include factors relating to : ( 1 ) general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business ; ( 2 ) fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future ; ( 3 ) competition in the financial services industry ; ( 4 ) our ability to implement our business strategy ; ( 5 ) our ability to adapt to the rapid pace of technological changes in the financial services industry ; ( 6 ) the reliability, performance, functionality and quality of our products and services and the investment performance of investment funds managed by third parties or by our asset managers ; ( 7 ) the availability of government authorizations on terms and conditions and within periods acceptable to us ; ( 8 ) our ability to continue attracting and retaining new appropriately - skilled employees ; ( 9 ) our capitalization and level of indebtedness ; ( 10 ) the interests of our controlling shareholders ; ( 11 ) changes in government regulations applicable to the financial services industry in Brazil and elsewhere ; ( 12 ) our ability to compete and conduct our business in the future ; ( 13 ) the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors ; ( 14 ) changes in consumer demands regarding financial products, customer experience related to investments and technological advances, and our ability to innovate to respond to such changes ; ( 15 ) changes in labor, distribution and other operating costs ; ( 16 ) our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us ; ( 17 ) the negative impacts of the COVID - 19 pandemic on global, regional and national economies and the related market volatility and protracted economic downturn ; and ( 18 ) other factors that may affect our financial condition, liquidity and results of operations . Accordingly, you should not place undue reliance on forward - looking statements . The forward - looking statements included herein speak only as at the date of this presentation and the Company does not undertake any obligation to update these forward - looking statements . Past performance does not guarantee or predict future performance . Moreover, the Company and its affiliates, officers, employees and agents do not undertake any obligation to review, update or confirm expectations or estimates or to release any revisions to any forward - looking statements to reflect events that occur or circumstances that arise in relation to the content of the presentation . You are cautioned not to unduly rely on such forward - looking statements when evaluating the information presented and we do not intend to update any of these forward - looking statements . Market data and industry information used throughout this presentation are based on management’s knowledge of the industry and the good faith estimates of management . The Company also relied, to the extent available, upon management’s review of industry surveys and publications and other publicly available information prepared by a number of third party sources . All of the market data and industry information used in this presentation involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates . Although the Company believes that these sources are reliable, there can be no assurance as to the accuracy or completeness of this information, and the Company has not independently verified this information . The contents hereof should not be construed as investment, legal, tax or other advice and you should consult your own advisers as to legal, business, tax and other related matters concerning an investment in the Company . The Company is not acting on your behalf and does not regard you as a customer or a client . It will not be responsible to you for providing protections afforded to clients or for advising you on the relevant transaction . This presentation also includes certain non - GAAP financial information . We believe that such information is meaningful and useful in understanding the activities and business metrics of the Company’s operations . We also believe that these non - GAAP financial measures reflect an additional way of viewing aspects of the Company’s business that, when viewed with our International Financial Reporting Standards (“IFRS”) results, as issued by the International Accounting Standards Board, provide a more complete understanding of factors and trends affecting the Company’s business . Further, investors regularly rely on non - GAAP financial measures to assess operating performance and such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with IFRS . We also believe that certain non - GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in the Company’s industry, many of which present these measures when reporting their results . The non - GAAP financial information is presented for informational purposes and to enhance understanding of the IFRS financial statements . The non - GAAP measures should be considered in addition to results prepared in accordance with IFRS, but not as a substitute for, or superior to, IFRS results . As other companies may determine or calculate this non - GAAP financial information differently, the usefulness of these measures for comparative purposes is limited . A reconciliation of such non - GAAP financial measures to the nearest GAAP measure is included in this presentation . For purposes of this presentation : “Active Clients” means the total number of retail clients served through our XP Investimentos, Rico, Clear, XP Investments and XP Private (Europe) brands, with an AUC above R $ 100 . 00 or that have transacted at least once in the last thirty days . For purposes of calculating this metric, if a client holds an account in more than one of the aforementioned entities, such client will be counted as one “active client” for each such account . For example, if a client holds an account in each of XP Investimentos and Rico, such client will count as two “active clients” for purposes of this metric . “Assets Under Custody (AUC)” means the market value of all client assets invested through XP’s platform, including equities, fixed income securities, mutual funds (including those managed by XP Gestão de Recursos Ltda . , XP Advisory Gestão Recursos Ltda . and XP Vista Asset Management Ltda . , as well as by third - party asset managers), pension funds (including those from XP Vida e Previdência S . A . , as well as by third - party insurance companies), exchange traded funds, COEs (Structured Notes), REITs, and uninvested cash balances (Floating Balances), among others . 2
3 Index 0 1 3Q20 KPIs and Financials 0 2 Growth Strategy Through Technology 0 3 Q&A 0 4 Opening Remarks
1 Opening Remarks
5 Accountability: Almost a Year Since our IPO Business Plan Delivery in a Crisis Period OUR PROMISSES AND WHAT WE HAVE DELIVERED... STRONG FINANCIAL RESULTS GROWTH STRATEGIES 2,645k ACTIVE CLIENTS +72% YoY R$ 563 bn TOTAL AUC +61% YoY R$ 161 bn NET INFLOW +29% YoY R$6,142 bn GROSS REVENUE +66% YoY R$3,892 bn GROSS PROFIT +68% YoY R$1,550 bn ADJ. NET INCOME +136% YoY BANKING Credit Card, Cash Solutions, Payments… EXPANDING OUR ECOSYSTEM 26.9% ADJ. NET MARGIN +780bps WHOLESALE BANK Corporate, SMB, FX… TECH - ENABLED PLATFORM Agile, Client Centered, Decreasing Marginal Cost… DISTRIBUTION CHANNELS Investing to accelerate expansion Guidance: + 35% (3 - 5y) Guidance: 18 - 22% (3 - 5y) +277 IFAs / MONTH (GROSS) +502 IFAs Oct’20 (GROSS) Recor d! Note: Data as of 9M20
2 3 Q20 KPIs and Financials
7 KPIs AUC, Active Clients and NPS Assets Under Custody (AUC) (R$ in bn) Net Inflow (R$ in bn) 3Q20 3Q19 1,536 2,645 +72% Active Clients (‘000) 350 563 195 3Q19 18 Market Appreciati on Net Inflow 3Q20 61% 36 29 39 1Q20 2Q20 3Q20 15 29 117 1Q20 2Q20 3Q20 Net Inflow Adj. by Extraordinary Inflows (R$ in bn)
8 KPIs Average Trades and NPS Note: NPS, is an independent widely known survey methodology that measures the willingness of customers to recommend a Compan y’s products and services. The NPS calculation as of a given date reflects the average of the answers in the previous six months Retail Equity DARTs (million) 1.0 3Q19 3Q20 2.7 189% NPS Sep - 20: 70 XP Inc. Retail Equity Market Share Sep - 20 28% Custody Traded Volume 57%
9 Shift to Higher - Yielding Assets: 3 - year Review S ecular trend with a long journey ahead: R$1 trillion in Poupança 0.23 Pension Alternatives 1.34 Multimarket 0.15 0.73 0.21 0.34 Fixed Income Equities 5.80 0.84 1.92 4.15 0.97 0.50 0.06 REITs Total 2.22 +16% +59% +32% +120% +61% +127% +40% Sep - 20 Dec - 17 Brazil Funds’ Industry AUM (R$ in trillion) ▪ REITs : R $ 145 bn AUM in 3 Q 20 , compared to $ 1 . 3 trillion market cap in the US ; - XP is a key REITs player since the early days, fostering both the primary and secondary markets ; - In 3 Q 20 , we participated in eighteen deals and were ranked # 1 by Anbima for the quarter and the last twelve months . ▪ Alternatives : - International Funds : AUC reached R $ 10 billion in 3 Q 20 , up 367 % vs 4 Q 19 , with a total of 68 funds offered ; - Private Equity : Recent fundraising of our second retail - focused PE fund – EB Capital - raising R $ 787 million with more then 5 , 000 clients . S ource : Anbima , Statista
10 Pension Funds important growth driver and source of diversification Player 1 Player 2 Player 3 XP Vida e Previdência 9% 33% 30% 27% 18% 6% 20% 1% Net Inflows Market Share YTD AUC Market Share YTD YTD Pension Funds Market Share (R$ in million) 55% Market Share in Transfers YTD: R$5 billion R$9.6 billion AUC in Sep - 20 S ource : Fenaprevi as of September 30
11 3Q20 Revenue and Breakdown RETAIL INSTITUTIONAL ISSUER SERVICES DIGITAL CONTENT 76 % 11 % 8 % 1 % Other Revenue represented 5% of Total Gross Revenues Total Gross Revenues (in R$ mn) Highlights ▪ Growth was mainly driven by strong performance in Retail ; ▪ In the 9 M 2020 , YoY growth was 66 % vs mid - term guidance of 35 % CAGR . of 3Q20 Total Gross Revenue 3Q19 3Q20 2,245 1,453 +55%
12 Retail Revenue and Take Rate Strong expansion following client addition and healthy net inflow LTM Take Rate (LTM Retail Revenue / Average AUC) Retail Revenue (in R$ mn) 3Q19 3Q20 1.2% 1.2% 944 3Q19 3Q20 1,698 +80% Highlights ▪ Stable take rate as higher Equities and Futures’ trading volumes and Financial Products distribution offset the lower Selic and the impact from the recent extraordinary equity inflow . Highlights ▪ Key revenue growth drivers were : ( 1 ) Equity and futures ; ( 2 ) Financial Products and ( 3 ) Fixed Income . Note: Average AUC = ( BoP AUC + EoP AUC)/2
13 Highlights ▪ Main highlights : ( 1 ) REITs, with eighteen executed deals and ( 2 ) Equity Capital Markets (ECM) division, with participation in fourteen deals . 143 169 3Q19 3Q20 18% Highlights ▪ Higher equity trading volume was the main driver, followed by Fixed Income secondary trading . 173 239 3Q20 3Q19 38% Institutional and Issuer Services Institutional benefited from volumes and Issuer Services from market window Issuer Services Revenue (in R$ mn) Institutional Revenue (in R$ mn)
14 COGS and SG&A Gross margin slight compression following distribution channel investments COGS (in R$ mn) Operating Expenses (in R$ mn) Highlights ▪ Year - over - year gross margin contraction due to product mix and investments in the IFA network . 445 706 3Q19 3Q20 59% 66.4% 67.2% Gross Margin 31.9% 35.5% % of Net Revenue 481 669 3Q19 3Q20 39% Highlights ▪ Mainly driven by investments in technology and other initiatives focused on supporting long - term growth . Excluding Share - Based Compensation
15 Adjusted Net Income and Margin Net margin expansion driven by strong growth across Retail and a lower tax rate Highlights ▪ Year - over - year growth in Adjusted Net Income and margin driven by ( 1 ) strong performance of Retail and ( 2 ) lower effective tax rate . Adjusted Net Income (in R$ mn) Adjusted Net Margin Note :: 1 – We calculate Adjusted Net Income as net income, plus Itaú Transaction and deal related expenses, plus IPO process related expenses, plus our Share Based Plan expenses, minus one - time tax claim recognition ( 2010 - 2017 ) plus/minus taxes . See appendix for a reconciliation of Adjusted Net Income . 2 – Adjusted Net Margin is calculated as Adjusted Net Income divided by net revenue . See appendix for a reconciliation of Adjusted Net Margin .. 19.2% 3Q19 3Q20 27.1% 261 570 3Q19 3Q20 119%
3 Growth Strategy Through Technology
17 Technology Update Comprehensive and robust Fintech ecosystem driving efficiency gains Financial Company ▪ Business Teams control Tech Teams ▪ Technology as a tool Waterfall Model 4 dev teams Agile Model 10 Squads Agile Model 35 Squads 7 Tribes Fintech Transition Ecosystem ▪ Business and Tech Teams side by side ▪ Technology involved in decision making YEARS TO COME 2020 2019 2018 2017 2016 Full Fintech Ecosystem ▪ Business and Tech Teams are the same ▪ Technology as our main service Scaled Agile 81 Squads 18 Tribes TECH TEAMS BUSINESS TEAMS TECH TEAMS BUSINESS TEAMS B.U. TEAMS 41 278 586 ~950 ~1, … Employees 20x 53% Engineering 20% Infra 10% Data 10% Products 6% Design
18 Growth Strategy Through Technology Social Media and Influencers Info M oney DIGITAL CONTEN T Dedicated Support Teams Trading Desk s 7.0 k IFAs XP Direct / Online Services INSTITUTIONA L ISSUER SERVICE S Capital Market Securities Placement Complementary Services EXPERT Event EXPERT Content Platform Corporate Access RETAIL Digital Bank TECH - ENABLED PLATFORM... ... ALLOWING A CONTINUOUS ENHANCEMENT OF OUR ECOSYSTEM AND SUPPORTING A CONSISTENT GROWTH OF OUR REVENUE TAM 2023 2020 2021 2022 2024 2025
19 Technology Update Case: XP App Metrics Evolution XP App Launch Wealth Evolution Charts + Stock Trading October 2020 December 2019 Septembe r 2018 New Layout + Banking Capabilities 100k 500k 830k 2018 2019 2020 MAU FREQUENCY PER MONTH NPS APP RATING 3x 15x 18x 2018 2019 2020 18 63 75 2020 2018 2019 2018 1.9 2019 2020 4.6 4.8 Record! Recor d!
20 Technology Update Goals and Achievements USER - CENTRIC DATA - DRIVEN Higher investment provides a new level of service quality to our customers QUALITY SCALE XP Inc.’s scalable systems accelerate growth Full focus on customer experience fast solutions for priority problems Data - Driven decision making optimize efforts WE ARE READY FOR THE FUTURE! TIME TO MARKET Less than 6 months to release projects
Q&A
Investor Relations Carlos Lazar André Martins Natali Pimenta ir@xpi.com.br IR Website: investors.xpinc.com
Appendix
24 Non - GAAP Financial Information Adjusted Net Income and Adjusted Gross Financial Assets 24 Adjusted Gross Financial Assets (in R $ mn ) Adjusted Net Income (in R $ mn ) R$ million 3Q20 3Q19 YoY 2Q20 QoQ Net Income 541 261 108% 541 0% (+) Stock Based Compensation 44 - n.a. 40 10% (+) Offering expenses 2 - n.a. - n.a. (+/ - ) Taxes (18) - n.a. (16) 10% Adj. Net Income 570 261 119% 565 1% Floating Balance (=net univested clients' deposits) 3Q20 2Q20 Assets (1,484) (1,949) ( - ) Securities trading and intermediation (1,484) (1,949) Liabilities 15,160 14,851 (+) Securities trading and intermediation 15,160 14,851 (=) Floating Balance 13,676 12,902 Adjusted Gross Financial Assets (=cash and equivalents, net of floating) 3Q20 2Q20 Assets 83,061 55,384 (+) Cash 642 346 (+) Securities - Fair value through profit or loss 38,702 26,453 (+) Securities - Fair value through other comprehensive income 9,589 5,252 (+) Securities - Evaluated at amortized cost 1,366 1,226 (+) Derivative financial instruments 13,149 15,589 (+) Securities purchased under agreements to resell 18,244 6,142 (+) Loan Operations* 1,369 377 Liabilities (61,514) (33,570) ( - ) Securities loaned (1,112) (473) ( - ) Derivative financial instruments (12,730) (15,005) ( - ) Securities sold under repurchase agreements (35,254) (10,118) ( - ) Private Pension Liabilities (9,649) (7,194) ( - ) Deposits* (1,627) (142) ( - ) Structured operations certificates* (1,142) (639) ( - ) Floating Balance (13,676) (12,902) (=) Adjusted Gross Financial Assets 7,871 8,913 *Banking activities added due to increased relevance in 3Q20
25 Recent Achievements XP Inc. continues to reinforce its competitive advantages and collect achievements AWARDS x Top of Mind of Best Investment Advisory by Folha de São Paulo x North American Costumer Centricity Awards 2020 in the category “Best Measurement in Customer Experience” x Época Negócios 360 o Award in the Category People ESG Source: XP Inc. x ESG Manifest launched x 4 ESG oriented funds launched x MLHR3 ▪ Target of 50% of female employees ▪ Gender equality fund that donates 20% of its management fee to an NGO ▪ Financial education journey for women
EXHIBIT 99.3
Report on review of interim condensedconsolidated financial statements
To the Board of Directors and Shareholders
XP Inc.
Introduction
We have reviewed the accompanying interim condensed consolidated balance sheets of XP Inc. as at September 30, 2020 and the related interim condensed consolidated statements of income and of comprehensive income for the quarter and nine-month period then ended, and the interim condensed consolidated statements of changes in equity and cash flows for the nine-month period then ended, and a summary of significant accounting policies and other explanatory notes.
Management is responsible for the preparation and presentation of these interim condensed consolidated financial statements in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting issued by the International Accounting Standards Board (IASB). Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review.
Scope of review
We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, and ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and consequently did not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements referred to above are not prepared, in all material respects, in accordance with IAS 34.
São Paulo, November 06, 2020
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Auditores Independentes
CRC 2SP000160/O-5
Tatiana Fernandes Kagohara Gueorguiev
Contador CRC 1SP245281/O-6
PricewaterhouseCoopers,Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil 05001-903, Caixa Postal 61005, www.pwc.com/br
| XP Inc. and its subsidiaries<br><br>Unaudited interim condensed consolidated balance sheets<br><br>As of September 30, 2020 and December 31, 2019<br><br>In thousands of Brazilian Reais | ||||||
|---|---|---|---|---|---|---|
| Note | September30, 2020 | December 31, 2019 | ||||
| --- | --- | --- | --- | --- | --- | --- |
| Cash | 642,491 | 109,922 | ||||
| Financial assets | 84,432,999 | 41,888,778 | ||||
| Fair value through profit or loss | 51,850,286 | 26,528,396 | ||||
| Securities | 4 | 38,701,519 | 22,443,392 | |||
| Derivative financial instruments | 5 | 13,148,767 | 4,085,004 | |||
| Fair value through other comprehensive income | 9,588,773 | 2,616,118 | ||||
| Securities | 4 | 9,588,773 | 2,616,118 | |||
| Evaluated at amortized cost | 22,993,940 | 12,744,264 | ||||
| Securities | 4 | 1,366,038 | 2,266,971 | |||
| Securities purchased under agreements to resell | 3 | 18,243,688 | 9,490,090 | |||
| Securities trading and intermediation | 9 | 1,483,507 | 504,983 | |||
| Accounts receivable | 251,194 | 462,029 | ||||
| Loan operations | 7 | 1,369,234 | 386 | |||
| Other financial assets | 280,279 | 19,805 | ||||
| Other assets | 1,484,110 | 643,619 | ||||
| Recoverable taxes | 170,066 | 243,320 | ||||
| Rights-of-use assets | 11 | 182,014 | 227,478 | |||
| Prepaid expenses | 8 | 1,090,998 | 89,684 | |||
| Other | 41,032 | 83,137 | ||||
| Deferred tax assets | 18 | 378,726 | 284,533 | |||
| Investments in associates and joint ventures | 10 | 696,742 | - | |||
| Property and equipment | 11 | 94,756 | 142,464 | |||
| Goodwill and Intangible assets | 11 | 669,534 | 553,452 | |||
| Total assets | 88,399,358 | 43,622,768 |
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
2
| XP Inc. and its subsidiaries<br><br>Unaudited interim condensed consolidated balance sheets<br><br>As of September 30, 2020 and December 31, 2019<br><br>In thousands of Brazilian Reais | ||||||
|---|---|---|---|---|---|---|
| Note | September 30, 2020 | December 31, 2019 | ||||
| --- | --- | --- | --- | --- | --- | --- |
| Financial liabilities | 69,388,840 | 31,842,054 | ||||
| Fair value through profit or loss | 13,841,366 | 5,250,943 | ||||
| Securities | 4 | 1,111,770 | 2,021,707 | |||
| Derivative financial instruments | 5 | 12,729,596 | 3,229,236 | |||
| Evaluated at amortized cost | 55,547,474 | 26,591,111 | ||||
| Securities sold under repurchase agreements | 3 | 35,253,928 | 15,638,407 | |||
| Securities trading and intermediation | 9 | 15,159,711 | 9,114,546 | |||
| Deposits | 12 | 1,626,709 | 70,195 | |||
| Structured operations certificates | 13 | 1,142,457 | 19,474 | |||
| Accounts payables | 655,117 | 266,813 | ||||
| Borrowings and lease liabilities | 14 | 511,981 | 637,484 | |||
| Debentures | 15 | 338,693 | 835,230 | |||
| Other financial liabilities | 16 | 858,878 | 8,962 | |||
| Other liabilities | 10,298,861 | 4,619,623 | ||||
| Social and statutory obligations | 379,696 | 492,723 | ||||
| Taxes and social security obligations | 234,652 | 345,331 | ||||
| Private pension liabilities | 17 | 9,649,322 | 3,759,090 | |||
| Provisions and contingent liabilities | 21 | 16,020 | 15,193 | |||
| Other | 19,171 | 7,286 | ||||
| Deferred tax liabilities | 18 | 41,074 | 5,132 | |||
| Total liabilities | 79,728,775 | 36,466,809 | ||||
| Equity attributable to owners of the Parent company | 8,669,470 | 7,153,396 | ||||
| Issued capital | 23 | 23 | ||||
| Capital reserve | 7,021,993 | 6,943,446 | ||||
| Other comprehensive income | 171,841 | 209,927 | ||||
| Retained earnings | 1,475,613 | - | ||||
| Non-controlling interest | 1,113 | 2,563 | ||||
| Total equity | 19 | 8,670,583 | 7,155,959 | |||
| Total liabilities and equity | 88,399,358 | 43,622,768 |
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
3
| XP Inc. and its subsidiaries<br><br>Unaudited interim condensed consolidated statements<br><br>of income and of comprehensive income<br><br>For the nine and three month periods ended September 30, 2020 and 2019<br><br>In thousands of Brazilian Reais, except earnings per share | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Nine months period ended September 30, | Three months period ended September 30, | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Note | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Net revenue from services rendered | 22(a) | 3,493,231 | 2,341,100 | 1,277,745 | 944,038 | |||||||||
| Net income from financial instruments at amortized cost and at fair value through other comprehensive income | 22(b) | 298,585 | 204,023 | 189,527 | 26,513 | |||||||||
| Net income from financial instruments at fair value through profit or loss | 22(b) | 1,964,691 | 891,390 | 633,465 | 385,373 | |||||||||
| Total revenue and income | 5,756,507 | 3,436,513 | 2,100,737 | 1,355,924 | ||||||||||
| Operating costs | 23 | (1,864,062 | ) | (1,118,967 | ) | (706,020 | ) | (444,958 | ) | |||||
| Selling expenses | 24 | (94,367 | ) | (82,419 | ) | (38,322 | ) | (30,104 | ) | |||||
| Administrative expenses | 24 | (2,077,587 | ) | (1,294,039 | ) | (809,596 | ) | (481,605 | ) | |||||
| Other operating income (expenses), net | 25 | 84,986 | 118,487 | 97,801 | 7,358 | |||||||||
| Interest expense on debt | (46,385 | ) | (62,631 | ) | (11,585 | ) | (24,481 | ) | ||||||
| Share of profit or (loss) in joint ventures and associates | 10 | (564 | ) | - | (564 | ) | - | |||||||
| Income before income tax | 1,758,528 | 996,944 | 632,451 | 382,134 | ||||||||||
| Income tax expense | 18 | (279,427 | ) | (297,646 | ) | (91,167 | ) | (121,336 | ) | |||||
| Net income for the period | 1,479,101 | 699,298 | 541,284 | 260,798 | ||||||||||
| Other comprehensive income | ||||||||||||||
| Items that can be subsequently reclassified to income | ||||||||||||||
| Foreign exchange variation of investees located abroad | 76,575 | 12,126 | 6,900 | 15,191 | ||||||||||
| Gains (losses) on net investment hedge | 6 | (80,370 | ) | (11,829 | ) | (7,531 | ) | (13,911 | ) | |||||
| Changes in the fair value of financial assets at fair value through other comprehensive income | (33,914 | ) | 986 | (45,072 | ) | (8,118 | ) | |||||||
| Other comprehensive income (loss) for the period, net of tax | (37,709 | ) | 1,283 | (45,703 | ) | (6,838 | ) | |||||||
| Total comprehensive income for the period | 1,441,392 | 700,581 | 495,581 | 253,960 | ||||||||||
| Net income attributable to: | ||||||||||||||
| Owners of the Parent company | 1,475,613 | 692,011 | 540,434 | 257,814 | ||||||||||
| Non-controlling interest | 3,488 | 7,287 | 850 | 2,984 | ||||||||||
| Total comprehensive income attributable to: | ||||||||||||||
| Owners of the Parent company | 1,437,904 | 693,294 | 494,731 | 250,976 | ||||||||||
| Non-controlling interest | 3,488 | 7,287 | 850 | 2,984 | ||||||||||
| Earnings per share from total income attributable to the ordinary equity holders of the company | ||||||||||||||
| Basic earnings per share | 27 | 2.6742 | 1.3589 | 0.9794 | 0.5063 | |||||||||
| Diluted earnings per share | 27 | 2.6534 | 1.3589 | 0.9710 | 0.5063 |
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
4
| XP Inc. and its subsidiaries<br><br>Unaudited interim condensed consolidated statements of changes in equity<br><br>For the nine months ended September 30, 2020 and 2019<br><br>In thousands of Brazilian Reais | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Attributable<br> to owners of the Parent | ||||||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Capital<br> reserve | ||||||||||||||||||||||
| **** | Notes | Issued Capital | Additional paid-in capital | Other Reserves | Other comprehensive income | Retained Earnings | Total | Non-Controlling interest | Total Equity | |||||||||||||
| Balances at December 31, 2018 | 21 | 927,895 | 947,696 | 209,165 | - | 2,084,777 | 6,935 | 2,091,712 | ||||||||||||||
| Comprehensive income for the period | ||||||||||||||||||||||
| Net income for the period | - | - | - | - | 692,011 | 692,011 | 7,287 | 699,298 | ||||||||||||||
| Other comprehensive income, net | - | - | - | 1,283 | - | 1,283 | - | 1,283 | ||||||||||||||
| Transactions with shareholders<br> - contributions and distributions | ||||||||||||||||||||||
| Gain (loss) in changes in interest<br> of subsidiaries, net | - | - | - | 210 | - | 210 | (1,439 | ) | (1,229 | ) | ||||||||||||
| Allocations of the net income for<br> the period | ||||||||||||||||||||||
| Dividends distributed | - | - | - | - | - | - | (9,193 | ) | (9,193 | ) | ||||||||||||
| Balances at September 30, 2019 | 21 | 927,895 | 947,696 | 210,658 | 692,011 | 2,778,281 | 3,590 | 2,781,871 | ||||||||||||||
| Balances at December 31, 2019 | 23 | 5,409,895 | 1,533,551 | 209,927 | - | 7,153,396 | 2,563 | 7,155,959 | ||||||||||||||
| Comprehensive income for the period | ||||||||||||||||||||||
| Net income for the period | - | - | - | - | 1.475,613 | 1,475,613 | 3,488 | 1,479,101 | ||||||||||||||
| Other comprehensive income, net | - | - | - | (37,709 | ) | - | (37,709 | ) | - | (37,709 | ) | |||||||||||
| Transactions with shareholders<br> - contributions and distributions | ||||||||||||||||||||||
| Share based incentive plan | 26 | - | - | 78,547 | - | - | 78,547 | (10 | ) | 78,537 | ||||||||||||
| Gain (loss) in changes in interest<br> of subsidiaries, net | - | - | - | (377 | ) | - | (377 | ) | 1,208 | 831 | ||||||||||||
| Allocations of the net income for<br> the period | ||||||||||||||||||||||
| Dividends distributed | - | - | - | - | - | - | (6,136 | ) | (6,136 | ) | ||||||||||||
| Balances at September, 2020 | 23 | 5,409,895 | 1,612,098 | 171,841 | 1,475,613 | 8,669,470 | 1,113 | 8,670,583 |
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
5
| XP Inc. and its subsidiaries<br><br>Unaudited interim condensed consolidated statements of cash flows<br><br>For the nine months ended September 30, 2020 and 2019<br><br>In thousands of Brazilian Reais | ||||||||
|---|---|---|---|---|---|---|---|---|
| Nine months ended<br> <br>September 30, | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Note | 2020 | 2019 | ||||||
| Operating activities | ||||||||
| Income before income tax | 1,758,528 | 996,944 | ||||||
| Adjustments to reconcile income before income taxes | ||||||||
| Depreciation of property and equipment and right-of-use assets | 11 | 52,972 | 38,409 | |||||
| Amortization of intangible assets | 11 | 52,928 | 23,992 | |||||
| Loss on impairment and write-off of property, equipment, intangible assets and leases, net | 11 | 61,888 | 7,606 | |||||
| Income from share in the net income of associates and joint ventures and other investments | 562 | - | ||||||
| Expected credit losses on accounts receivable, loan operations and other financial assets | 38,171 | 6,318 | ||||||
| (Reversal of) Provision for contingencies, net | 21 | (53 | ) | (2,207 | ) | |||
| Net foreign exchange differences | 2,981 | 571 | ||||||
| Share based plan | 78,537 | - | ||||||
| Interest accrued | 47,529 | 64,099 | ||||||
| Changes in assets and liabilities | ||||||||
| Securities (assets and liabilities) | (23,926,297 | ) | (11,018,501 | ) | ||||
| Derivative financial instruments (assets and liabilities) | 314,825 | 390,880 | ||||||
| Securities trading and intermediation (assets and liabilities) | 5,066,641 | 1,986,946 | ||||||
| Securities purchased (sold) under resale (repurchase) agreements | 10,861,923 | 6,094,987 | ||||||
| Accounts receivable | 178,152 | (34,217 | ) | |||||
| Loan operations | (1,375,823 | ) | - | |||||
| Prepaid expenses | (1,001,314 | ) | (142 | ) | ||||
| Other assets and other financial assets | (216,882 | ) | 20,583 | |||||
| Structured operations certificates | 1,122,983 | - | ||||||
| Accounts payable | 387,120 | 72,928 | ||||||
| Deposits | 1,556,514 | - | ||||||
| Social and statutory obligations | (113,027 | ) | 23,878 | |||||
| Tax and social security obligations | (262,915 | ) | 6,930 | |||||
| Private pension liabilities | 5,890,232 | 1,705,647 | ||||||
| Other liabilities and other financial liabilities | 341,273 | 5,628 | ||||||
| Cash from operations | 917,448 | 391,279 | ||||||
| Income tax paid | (48,097 | ) | (355,410 | ) | ||||
| Contingencies paid | 21 | (592 | ) | (1,062 | ) | |||
| Interest paid | 31 | (62,015 | ) | (16,386 | ) | |||
| Net cash flows from operating activities | 806,744 | 18,421 | ||||||
| Investing activities | ||||||||
| Acquisition of intangible assets | 11 | (79,127 | ) | (39,974 | ) | |||
| Acquisition of property and equipment | 11 | (40,011 | ) | (43,749 | ) | |||
| Acquisition of subsidiaries, net of cash acquired | 11 | (55,741 | ) | - | ||||
| Investment in associates and joint ventures | (204,960 | ) | - | |||||
| Net cash flows used in investing activities | (379,839 | ) | (83,723 | ) | ||||
| Financing activities | ||||||||
| Payments of borrowings and lease liabilities | 31 | (130,798 | ) | (101,047 | ) | |||
| Payment of debentures | 31 | (400,000 | ) | - | ||||
| Repurchase of debentures | 31 | (64,717 | ) | - | ||||
| Proceeds of debentures | - | 400,000 | ||||||
| Transactions with non-controlling interests | 831 | (1,229 | ) | |||||
| Dividends paid to non-controlling interests | (6,136 | ) | (9,193 | ) | ||||
| Net cash flows from (used in) financing activities | (600,820 | ) | 288,531 | |||||
| Net increase in cash and cash equivalents | (173,915 | ) | 223,230 | |||||
| Cash and cash equivalents at the beginning of the period | 887,796 | 626,863 | ||||||
| Effects of exchange rate changes on cash and cash equivalents | 33,814 | (4,116 | ) | |||||
| Cash and cash equivalents at the end of the period | 747,695 | 845,977 | ||||||
| Cash | 642,491 | 70,483 | ||||||
| Securities purchased under agreements to resell | 3 | - | 684,964 | |||||
| Interbank certificate deposits | 4 | 105,204 | 90,530 |
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
6
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| 1. | Operations |
| --- | --- |
XP Inc. (the “Company”) is a Cayman Island exempted company with limited liability, incorporated on August 29, 2019. The registered office of the Company is Ugland House, 121 South Church Street in George Town, Grand Cayman. The Company’s principal executive office is located in the city of São Paulo, Brazil.
XP Inc. is a holding company controlled by XP Controle Participações S.A., which holds 53.38% of voting rights and whose is ultimately controlled by a group of individuals.
XP Inc. and its subsidiaries (collectively, the “Company”, “Group” or “XP Group”) is a leading, technology-driven financial services platform and a trusted provider of low-fee financial products and services in Brazil. XP Group are principally engaged in providing its customers, represented by individuals and legal entities in Brazil and abroad, various financial products, services, digital content and financial advisory services, mainly acting as broker-dealer, including securities brokerage, private pension plans, commercial and investment banking products such as loan operations, transactions in the foreign exchange markets and deposits, through our brands that reach clients directly and through network of Independent Financial Advisers (“IFAs”).
On November 29, 2019, the Group carried out a corporate reorganization in order to prepare the structure to the Initial Public Offering of its shares. As result, the capital contributed by the shareholders on XP Investimentos S.A. were transferred and incorporated on XP Inc. Therefore the shareholders have a direct stake on XP Inc. which controls XP Investimentos S.A. and the other operating companies of the Group.
On November 30, 2019, the Company carried out a reverse share split of 4:1. As a result, the share capital represented by 2,036,988,542 shares decreased to 509,247,136 shares. The reverse share split has been applied retrospectively to all figures in the historical financial statements regarding number of shares (Note 27) and per share data as if the reverse share split had been in effect for all periods presented.
| 1.1 | Initial Public Offering (“IPO”) and resulting transactions |
|---|
On December 13, 2019, the Company completed its Initial Public Offering (“IPO”), offering 72,510,641 of Class A common shares, of which 42,553,192 new shares were offered by the Company and the remaining 29,957,449 shares were offered by selling shareholders. Additionally, the underwriters executed an option to purchase 10,876,596 additional Class A common shares at the initial public offering price which resulted in a total of 83,387,237 Class A common shares sold.
The initial offering price per Class A common share was US$ 27.00, resulting in gross proceeds of US$ 1,148,936 thousand (or R$4,705,803) to XP Inc, deducting R$200,977 thousand as underwriting discounts and commissions. Additionally, the Company incurred in R$44,726 thousand regarding other offering expenses, of which R$21,902 thousand was recognized directly in income statements and an amount of R$22,824 in equity as transaction costs.
The shares offered and sold in the IPO were registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form F-1 (Registration N° 333-234719), which was declared effective by the Securities and Exchange Commission on December 10, 2019. The common shares began trading on the Nasdaq Global Select Market (“NASDAQ-GS”) on December 11, 2019 under the symbol “XP”.
7
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| 1.2 | Follow-on public offering |
| --- | --- |
On July 1, 2020, XP Inc. concluded an underwritten public offering of 22,465,733 Class A common shares offered by General Atlantic (XP) Bermuda, L.P. and XP Controle Participações S.A. (“selling shareholders”) at a public offering price of US$42.50 per share, including the full exercise of the underwriters’ option to purchase an additional 2,930,313 Class A common shares from the selling shareholders. The Company did not receive any proceeds from the sale of Class A common shares by the selling shareholders and there were no changes in the Company’s control structure as a result of such transaction.
These unaudited interim condensed consolidated financial statements as of September 30, 2020 and for the three and nine month periods ended September 30, 2020 were approved by the Board of Director’s meeting on November 6, 2020.
| 2. | Basis of preparation of the financial statements and changes to the Group’s accounting policies |
|---|---|
| a) | Basis of preparation of the unaudited interim condensed consolidated financial statements |
| --- | --- |
The unaudited interim condensed consolidated financial statements as of September 30, 2020 and for the three and nine months period ended September, 2020 and 2019 have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”).
The unaudited interim condensed consolidated financial statements have been prepared on a historical cost basis, except for financial instruments that have been measured at fair value.
The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group’s annual consolidated financial statements as of December 31, 2019. The list of notes that were not apresented in this unaudited interim condensed is presented below:
| Note to financial statements of December 31, 2019 | Description |
|---|---|
| 3. | Summary of significant accounting policies |
| 4. | Significant estimated and judgements |
| 5. | Group structure |
| 10. | Accounts receivable |
| 11. | Recoverable taxes |
| 19. | Social and Statutory obligations |
| 20. | Tax and social security obligations |
| 24. (a) | Key-person management compensation |
| 33. (b) to (f) | Management of financial risks and financial<br> instruments |
The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period, except for the new accounting policies adopted for the current interim reporting period, see Note 2 (c).
The unaudited interim condensed consolidated financial statements are presented in Brazilian reais (“R$”), which is the Group’s presentation currency and all amounts disclosed in the financial statements and notes have been rounded off to the nearest thousand currency units unless otherwise stated.
8
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| b) | New standards, interpretations and amendments not yet adopted |
| --- | --- |
The accounting policies adopted in the preparation of the unaudited interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s consolidated financial statements for the year ended December 31, 2019.
Certain new accounting standards and interpretations have been published ,which include Amendments to IFRS 3: Definition of a Business; Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform; and Amendments to IAS 1 and IAS 8: Definition of Material; and Conceptual Framework for Financial Reporting issued on March 29, 2018, that are not mandatory for the period ended September 30, 2020, and have not been early adopted by the group. These standards are not expected to have a material impact on the entity in the current or future financial statements periods and on foreseeable future transactions.
| c) | New accounting policies adopted by the Group |
|---|
Derivativefinancial instruments and hedging activities
In compliance with IFRS 9, as of September 30, 2020, the Group designated certain derivatives as fair value hedges for protection of the exposure of Fixed-Income carried out through structured operations certificates. The following accounting policy is adopted for theses fair value hedges:
For the derivative financial instruments that are designated and qualify as fair value hedges, the following policies apply:
| a) | the<br> gain or loss resulting from the fair value appreciation or depreciation of the hedging<br> instrument at fair value should be recorded in profit or loss; and |
|---|---|
| b) | the<br> gain or loss resulting from fair value appreciation or depreciation of the hedged item,<br> that is attributable to the effective portion of the hedged item should adjust the carrying<br> amount of the hedged item, which will be recorded in profit or loss. |
| --- | --- |
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the remaining period until maturity, using a recalculated effective interest rate.
| d) | Basis of consolidation |
|---|
There were no changes since December 31, 2019 in the accounting practices adopted for consolidation of the Company’s direct and indirect interests in its subsidiaries for the purposes of these unaudited interim condensed consolidated financial statements, except for the following items:
| % of Group’s interest (i) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Entity name | Country of incorporation | Principal activities | September 30,2020 | December<br><br> <br>31, 2019 | ||||
| Indirectly controlled | ||||||||
| XP Allocation Asset Management Ltda. (ii) | Brazil | Asset management | 99.97 | % | - | |||
| Track Índices Consultoria Ltda. (ii) | Brazil | Index Provider | 100.00 | % | - | |||
| XP Eventos Ltda. (ii) | Brazil | Media and Events | 99.00 | % | - | |||
| Carteira Online Controle de Investimentos Ltda.-ME (iii) | Brazil | Investment consolidation platform | 99.99 | % | - | |||
| Antecipa S.A. (iii) | Brazil | Receivables Financing Market | 100.00 | % | - |
9
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||||
|---|---|---|---|---|---|---|
| Consolidated investments funds | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| NIMROD Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (ii) | Brazil | Investment fund | 100.00 | % | - | |
| XP High Yield Fund SP (ii) | Cayman | Investment fund | 100.00 | % | - | |
| XP International Fund SPC (ii) | Cayman | Investment fund | 100.00 | % | - | |
| Spatha Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (iv) | Brazil | Investment fund | - | 100.00 | % | |
| Balista Debentures Incentivadas Fundo de Investimento Multimercado Crédito Privado (iv) | Brazil | Investment fund | - | 100.00 | % | |
| (i) | The<br> percentage of participation represents the Group’s interest in total capital and<br> voting capital of its subsidiaries. | |||||
| --- | --- | |||||
| (ii) | New<br> subsidiaries and investment funds commenced operations in the period. | |||||
| --- | --- | |||||
| (iii) | New<br> subsidiaries acquired in the period. | |||||
| --- | --- | |||||
| (iv) | Investiments<br> funds closed during the period. | |||||
| --- | --- | |||||
| e) | Interests in associates and joint ventures | |||||
| --- | --- | |||||
| i. | Associates | |||||
| --- | --- |
Associates are companies in which the investor has a significant influence but does not hold control. Investments in these companies are initially recognized at cost of acquisition and subsequently accounted for using the equity method. Investments in associates and joint ventures include the goodwill identified upon acquisition, net of any cumulative impairment loss.
| ii. | Joint ventures |
|---|
The Group has joint venture whereby the parties that have joint control of the arrangement have rights to the net assets.
| iii. | Equity method |
|---|
Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint ventures are recognised as a reduction in the carrying amount of the investment.
Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity-accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group.
If its interest in the associates and joint ventures decreases, but the Group retains significant influence or joint control, only the proportional amount of the previously recognized amounts in Other comprehensive income is reclassified in Income, when appropriate.
10
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| f) | Business acquisitions |
| --- | --- |
The acquisitions of Fliper and Antecipa were recently completed and the allocation of the purchase price to acquired assets, including goodwill, and assumed liabilities is still preliminary pending receipt of the final fair value valuations of the acquired assets and assumed liabilities as of the closing date of the transaction. For the concluded acquisitions, the total consideration paid is R$83,925, being: i) R$55,741 paid in cash, ii) R$14,000 payable in three consecutives annual installments from 2020 to 2022 adjusted by the Interbank Certificates of Deposit (“CDI”) rate and iii) R$14,183 as a fair value of the contingent consideration.
These acquisitions are not considered material for XP Inc. interim financial statements.The preliminary purchase prices were mostly allocated to goodwill, representing the value of expected synergies arising from the acquisition.
CarteiraOnline Controle de Investimentos Ltda.-ME (“Fliper”)
On June 5, 2020, the Group entered into an agreement, to acquire 100% of total share capital Fliper, an automated investment consolidation platform that offers its users connectivity and tools to perform intuitive and intelligent financial self-management. The transaction allows XP Inc. to offer its customers additional resources to manage their investments, as the open banking trend continues to accelerate in Brazil. On July 13, 2020, the acquisition was concluded, through approval of Central Bank (BACEN).
AntecipaS.A. (“Antecipa”)
On June 29, 2020, the Group entered into an agreement, through its for the acquisition of 100% of total share capital of Antecipa , a digital platform for the financing of receivables.Antecipa's central objective is to offer an efficient alternative for companies to optimize cash flow management. For the Group, the acquisition represents an opportunity to further expand its product range and reinforce the company’s presence in the Small to Medium Enterprise (SME) and corporate segments in Brazil, similar to XP’s transformational initiatives across the Retail, High-Income and Private Market channels. On September 1, 2020, acquisition was consummated, through approval of Central Bank (BACEN).
DM10 Corretorade Seguros e Assessoria Ltda. (“DM10”)
On June 9, 2020, the Group entered into an agreement to acquire of 100% of total share capital of DM10, a marketplace that connects hundreds of independent distributors with Life Insurance and Pension Plan products, adding value through technology and education. With the transaction, the Group enhances its distribution network in the insurance division. This transaction is expected to close in the fourth quarter of 2020.
| g) | Segment reporting |
|---|
In reviewing the operational performance of the Group and allocating resources, the chief operating decision maker of the Group (“CODM”), who is the Group’s Chief Executive Officer (“CEO”) and the Board of Directors (“BoD”), represented by statutory directors holders of ordinary shares of the immediate parent of the Company, reviews selected items of the statement of income and of comprehensive income.
The CODM considers the whole Group as a single operating and reportable segment, monitoring operations, making decisions on fund allocation and evaluating performance based on a single operating segment. The CODM reviews relevant financial data on a combined basis for all subsidiaries and joint ventures.
11
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
Disaggregated information is only reviewed at the revenue level (Note 22), with no corresponding detail at any margin or profitability levels.
The Group’s revenue, results and assets for this one reportable segment can be determined by reference to the unaudited interim condensed consolidated statements of income and of comprehensive income and unaudited interim condensed consolidated balance sheet.
See Note 22 (c) for a breakdown of total revenue and income and selected assets by geographic location
| h) | Impacts related COVID-19 in the current period |
|---|
Starting from January 2020, it was reported that a novel strain of coronavirus, later named COVID-19, spread worldwide. The current pandemic has negatively impacted the global, national and regional economies and disrupted supply chains and otherwise reduce international trade and business activity. The Group has reviewed its exposure to economic-related and market volatility, which could negatively impact the value of a certain class of financial instruments however has not identified relevant impact to the financial performance or position of the group as of September, 2020. The company has sufficient headroom to enable it to comply with its covenants on its existing borrowings and sufficient working capital and undrawn financing facilities to service its operating activities and ongoing investments.
Although the Group have not identified relevant impacts to its financial performance as at September 30, 2020, the Group is monitoring COVID-19 effects on its business, which are still uncertain and will depend on the severity of the coronavirus and the actions to contain or treat its impact, among others.
As a consequence of this pandemic, most of the Group’s employees is working from home. Based on thorough assessments about the well-being and performance of our workforce, management announced on September 11, 2020, the permanent and company-wide adoption of the home-office model.
| i) | Estimates |
|---|
The preparation of unaudited interim condensed consolidated financial statements of the Group requires management to make judgments and estimates and to adopt assumptions that affect the amounts presented referring to revenues, expenses, assets and liabilities at the reporting date. Actual results may differ from these estimates.
In preparing these unaudited interim condensed consolidated financial statements, the significant judgements and estimates made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that are set the consolidated financial statements for the year ended December 31, 2019.
| 3. | Securities purchased (sold) under resale (repurchase) agreements | |||
|---|---|---|---|---|
| a) | Securities purchased under agreements to resell | |||
| --- | --- | |||
| September30, 2020 | December 31, 2019 | |||
| --- | --- | --- | --- | --- |
| Available portfolio | 1,883,825 | 971,991 | ||
| National Treasury Notes (NTNs) | 1,639,174 | 771,099 | ||
| Financial Treasury Bills (LFTs) | - | 195,980 | ||
| National Treasury Bills (LTNs) | 244,651 | 4,912 |
12
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||
|---|---|---|
| Collateral held | 16,359,863 | 8,518,099 |
| --- | --- | --- |
| National Treasury Bills (LTNs) | 397,275 | 1,764,410 |
| National Treasury Notes (NTNs) | 15,962,588 | 6,753,689 |
| Total | 18,243,688 | 9,490,090 |
Investments in purchase and sale commitments backed by sovereign debt securities refer to transactions involving the purchase of sovereign debt securities with a commitment to sale originated in the subsidiary XP CCTVM and in exclusive funds and were carried out at an average fixed rate of 1.92% p.a. (December 31, 2019 – 4.63% p.a.).
As of September 30, 2020 no amounts (December 31, 2019 - R$ 654,057) from the total amount of available portfolio is being presented as cash equivalents in the statements of cash flows.
| b) | Securities sold under repurchase agreements | |||
|---|---|---|---|---|
| September<br><br> <br>30, 2020 | December<br><br> <br>31,2019 | |||
| --- | --- | --- | --- | --- |
| National Treasury Bills (LTNs) | 12,682,922 | 5,653,994 | ||
| National Treasury Notes (NTNs) | 22,571,006 | 8,533,113 | ||
| Financial Treasury Bills (LFTs) | - | 1,451,300 | ||
| Total | 35,253,928 | 15,638,407 |
As of September 30, 2020, securities sold under repurchase agreements were agreed with average interest rates of 1.89% p.a. (December 31, 2019 – 4.48% p.a.), with assets pledged as collateral.
| 4. | Securities | |||||||
|---|---|---|---|---|---|---|---|---|
| a) | Securities classified at fair value through profit and loss and at fair value through other comprehensive income | |||||||
| --- | --- | |||||||
| September 30, 2020 | December31, 2019 | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Gross carrying amount | Fair<br> <br>value | Gross carrying amount | Fair<br> <br>Value | |||||
| Financial assets | ||||||||
| At fair value through profit and loss | 38,569,036 | 38,701,519 | 22,332,936 | 22,443,392 | ||||
| Agribusiness receivables certificates | 179,155 | 177,095 | 598,085 | 589,525 | ||||
| Bank deposit certificates (i) | 368,845 | 370,385 | 244,071 | 246,827 | ||||
| Brazilian government bonds | 25,239,874 | 25,280,046 | 15,404,300 | 15,494,046 | ||||
| Certificate of real estate receivable | 126,791 | 124,056 | 75,922 | 75,123 | ||||
| Debentures | 1,034,742 | 1,018,893 | 885,344 | 885,068 | ||||
| Financial credit bills | 82,439 | 82,683 | 98,068 | 106,759 | ||||
| Investment funds (ii) | 7,656,488 | 7,656,266 | 3,047,198 | 3,047,198 | ||||
| United States government bonds | 666,870 | 702,869 | - | - | ||||
| Real estate credit bill | 1,632 | 1,651 | 1,282 | 1,300 | ||||
| Stocks issued by public-held company | 2,546,996 | 2,546,996 | 1,562,965 | 1,562,965 | ||||
| Structured operations certificate | 410,022 | 470,652 | 237,112 | 256,381 | ||||
| Others (iii) | 255,182 | 269,927 | 178,589 | 178,200 | ||||
| At fair value through other comprehensive income | 9,637,582 | 9,588,773 | 2,608,325 | 2,616,118 | ||||
| National treasury bill | 9,637,582 | 9,588,773 | 2,608,325 | 2,616,118 |
13
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||||||
|---|---|---|---|---|---|---|---|---|
| (i) | Bank<br> deposit certificates include R$ 105,204 (December 31, 2019 – R$123,817) is being<br> presented as cash equivalents in the statements of cash flows. | |||||||
| --- | --- | |||||||
| (ii) | Investments<br> funds include R$ 7,230,918 (December 31, 2019 – R$ 3,759,090) amounts related to<br> Specially Constituted Investment Fund (“FIE”) as presented in Note 17. | |||||||
| --- | --- | |||||||
| (iii) | Mainly<br> related to bonds issued and traded overseas. | |||||||
| --- | --- | |||||||
| b) | Securities evaluated at amortized cost | |||||||
| --- | --- | |||||||
| September 30, 2020 | December 31, 2019 | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Gross carrying amount | Book<br> <br>Value | Gross carrying amount | Book<br> <br>Value | |||||
| Financial assets | ||||||||
| At amortized cost | 1,366,038 | 1,366,038 | 2,266,971 | 2,266,971 | ||||
| Bonds | 1,366,038 | 1,366,038 | 2,266,971 | 2,266,971 | ||||
| c) | Securities on the financial liabilities classified at fair value through profit or loss | |||||||
| --- | --- | |||||||
| September 30, 2020 | December 31, 2019 | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Gross carrying amount | Book<br> <br>value | Gross carrying amount | Book<br> <br>Value | |||||
| Financial liabilities | ||||||||
| At fair value through profit or loss | 1,111,770 | 1,111,770 | 2,021,707 | 2,021,707 | ||||
| Securities | 1,111,770 | 1,111,770 | 2,021,707 | 2,021,707 | ||||
| d) | Securities classified by maturity | |||||||
| --- | --- | |||||||
| Assets | Liabilities | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| September 30, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | |||||
| Financial assets | ||||||||
| At fair value through P&L and at OCI | ||||||||
| Current | 22,696,712 | 9,804,819 | 1,111,770 | 2,021,707 | ||||
| Non-stated maturity | 10,466,704 | 4,999,333 | 1,111,770 | 2,021,707 | ||||
| Up to 3 months | 644,886 | 257,544 | - | - | ||||
| From 3 to 12 months | 11,585,122 | 4,547,942 | - | - | ||||
| Non-current | 25,593,580 | 15,254,691 | - | - | ||||
| After one year | 25,593,580 | 15,254,691 | - | - | ||||
| Evaluated at amortized cost | ||||||||
| Current | 1,366,038 | 2,266,971 | - | - | ||||
| Up to 3 months | 194,334 | 807,218 | - | - | ||||
| From 3 to 12 months | 1,171,704 | 1,459,753 | - | - | ||||
| Total | 49,656,330 | 27,326,481 | 1,111,770 | 2,021,707 |
14
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| 5. | Derivative financial instruments |
| --- | --- |
The Group trades derivative financial instruments with various counterparties to manage its overall exposures (interest rate, foreign currency and fair value of financial instruments) and to assist its customers in managing their own exposures.
Below is the composition of the derivative financial instruments portfolio (assets and liabilities) by type of instrument, stated fair value and by maturity:
| September 30, 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Notional | FairValue | % | Upto 3<br> <br>months | From3 to 12 months | Above12 months | |||||||
| Assets | ||||||||||||
| Options | 602,159,341 | 6,602,467 | 50 | 1,649,905 | 229,791 | 4,722,771 | ||||||
| Swap contracts | 16,819,387 | 637,693 | 5 | 38,784 | 156,750 | 442,159 | ||||||
| Forward contracts | 14,566,817 | 5,901,156 | 45 | 5,651,129 | 161,202 | 88,825 | ||||||
| Future contracts | 22,282,253 | 7,451 | - | 7,451 | - | - | ||||||
| Total | 655,827,798 | 13,148,767 | 100 | 7,347,269 | 547,743 | 5,253,755 | ||||||
| Liabilities | ||||||||||||
| Options | 574,319,779 | 6,524,516 | 52 | 1,372,572 | 153,207 | 4,998,737 | ||||||
| Swap contracts | 5,517,378 | 693,187 | 5 | 75,816 | 170,932 | 446,439 | ||||||
| Forward contracts | 10,248,842 | 5,492,148 | 43 | 5,458,963 | 13,058 | 20,127 | ||||||
| Future contracts | 20,343,451 | 19,745 | - | 19,745 | - | - | ||||||
| Total | 610,429,450 | 12,729,596 | 100 | 6,927,096 | 337,197 | 5,465,303 | ||||||
| December 31, 2019 | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Notional | FairValue | % | Upto 3 months | From3 to 12 months | Above12 months | |||||||
| Assets | ||||||||||||
| Options | 498,484,022 | 2,742,035 | 67 | 1,837,073 | 577,177 | 327,785 | ||||||
| Swap contracts | 3,955,473 | 1,133,768 | 27 | 10,418 | 700,668 | 422,682 | ||||||
| Forward contracts | 1,857,542 | 187,392 | 5 | 159,163 | 28,175 | 54 | ||||||
| Future contracts | 15,920,584 | 21,809 | 1 | 21,809 | - | - | ||||||
| Total | 520,217,621 | 4,085,004 | 100 | 2,028,463 | 1,306,020 | 750,521 | ||||||
| Liabilities | ||||||||||||
| Options | 488,482,756 | 2,741,592 | 85 | 1,745,532 | 637,393 | 358,667 | ||||||
| Swap contracts | 3,420,857 | 485,164 | 14 | 15,838 | 40,687 | 428,639 | ||||||
| Forward contracts | 164,209 | 2,480 | 1 | 1,693 | 325 | 462 | ||||||
| Total | 492,067,822 | 3,229,236 | 100 | 1,763,063 | 678,405 | 787,768 |
15
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| 6. | Hedge accounting |
| --- | --- |
The Group has two types of hedge relationships: hedge of net investment in foreign operations and fair value hedge.
For hedge accounting purposes, the risk factors measured by the Group are:
| · | Interest<br> Rate: Risk of volatility in transactions subject to interest rate variations; |
|---|---|
| · | Currency:<br> Risk of volatility in transactions subject to foreign exchange variation. |
| --- | --- |
The structure of risk limits is extended to the risk factor level, where specific limits aim at improving the monitoring and understanding processes, as well as avoiding concentration of these risks.
The structures designed for interest rate and exchange rate categories take into account total risk when there are compatible hedging instruments. In certain cases, management may decide to hedge a risk for the risk factor term and limit of the hedging instrument.
| a) | Hedge of net investment in foreign operations |
|---|
In the nine month period ended September 30, 2020 and in the year ended December 31, 2019, the objective for the Group was to hedge the risk generated by the US$ variation from investments in our subsidiaries in the United States, XP Holdings International and XP Advisors Inc.
The Group has entered into forward contracts to protect against changes in future cash flows and exchange rate variation of net investments in foreign operations known as Non Deliverable Forward (“NDF”) contracts.
The Group undertakes risk management through the economic relationship between hedge instruments and hedged item, in which it is expected that these instruments will move in opposite directions, in the same proportions, with the aim of neutralizing the risk factors.
| Hedged item | Hedge instrument | |||||||
|---|---|---|---|---|---|---|---|---|
| Book Value | ||||||||
| Strategies | **** | Assets | Liabilities | Variation in value recognized in Other comprehensive income | **** | Nominal value | Variation in the amounts used<br><br> <br>to calculate hedge ineffectiveness | **** |
| September 30, 2020 | ||||||||
| Foreign exchange risk | ||||||||
| Hedge of net investment in foreign operations | 224,539 | - | 70,882 | 395,977 | (80,370 | ) | ||
| Total | 224,539 | - | 70,882 | 395,977 | (80,370 | ) | ||
| December 31, 2019 | ||||||||
| Foreign exchange risk | ||||||||
| Hedge of net investment in foreign operations | 186,412 | - | 5,946 | 248,896 | (7,133 | ) | ||
| Total | 186,412 | - | 5,946 | 248,896 | (7,133 | ) |
16
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
For the period ended of September 30, 2020, there was no ineffectiveness in relation to the foreign net investment hedge.
| b) | Fair value hedge |
|---|
The fair value hedging strategy of the Group consists of hedging the exposure of Fixed-Income securities carried out through structured operations certificates.
The market risk hedge strategy involves avoiding temporary fluctuations in earnings arising from changes in the interest rate market in Reais. Once this risk is offset, the Group seeks to index the portfolio to the CDI, through the use of derivatives (DI1 Futuro).
The hedge is contracted in order to neutralize the total exposure to the market risk of the fixed-income funding portfolio, excluding the portion of the fixed-income compensation represented by the credit spread of Banco XP S.A, seeking to obtain the closest match deadlines and volumes as possible.
The effects of hedge accounting on the financial position and performance of the Group are presented below:
| Hedged item | Hedge instrument | |||||||
|---|---|---|---|---|---|---|---|---|
| Book Value | ||||||||
| Strategies | **** | Assets | Liabilities | Variation in value recognized in income | **** | Nominal value | Variation in the amounts used to calculate hedge ineffectiveness | **** |
| September 30, 2020 | ||||||||
| Interest rate risk | ||||||||
| Hedge of fixed-income securities | - | 1,142,457 | 51,787 | 1,159,250 | (51,361 | ) | ||
| Total | - | 1,142,457 | 51,787 | 1,159,250 | (51,361 | ) |
For the period ended of September 30, 2020, there was no ineffectiveness in relation to the fair value hedge.
| September 30, 2020 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Book value (i) | ||||||||
| Hedge Instruments | Notional amount | **** | Assets | Liabilities | Variation in fair value used to calculate hedge ineffectiveness | **** | **** | Hedge ineffectiveness recognized in income |
| Interest rate risk | ||||||||
| Futures | 1,159,250 | - | 1,142,457 | (51,361 | ) | 427 | ||
| (i) | Amounts<br> recorded under Derivatives. | |||||||
| --- | --- |
The table below presents, for each strategy, the notional amount and the fair value adjustments of hedge instruments and the book value of the hedged item:
| September 30, 2020 | December 31, 2019 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Hedge instruments | Hedge item | Hedge instruments | Hedge item | ||||||||||
| Strategies | **** | Notional amount | Fair value adjustments | **** | **** | Book value | **** | **** | Notional amount | Fair value adjustments | **** | Book value | **** |
| Hedge of Fair Value | 1,159,250 | 51,787 | (51,361 | ) | - | - | - | ||||||
| Hedge of net investment in foreign operations | 395,977 | (80,370 | ) | (80,370 | ) | 248,896 | 5,946 | (7,133 | ) | ||||
| Total | 1,555,227 | (28,583 | ) | (131,731 | ) | 248,896 | 5,946 | (7,133 | ) |
17
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
The table below shows the breakdown by maturity of the hedging strategies:
| September 30, 2020 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 0-1 year | 1-2 years | 2-3 years | 3-4 years | 4-5 years | 5-10 years | Total | |||||||||||||||
| Hedge of Fair Value | (2 | ) | (14 | ) | (563 | ) | - | (30,698 | ) | (20,084 | ) | (51,361 | ) | ||||||||
| Hedge of net investment in foreign operations | (8,732 | ) | - | - | (30,284 | ) | (41,354 | ) | - | (80,370 | ) | ||||||||||
| Total | (8,734 | ) | (14 | ) | (563 | ) | (30,284 | ) | (72,052 | ) | (20,084 | ) | (131,731 | ) | |||||||
| December 31, 2019 | |||||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||||||
| 0-1 year | 1-2 years | 2-3 years | 3-4 years | 4-5 years | 5-10 years | Total | |||||||||||||||
| Hedge of Fair Value | - | - | - | - | - | - | - | ||||||||||||||
| Hedge of net investment in foreign operations | (198 | ) | - | - | (2,932 | ) | (4,003 | ) | - | (7,133 | ) | ||||||||||
| Total | (198 | ) | - | - | (2,932 | ) | (4,003 | ) | - | (7,133 | ) | ||||||||||
| 7. | Loan operations | ||||||||||||||||||||
| --- | --- |
Following are the breakdown of the carrying amount of loan operations by class, sector of debtor, maturity and concentration:
| Loans by type | September<br><br> <br>30, 2020 | December<br><br> <br>31, 2019 | ||||
|---|---|---|---|---|---|---|
| Retail | ||||||
| Pledged asset loan | 947,449 | 388 | ||||
| Credit card | 8,061 | - | ||||
| Corporate | ||||||
| Pledged asset loan | 316,412 | - | ||||
| Non-pledged loan | 104,368 | - | ||||
| Total Loans operations | 1,376,290 | 388 | ||||
| Expected Credit Loss | (7,056 | ) | (2 | ) | ||
| Total loans operations, net of Expected Loss | 1,369,234 | 386 | ||||
| By maturity | September 30, 2020 | December 31,<br> <br>2019 | ||||
| --- | --- | --- | --- | --- | ||
| Due in 3 months or less | 68,783 | 388 | ||||
| Due after 3 months through 12 months | 287,720 | - | ||||
| Due after 12 months | 1,019,786 | - | ||||
| Total Loans operations | 1,376,289 | 388 |
XP Inc offers several loan products through Banco XP to its customers. The loan products offered to its customers are: (i) "Limite Express": loans fully collaterized by customers’ investments on XP platform and (ii)
18
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
"COE Alavancado": credit product strictly related to investments in structured notes, in which the borrower is able to operate leveraged, retaining the structured note itself as guarantee for the loan.
XP Inc uses client’s investments as collaterals to reduce potential losses and protect against credit risk exposure by managing these collaterals so that they are always sufficient, legally enforceable (effective) and viable, XP monitors the value of the collaterals. The Credit Risk Management provides subsidies to define strategies as risk appetite, to establish limits, including exposure analysis and trends as well as the effectiveness of the credit policy.
As of September 30, 2020, these two products together represented 94% (December 31, 2019: nil) of the Company's credit portfolio. The expected credit loss amounting to R$ 7,056 corresponds to approximately 0.5% of the total credit portfolio as of September 30, 2020 (December 31, 2019: nil).
The loans operations have an high credit quality and the Group often uses risk mitigation measures, primarily through client’s investments as collaterals, which explains the low provision ratio. As of September 30, 2020, the loans and expected credit loss are classified as stage 1 in accordance with IFRS 9.
This classification is periodically reassessed as provided for in XP Inc.'s credit risk policy.
| 8. | Prepaid expenses | |||
|---|---|---|---|---|
| September 30, 2020 | December 31, 2019 | |||
| --- | --- | --- | --- | --- |
| Commissions and premiums paid in advance (a) | 1,035,869 | 49,233 | ||
| Marketing expenses | 8,110 | 9,678 | ||
| Services paid in advance | 1,124 | 2,043 | ||
| Other expenses paid in advance | 45,895 | 28,730 | ||
| Total | 1,090,998 | 89,684 | ||
| Current | 461,304 | 56,605 | ||
| Non-current | 629,694 | 33,079 |
(a) Mostly comprised by long term investment programs implemented by XP CCTVM through its network of IFAs. These commissions and premiums paid are recognized at the signing date of each contract and are amortized in the statement of income of the Company, linearly, according to the investment term period.
| 9. | Securities trading and intermediation (receivable and payable) |
|---|
Represented by operations at B3 on behalf of and on account of third parties, with liquidation operating cycle between D+1 and D+3.
| September30, 2020 | December 31, 2019 | |||
|---|---|---|---|---|
| Cash and settlement records | 378,727 | 13,823 | ||
| Debtors pending settlement | 967,599 | 477,646 | ||
| Other | 137,181 | 13,514 | ||
| Total Assets | 1,483,507 | 504,983 | ||
| Cash and settlement records | 378,030 | 474,759 | ||
| Creditors pending settlement | 14,781,681 | 8,639,787 | ||
| Total Liabilities | 15,159,711 | 9,114,546 |
19
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| 10. | Investments in associates and joint ventures |
| --- | --- |
Set out below are the associates and joint venture of the Group as of September 30, 2020. The entities listed below have share capital consisting solely of ordinary shares, which are held directly by the Group. The country of incorporation or registration is also their principal place of business, and the proportion of ownership interest is the same as the proportion of voting rights held.
| Name of entity | % of ownership interest | Nature of relationship | Measurement method | Equity | Carrying amount | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Du Agro Holdings S.A. | 49 | % | Joint Venture (1) | Equity method | 479 | 235 | |||||
| VPL Gestão Patrimonial e Participações S.A. | 49 | % | Associate (2) | Equity method | 150,000 | 74,851 | |||||
| O Primo Rico Mídia, Educacional e Participações Ltda. | 20 | % | Associate (3) | Equity method | (520 | ) | (105 | ) | |||
| Total equity-accounted investments | 149,959 | 74,981 |
(1) On June 23, 2020, the Company acquired a 49% interest in DuAgro Holdings S.A. (“DuAgro”), a joint venture involved in the agribusiness. DuAgro is an integrated platform that utilizes technology to finance the purchase of agricultural inputs. The focus is on small- and medium-sized producers.
(2) On September 8, 2020, the Company entered into an agreement to hold a 49.9% minority stake of the total share capital of VPL Gestão Patrimonial e Participações S.A..With this transaction XP Inc. is complementing the existing offering to ultra-high-net-worth individual in the Wealth Management segment.
(3) O Primo Rico is a company focused on digital content services, including developing and selling financial education courses and online events.
| Entity | December31,<br> <br>2019 | Acquisition/Equity | Equity in earnings | Other comprehensive income | Goodwill (i) | September 30, 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| VPL Gestão Patrimonial e Participações S.A. | - | 74,851 | - | - | 621,248 | 696,099 | |||||||||
| Du Agro Holdings S.A. | - | 572 | (337 | ) | - | 408 | 643 | ||||||||
| O Primo Rico (ii) | - | 242 | (227 | ) | (120 | ) | - | (105 | ) | ||||||
| Total | - | 75,665 | (564 | ) | (120 | ) | 621,656 | 696,637 |
(i) Related to the acquisitions of associates and joint ventures. As of September 30, 2020 the goodwill recognized is preliminary and includes the value of expected synergies arising from the investments.
(ii) As of September 30, 2020 the entity presented a negative net equity. The amounts related to the negative net equity are recognized in Other liabilities.
| 11. | Property, equipment, goodwill, intangible assets and lease | |||||
|---|---|---|---|---|---|---|
| a) | Changes in the period | |||||
| --- | --- | |||||
| Property and | Goodwill and intangible | |||||
| --- | --- | --- | --- | --- | --- | --- |
| equipment | assets | |||||
| As of January 1, 2019 | 99,127 | 504,915 | ||||
| Additions | 43,749 | 39,974 | ||||
| Write-offs | (7,550 | ) | (56 | ) | ||
| Depreciation / Amortization in the period | (15,174 | ) | (23,992 | ) | ||
| As of September 30, 2019 | 120,152 | 520,841 | ||||
| Cost | 165,314 | 604,298 | ||||
| Accumulated depreciation / amortization | (45,162 | ) | (83,457 | ) | ||
| As of January 1, 2020 | 142,464 | 553,452 | ||||
| Additions | 40,011 | 79,127 |
20
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||
|---|---|---|---|---|
| Business combination (Note 2(f)) | - | 83,925 | ||
| --- | --- | --- | --- | --- |
| Write-offs (i) | (61,967 | ) | (185 | ) |
| Transfers | (6,143 | ) | 6,143 | |
| Depreciation / Amortization in the period | (19,609 | ) | (52,928 | ) |
| As of September 30, 2020 | 94,756 | 669,534 | ||
| Cost | 196,081 | 767,878 | ||
| Accumulated depreciation / amortization | (101,325 | ) | (98,344 | ) |
| (i) | As<br> previously mentioned on Note 2(h), as a result of the COVID-19 pandemic, the Group decided<br> to implement a permanent remote work model, which has resulted in initiatives to reduce<br> some of its offices in the city of São Paulo. During the third quarter of 2020,<br> the Company concluded its analysis and wrote-off the corresponding properties and equipments<br> of these offices. Some of these amounts was previously classified as impaired considering<br> that the Conmpany was in the early stages of the assessment. | |||
| --- | --- | |||
| b) | Impairment test for goodwill | |||
| --- | --- |
Given the interdependency of cash flows and the merger of business practices, all Group’s entities are considered a single cash generating units (“CGU”) and, therefore, goodwill impairment test is performed at the single operating level. Therefore, the carrying amount considered for the impairment test represents the Company’s equity.
The Group performs its annual impairment test in December and when circumstances indicates that the carrying value may be impaired. The Group’s impairment tests are based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the cash generating unit were disclosed in the annual consolidated financial statements for the year ended December 31, 2019. As of September 30, 2020, there were no indicators of a potential impairment of goodwill.
| c) | Leases |
|---|
Set out below, are the carrying amounts of the Group’s right-of-use assets and lease liabilities and the movements during the period.
| Right-of-use assets | Lease liabilities | |||||
|---|---|---|---|---|---|---|
| As of January 1, 2019 | 133,870 | 148,494 | ||||
| Additions (i) | 104,487 | 105,694 | ||||
| Depreciation expense | (23,235 | ) | - | |||
| Interest expense | - | 12,447 | ||||
| Effects of exchange rate | 6,259 | 6,460 | ||||
| Payment of lease liabilities | - | (26,194 | ) | |||
| As of September 30, 2019 | 221,381 | 246,901 | ||||
| Current | - | 28,970 | ||||
| Non-current | 221,381 | 217,931 | ||||
| As of January 1, 2020 | 227,478 | 255,406 | ||||
| Additions (i) | 45,377 | 45,129 | ||||
| Depreciation expense | (33,363 | ) | - | |||
| Write-offs (ii) | (78,321 | ) | (78,322 | ) | ||
| Interest expense | - | 15,648 | ||||
| Revaluation (iii) | (9,115 | ) | (10,050 | ) | ||
| Impairment, net | 264 | - | ||||
| Effects of exchange rate | 29,694 | 32,675 | ||||
| Payment of lease liabilities | - | (45,903 | ) |
21
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||
|---|---|---|
| As of September 30, 2020 | 182,014 | 214,583 |
| --- | --- | --- |
| Current | - | 31,566 |
| Non-current | 182,014 | 183,017 |
| (i) | Additions<br> to right-of-use assets in the period include prepayments to lessors and accrued liabilities. | |
| --- | --- | |
| (ii) | As<br> previously mentioned on Note 2(h), as a result of the COVID-19 pandemic, the Group decided<br> to implement a permanent remote work model, which has resulted in initiatives to reduce<br> some of its offices in the city of São Paulo. As consequence the Group has recorded<br> the corresponding write-off of the right-of-use and lease liabilities related to the<br> early termination of the leasing contracts. | |
| --- | --- | |
| (iii) | Revaluation<br> of discount rate that represent the current market assessment. | |
| --- | --- |
The Group recognized rent expense from short-term leases and low-value assets of R$ 1,523 for the period ended September 30, 2020. The total rent expense of R$ 7,853, include other expenses related to leased offices such as condominium.
Depreciation and amortization expense have been charged in the following line items of consolidated statement of income:
| Nine months period ended September 30, | Three months period ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||||||||
| Property and equipment | ||||||||||||||
| Depreciation in the period | 19,609 | 15,174 | 6,616 | 5,298 | ||||||||||
| Leases | ||||||||||||||
| Depreciation in the period | 33,363 | 23,235 | 10,313 | 8,796 | ||||||||||
| Intangible assets | ||||||||||||||
| Amortization in the period | 52,928 | 23,992 | 19,451 | 9,361 | ||||||||||
| 105,900 | 62,401 | 36,380 | 23,455 | |||||||||||
| 12. | Deposits | |||||||||||||
| --- | --- | |||||||||||||
| September<br><br> <br>30, 2020 | December<br><br> <br>31, 2019 | |||||||||||||
| --- | --- | --- | --- | --- | ||||||||||
| Demands deposits | 40,310 | 70,190 | ||||||||||||
| Time deposits | 1,586,399 | 4 | ||||||||||||
| Total | 1,626,709 | 70,194 | ||||||||||||
| Current | 997,285 | 70,194 | ||||||||||||
| Non-Current | 629,424 | - | ||||||||||||
| Maturity – As of September 30, 2020 | ||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Class | Within 30 days | From 31 to 60 days | From 61 to 90 days | From 91 to 180 days | From 181 to 360 days | After 360 days | Total | |||||||
| Demand deposits | 40,310 | - | - | - | - | - | 40,310 | |||||||
| Time deposits | - | - | 141,895 | 34,544 | 780,536 | 629,424 | 1,586,399 | |||||||
| Total | 40,310 | - | 141,895 | 34,544 | 780,536 | 629,424 | 1,626,709 |
22
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Maturity – As of December 31, 2019 | ||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Class | Within 30 days | From 31 to 60 days | From 61 to 90 days | From 91 to 180 days | From 180 to 366 days | After 360 days | Total | |||||||
| Demand deposits | 70,190 | - | - | - | - | - | 70,190 | |||||||
| Time deposits | 4 | - | - | - | - | - | 4 | |||||||
| Total | 70,194 | - | - | - | - | - | 70,194 | |||||||
| 13. | Structured operations certificates | |||||||||||||
| --- | --- | |||||||||||||
| September<br><br> <br>30, 2020 | December<br><br> <br>31, 2019 | |||||||||||||
| --- | --- | --- | --- | --- | ||||||||||
| Maturity | ||||||||||||||
| From 91 to 180 days | 1,918 | - | ||||||||||||
| After 360 days | 1,140,539 | 19,474 | ||||||||||||
| Total | 1,142,457 | 19,474 | ||||||||||||
| Current | 1,918 | - | ||||||||||||
| Non-Current | 1,140,539 | 19,474 | ||||||||||||
| 14. | Borrowings and lease liabilities | |||||||||||||
| --- | --- | |||||||||||||
| Interest rate % | Maturity | September 30, 2020 | December 31, 2019 | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |||||||
| Bank borrowings – domestic (i) | 113% of CDI(*) | March 2021 | 21,292 | 52,668 | ||||||||||
| Related parties | 21,292 | 52,668 | ||||||||||||
| Financial institution (ii) | CDI (*)+ 0.774% | April 2023 | 276,106 | 329,410 | ||||||||||
| Third parties | 276,106 | 329,410 | ||||||||||||
| Total borrowings | 297,398 | 382,078 | ||||||||||||
| Lease liabilities | 214,583 | 255,406 | ||||||||||||
| Total borrowings and lease liabilities | 511,981 | 637,484 | ||||||||||||
| Current | 61,226 | 116,450 | ||||||||||||
| Non-current | 450,755 | 521,034 |
(*) Brazilian Interbank Offering Rate (CDI)
(i) Loan agreement with Itaú Unibanco with maturity on March 8, 2021, payable in 36 monthly installments.
(ii) Loan agreement entered into on March 28, 2018 with the International Finance Corporation (IFC). The principal amount is due on the maturity date and accrued interests payable at every six months.
All the obligations above contain financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 30 (b)).
23
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| 15. | Debentures |
| --- | --- |
On May 15, 2019 and September 28, 2018, the Company issued Debentures, non-convertible into shares, in the amount of R$ 800,000, with the objective of funding the Group’s working capital and treasury investments. As of September 30, 2020, the total balance is comprised of the following issuances:
| Issuance | QuantityIssued (units) | Annual<br> <br>rate | Issuancedate | Maturitydate | Unitvalue at issuance | Unit<br>value at period-end | ||
|---|---|---|---|---|---|---|---|---|
| 1 st | 400,000 | 108.0% CDI | 9/28/2018 | 9/28/2020 | R$ 1,000.00 | R1,108.56 | - | |
| 2 nd | 400,000 | 107.5% CDI | 5/15/2019 | 5/15/2022 | R$ 1,000.00 | R1,009.05 | 338,693 | |
| Total | 800,000 | 338,693 |
All values are in US Dollars.
| September 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|
| Principal | 400,000 | 800,000 | ||||
| Interest | 23,746 | 47,127 | ||||
| Payments | (20,336 | ) | (11,897 | ) | ||
| Repurchase (a) | (64,717 | ) | - | |||
| Total | 338,693 | 835,230 | ||||
| Current | - | 435,230 | ||||
| Non-current | 338,693 | 400,000 | ||||
| (a) | As<br> of September 30, 2020 the Group repurchased 65,611 units of the second series of non-convertible<br> debentures. | |||||
| --- | --- |
The principal amount and accrued interest payable related to the first issuance are due on the maturity date, while for the second issuance, 50% of the principal amount is due on May 15, 2021 and the remaining balance on the maturity date, and accrued interest payable every 12 months from the issuance date. There were no interest amounts paid in the period ended of September 30, 2020.
On September 28, 2020 the first series of non-convertible debentures was fully prepaid in the amount of R$ 432,793, which includes principal and interest.
Debentures are subject to financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 30(b)).
| 16. | Other financial liabilities | |||
|---|---|---|---|---|
| September 30, 2020 | December 31, 2019 | |||
| --- | --- | --- | --- | --- |
| Foreign exchange portfolio | 249,394 | 8,962 | ||
| Contingent consideration (i) | 462,000 | - | ||
| Financial bills (ii) | 16,311 | - | ||
| Credit cards operations (ii) | 8,294 | - | ||
| Others (iii) | 122,879 | - | ||
| Total | 858,878 | 8,962 | ||
| Current | 380,567 | 8,962 | ||
| Non-current | 478,311 | - |
24
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| (i) | Contractual<br> contingent considerations mostly associated to the investment acquisition of VPL, as<br> described in Note 10. The maturity of the total contingent consideration payment is up<br> to 6 years and the contractual maximum amount payable is R$653,222 (the minimum amount<br> is zero). |
| --- | --- |
| (ii) | Related<br> to operations of Banco XP S.A. |
| --- | --- |
| (iii) | Include<br> R$58,526 payable through our acquisitions (Note 2(f)) and investments in associates and<br> joint ventures. |
| --- | --- |
| 17. | Private pension liabilities |
| --- | --- |
As of September 30, 2020, active plans are principally accumulation of financial resources through products PGBL and VGBL structured in the form of variable contribution, for the purpose of granting participants with returns based on the accumulated capital in the form of monthly withdraws for a certain term or temporary monthly withdraws.
In this respect, such financial products represent investment contracts that have the legal form of private pension plans, but which do not transfer insurance risk to the Group. Therefore, contributions received from participants are accounted for as liabilities and balance consists of the balance of the participant in the linked Specially Constituted Investment Fund (“FIE”) at the reporting date (Note 4 (a)).
Changes in the period:
| Nine months period ended<br> <br>September 30, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| As of January 1 | 3,759,090 | 16,059 | ||||
| Contributions received | 984,816 | 211,396 | ||||
| Transfer with third party plans | 5,087,561 | 1,466,444 | ||||
| Redemptions paid | (162,218 | ) | (7,911 | ) | ||
| Gain (loss) from FIE | (19,927 | ) | 35,718 | |||
| As of September 30 | 9,649,322 | 1,721,706 | ||||
| 18. | Income tax | |||||
| --- | --- | |||||
| a) | Deferred income tax | |||||
| --- | --- |
Deferred tax assets (DTA) and deferred tax liabilities (DTL) are comprised of the main following components:
| Balance Sheet | ||||
|---|---|---|---|---|
| September 30, 2020 | December 31, 2019 | |||
| Tax losses carryforwards | 38,616 | 17,146 | ||
| Goodwill on business combinations (i) | 28,430 | 22,303 | ||
| Provisions for IFAs’ commissions | 72,222 | 68,041 | ||
| Revaluations of financial assets at fair value | (9,993 | ) | 25,259 | |
| Expected losses (ii) | 20,578 | 5,666 | ||
| Financial instruments taxed on redemption | (18 | ) | - | |
| Profit sharing plan | 79,727 | 141,136 | ||
| Net gain on hedge instruments | 32,927 | (36,384 | ) |
25
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Share based plan | 47,824 | 2,950 | ||||||||
| --- | --- | --- | --- | --- | ||||||
| Other provisions | 27,339 | 33,284 | ||||||||
| Total | 337,652 | 279,401 | ||||||||
| Deferred tax assets | 378,726 | 284,533 | ||||||||
| Deferred tax liabilities | (41,074 | ) | (5,132 | ) | ||||||
| Net change in the nine months period ended September 30, | Net change in the three months period ended September 30, | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 2020 | 2019 | 2020 | 2019 | |||||||
| Tax losses carryforwards | 21,470 | (41,725 | ) | 24,769 | (7,064 | ) | ||||
| Goodwill on business combinations (i) | 6,127 | (25,845 | ) | (5,861 | ) | (8,153 | ) | |||
| Provisions for IFAs’ commissions | 4,181 | 21,103 | 1,718 | 7,698 | ||||||
| Revaluations of financial assets at fair value | (35,252 | ) | (9,374 | ) | 3,513 | (1,178 | ) | |||
| Expected losses (ii) | 14,912 | 1,563 | 4,248 | 1,411 | ||||||
| Financial instruments taxed on redemption | (18 | ) | (11,637 | ) | (18 | ) | (18,980 | ) | ||
| Profit sharing plan | (61,409 | ) | 76,105 | (97,272 | ) | (38,295 | ) | |||
| Net gain (loss) on hedge instruments | 69,311 | (1,885 | ) | 5,805 | 3,675 | |||||
| Share based plan | 44,874 | - | 17,533 | - | ||||||
| Other provisions | (5,945 | ) | 5,142 | (17,750 | ) | 239 | ||||
| Total | 58,251 | 13,447 | (63,315 | ) | (60,647 | ) | ||||
| (i) | For<br> tax purposes, goodwill is amortized over 5 years on a straight-line basis when the entity<br> acquired is sold or merged into another entity. | |||||||||
| --- | --- | |||||||||
| (ii) | Include<br> expected credit loss on accounts receivable, loan operations and other financial assets. | |||||||||
| --- | --- |
The changes in the net deferred tax were recognized as follows:
| Nine months period ended<br> <br>September 30, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| As of January 1 | 279,401 | 140,400 | ||||
| Foreign exchange variations | 22,721 | 21,883 | ||||
| Charges to statement of income | (28,561 | ) | (8,564 | ) | ||
| Tax relating to components of other comprehensive income | 64,091 | 128 | ||||
| As of September 30 | 337,652 | 153,847 |
Unrecognized deferred taxes
Deferred tax assets are recognized for tax losses to the extent that the realization of the related tax benefit against future taxable profits is probable. The Group did not recognize deferred tax assets of R$ 20,610 (September 30, 2019 - R$ 18,731) mainly in respect of losses from subsidiaries overseas and that can be carried forward and used against future taxable income. A deferred tax asset was not recorded as taxable income is not expected.
| b) | Income tax expense reconciliation |
|---|
The tax on the Group's pre-tax profit differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities. The following is a reconciliation of income
26
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the period ended September 30:
| Nine months period | Three months period | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ended September 30, | ended September 30, | |||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||
| Income before taxes | 1,758,528 | 996,944 | 632,451 | 382,134 | ||||||||
| Combined tax rate in Brazil (i) | 34 | % | 34 | % | 34 | % | 34 | % | ||||
| Tax expense at the combined rate | 597,900 | 338,961 | 215,034 | 129,926 | ||||||||
| Income (loss) from entities not subject to taxation | (11,358 | ) | (8,228 | ) | (2,630 | ) | (3,659 | ) | ||||
| Effects from entities taxed at different rates | 36,792 | 16,208 | 17,630 | 7,170 | ||||||||
| Effects from entities taxed at different taxation regimes (ii) | (285,529 | ) | (24,816 | ) | (111,061 | ) | (9,138 | ) | ||||
| Intercompany transactions with different taxation | (46,775 | ) | (27,989 | ) | (19,645 | ) | (5,711 | ) | ||||
| Tax incentives | (2,491 | ) | (2,220 | ) | (4,521 | ) | (2,220 | ) | ||||
| Non deductible expenses (non-taxable income), net | (12,693 | ) | 8,687 | (3,434 | ) | 4,310 | ||||||
| Others | 3,581 | (2,957 | ) | (206 | ) | 658 | ||||||
| Total | 279,427 | 297,646 | 91,167 | 121,336 | ||||||||
| Effective tax rate | 15.89 | % | 29.86 | % | 14.41 | % | 31.75 | % | ||||
| Current | 250,866 | 306,210 | (6,732 | ) | 49,189 | |||||||
| Deferred | 28,561 | (8,564 | ) | 97,899 | 72,147 | |||||||
| Total expense | 279,427 | 297,646 | 91,167 | 121,336 | ||||||||
| (i) | Considering<br> that XP Inc. is domiciled in Cayman and there is no income tax in that jurisdiction,<br> the combined tax rate of 34% demonstrated above is the current rate applied to XP Investimentos<br> S.A. which is the holding company of all operating entities of XP Inc. in Brazil. | |||||||||||
| --- | --- | |||||||||||
| (ii) | Certain<br> eligible subsidiaries adopted the PPM tax regime and the effect of the presumed profit<br> of subsidiaries represents the difference between the taxation based on this method and<br> the amount that would be due based on the statutory rate applied to the taxable profit<br> of the subsidiaries. Additionally, some entities and investment funds adopt different<br> taxation regimes according to the applicable rules in their jurisdictions. | |||||||||||
| --- | --- |
Other comprehensive income
The tax (charge)/credit relating to components of other comprehensive income is as follows:
| Before tax | (Charge)<br> <br>/ Credit | After tax | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Foreign exchange variation of investees located abroad | 12,126 | - | 12,126 | ||||||
| Gains (losses) on net investment hedge | (17,591 | ) | 5,762 | (11,829 | ) | ||||
| Changes in the fair value of financial assets at fair value | 1,494 | (508 | ) | 986 | |||||
| As of September 30, 2019 | (3,971 | ) | 5,254 | 1,283 | |||||
| Foreign exchange variation of investees located abroad | 76,575 | - | 76,575 | ||||||
| Gains (losses) on net investment hedge | (121,772 | ) | 41,402 | (80,370 | ) | ||||
| Changes in the fair value of financial assets at fair value | (56,603 | ) | 22,689 | (33,914 | ) | ||||
| As of September 30, 2020 | (101,800 | ) | 64,091 | (37,709 | ) |
27
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| 19. | Equity |
| --- | --- |
| (a) | Issued capital |
| --- | --- |
The Company has an authorized share capital of US$ 35 thousand, corresponding to 3,500,000,000 authorized shares with a par value of US$ 0,00001 each of which:
| · | 2,000,000,000<br> shares are designated as Class A common shares and issued; and |
|---|---|
| · | 1,000,000,000<br> shares are designated as Class B common shares and issued. |
| --- | --- |
The remaining 500,000,000 authorized but unissued shares are presently undesignated and may be issued by XP Inc. Board of Directors as common shares of any class or as shares with preferred, deferred or other special rights or restrictions. Therefore, the Company is authorized to increase capital up to this limit, subject to approval of the Board of Directors.
As of September 30, 2020 and December 31, 2019, the Company have US$ 23 thousand of issued capital which were represented by 354,181,346 Class A common shares and 197,618,980 Class B common shares. In the IPO that took place on December 11, 2019, the Company issued 83,387,238 new Class A common shares, with a corresponding increased of US$ 2 in the issued capital of the Company.
| (b) | Additional paid-in capital and capital reserve |
|---|
In December 2019, immediately prior the completion of the IPO, the Company had 257,456,251,558 Class A common shares and 251,790,558 Class B common shares of its authorized share capital issued. Class A and Class B common shares.
At the Board of Directors meetings on November 30, 2019, the Company’s shareholders approved a reverse share split of 4:1 (four for one) for an initial consideration to IPO with a conversion of 2,036,988,542 into 509,247,134 shares. On the same event shareholders also approved the conversion of 30,807,911 Class B common shares of the Company into Class A common shares.
In December 2019, as a result of the completion of the IPO describe in Note 1.1, 42,553,192 new Class A common shares were issued.
As mentioned in Note 26, the Board of Directors approved on December 2019 a share based long-term incentive plan, which the maximum number of shares should not exceed 5% of the issued and outstanding shares. As of September 30, 2020, the Company has 3,759,867 (December 31, 2019 – 1,921,669) restricted share units (“RSUs”) and 2,190,377 (December 31, 2019 – 2,190,377) performance restricted units (“PSUs”) to be issued at the vesting date.
The additional paid-in capital refers to the difference between the purchase price that the shareholders pay for the shares and their par value. Under Cayman Law, the amount in this type of account may be applied by the Company to pay distributions or dividends to members, pay up unissued shares to be issued as fully paid, for redemptions and repurchases of own shares, for writing off preliminary expenses, recognized expenses, commissions or for other reasons. All distributions are subject to the Cayman Solvency Test which addresses the Company’s ability to pay debts as they fall due in the natural course of business.
28
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| (c) | Dividends distribution |
| --- | --- |
The Group has not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors such as the Company's results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by XP Inc. board of directors and, where applicable, the shareholders.
The proposal and payment of dividends recorded in the Company's financial statements, subject to the approval of the shareholders in General Meetings.
For the nine months period ended September 30, 2020, the Company has not declared and paid dividends to the shareholders.
| (d) | Other comprehensive income |
|---|
Increases or decreases in value attributed to assets and liabilities are classified as equity valuation adjustments, while not being computed in the income for the period in accordance with the accrual basis as a result of their valuation at fair value.
| 20. | Related party transactions |
|---|
The main transactions carried with related parties, under commutative conditions, including interest rates, terms and guarantees, and period-end balances arising from such transactions are as follows:
| Assets/(Liabilities) | Revenue/(Expenses) | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Nine months period ended September 30, | Three months period ended September 30, | |||||||||||||||||
| Relation and transaction | September <br> 30, 2020 | December 31, 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Shareholders with significant influence | (3,891,015 | ) | (732,420 | ) | (36,541 | ) | (14,905 | ) | (13,509 | ) | (18,863 | ) | ||||||
| Securities | 105,100 | 123,813 | 9,154 | 7,279 | 1,895 | 2,915 | ||||||||||||
| Securities purchased under agreements to resell | 14,999 | 196,009 | 3,557 | - | 650 | - | ||||||||||||
| Accounts receivable | 10,178 | 594 | 233 | - | (163 | ) | (2,270 | ) | ||||||||||
| Securities sold under repurchase agreements | (4,000,000 | ) | (1,000,168 | ) | (48,243 | ) | (18,313 | ) | (15,514 | ) | (18,313 | ) | ||||||
| Borrowings | (21,292 | ) | (52,668 | ) | (1,242 | ) | (3,871 | ) | (377 | ) | (1,195 | ) |
Mostly represent transactions with Itaú Unibanco who became a shareholder of the Company in 2018 and since than a related party. Transactions with related parties also includes transactions among the Company and its subsidiaries in the ordinary course of operations include services rendered such as: (i) education, consulting and business advisory; (ii) financial advisory and financial consulting in general; (iii) management of resources and portfolio management; (iv) information technology and data processing; and (v) insurance. The effects of these transactions have been eliminated and do not have effects on the unaudited interim condensed consolidated financial statements.
| 21. | Provisions and contingent liabilities |
|---|
The Company and its subsidiaries are party to judicial and administrative litigations before various courts and government bodies, arising from the ordinary course of operations, involving tax, civil and labor matters and
29
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
other issues. Periodically, Management evaluates the tax, civil and labor and risks, based on legal, economic and tax supporting data, in order to classify the risks as probable, possible or remote, in accordance with the chances of them occurring and being settled, taking into consideration, case by case, the analyses prepared by external and internal legal advisors.
| September<br><br> <br>30, 2020 | December<br><br> <br>31, 2019 | |||
|---|---|---|---|---|
| Tax contingencies | 10,062 | 9,878 | ||
| Civil contingencies | 3,660 | 2,673 | ||
| Labor contingencies | 2,298 | 2,642 | ||
| Total provision | 16,020 | 15,193 | ||
| Judicial deposits (i) | 10,168 | 18,403 | ||
| (i) | There<br> are circumstances in which the Group is questioning the legitimacy of certain litigations<br> or claims filed against it. As a result, either because of a judicial order or based<br> on the strategy adopted by management, the Group might be required to secure part or<br> the whole amount in question by means of judicial deposits, without this being characterized<br> as the settlement of the liability. These amounts are classified as “Other assets”<br> on the consolidated balance sheets and referred above for information. | |||
| --- | --- |
Changesin the provision during the period
| Nine months period ended September 30, | Three months period ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||||||
| At the beginning of period | 15,193 | 17,474 | 15,479 | 17,171 | ||||||||
| Monetary correction | 1,472 | 1,499 | 499 | 809 | ||||||||
| Provision accrued | 912 | 1,726 | 333 | 1,657 | ||||||||
| Provision reversed | (965 | ) | (3,933 | ) | (78 | ) | (3,931 | ) | ||||
| Payments | (592 | ) | (1,062 | ) | (213 | ) | (2 | ) | ||||
| At the end of period | 16,020 | 15,704 | 16,020 | 15,704 |
Natureof claims
| a) | Tax |
|---|
As of September 30, 2020, the Group has claims classified as probable risk of loss in the amount of R$ 10,062 (December 31, 2019 - R$ 9,878), regarding social contributions on revenue (PIS and COFINS), questioning the definition of the calculation base of revenues to pay correctly. This proceeding was pending the expert technical report following the decision of the second instance court to grant the right to provide evidence and send the proceeding back to the lower court. These lawsuits are supported by court deposits in its entirety.
| b) | Civil |
|---|
The majority of the civil claims involve matters that are normal and specific to the business, and refer to demands for indemnity primarily due to: (i) financial losses in the stock market; (ii) portfolio management; and (iii) alleged losses generated from the liquidation of costumers assets in portfolio due to margin cause and/or negative balance. As of September 30, 2020, there were 58 civil claims for which the likelihood of loss has been classified as probable, in the amount of R$ 3,660 (December 31, 2019 - R$ 2,673). An amount of R$ 112 was deposited in court as of September 30, 2020 (December 31, 2019 – R$ 9,744).
30
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| c) | Labor |
| --- | --- |
Labor claims to which the Group is party primarily concern: (i) the existence (or otherwise) of a working relationship between the Group and IFAs; and (ii) severance payment of former employees. As of September 30, 2020, the Company and its subsidiaries are the defendants in approximately 9 cases involving labor matters for which the likelihood of loss has been classified as probable, in the amount of R$ 2,298 (December 31, 2019 - R$ 2,642).
Contingentliabilities - probability of loss classified as possible
In addition to the provisions constituted, the Company and its subsidiaries have several labor, civil and tax contingencies in progress, in which they are the defendants, and the likelihood of loss, based on the opinions of the internal and external legal advisors, is considered possible. These contingencies are not recorded as provisions. As of September 30 2020, for claims classified as possible loss the estimated risk is approximately R$ 191,941 (December 31, 2019 - R$ 153,951).
Below is summarized these possible claims by nature:
| September 30,2020 | December 31, 2019 | |||
|---|---|---|---|---|
| Tax (i) | 70,700 | 69,386 | ||
| Civil (ii) | 114,669 | 81,414 | ||
| Labor | 6,572 | 3,151 | ||
| Total | 191,941 | 153,951 | ||
| (i) | In<br> December 2019, the Group was notified by tax authorities for a requirement of social<br> security contributions due to employee profit sharing payments related to the calendar<br> year 2015, allegedly in violation of Brazilian Law 10,101/00. Currently, the first appeal<br> was denied by the first administrative level of the Revenue Service Office. The Group<br> will provide the ordinary appeal to Administrative Council of Tax Appeals (“CARF”).<br> There are other favorable CARF precedents on the subject and the Group obtained legal<br> opinions that support the Group’s defense and current practice. | |||
| --- | --- | |||
| (ii) | The<br> Group is defendant in 592 civil claims by customers and investment agents, mainly related<br> to portfolio management, risk rating, copyrights and contract termination. The total<br> amount represents the collective maximum value to which the Group is exposed based on<br> the claims’ amounts monetarily restated. | |||
| --- | --- | |||
| 22. | Total revenue and income | |||
| --- | --- | |||
| a) | Net revenue from services rendered | |||
| --- | --- |
Revenue from contracts with customers derives mostly from services rendered and fees charged at daily transactions from customers, therefore mostly recognized at a point in time. Disaggregation of revenue by major service lines are as follows:
| Nine months period<br><br> <br>ended September 30, | Three months period<br><br> <br>ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| Major service lines | ||||||||
| Brokerage commission | 1,595,435 | 935,998 | 547,862 | 349,554 | ||||
| Securities placement | 922,057 | 693,198 | 388,283 | 328,224 | ||||
| Management fees | 809,024 | 591,591 | 274,353 | 207,070 | ||||
| Insurance brokerage fee | 74,299 | 69,367 | 17,624 | 27,344 |
31
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||||||
|---|---|---|---|---|---|---|---|---|
| Educational services | 95,627 | 75,037 | 25,474 | 32,782 | ||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Other services | 334,470 | 212,874 | 155,063 | 85,388 | ||||
| Gross revenue from services rendered | 3,830,912 | 2,578,065 | 1,408,659 | 1,030,362 | ||||
| (-) Sales taxes and contributions on services (i) | (337,681 | ) | (236,965 | ) | (130,914 | ) | (86,324 | ) |
| 3,493,231 | 2,341,100 | 1,277,745 | 944,038 |
(i) Mostly related to taxes on services (ISS) and contributions on revenue (PIS and COFINS).
| b) | Net income from financial instruments | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ninemonths period<br><br> <br>endedSeptember 30, | Threemonths period<br><br> <br>endedSeptember 30, | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 2020 | 2019 | 2020 | 2019 | |||||||||
| Net income from financial instruments at fair value through profit or loss | 2,007,466 | 913,110 | 647,076 | 395,838 | ||||||||
| Net income from financial instruments measured at amortized cost and at fair value through other comprehensive income | 303,388 | 204,023 | 189,527 | 26,513 | ||||||||
| Total income from financial instruments | 2,310,854 | 1,117,133 | 836,603 | 422,351 | ||||||||
| (-) Taxes and contributions on financial income | (47,578 | ) | (21,720 | ) | (13,611 | ) | (10,465 | ) | ||||
| 2,263,276 | 1,095,413 | 822,992 | 411,886 | |||||||||
| c) | Disaggregation by geographic location | |||||||||||
| --- | --- |
Breakdown of total net revenue and income and selected assets by geographic location:
| Nine months period ended September 30, | Three months period ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| Brazil | 5,156,387 | 3,207,076 | 1,721,542 | 1,273,565 | ||||
| United States | 570,738 | 205,830 | 368,524 | 74,917 | ||||
| Europe | 29,382 | 23,607 | 10,671 | 7,442 | ||||
| Net revenue and income | 5,756,507 | 3,436,513 | 2,100,737 | 1,355,924 | ||||
| September 30, 2020 | December 31, 2019 | |||||||
| --- | --- | --- | --- | --- | ||||
| Brazil | 1,175,503 | 1,208,737 | ||||||
| United States | 375,565 | 224,244 | ||||||
| Europe | 29,634 | 16,476 | ||||||
| Selected assets(i) | 1,580,702 | 1,449,457 |
(i) Selected assets are total assets of the Group, less: cash, financial assets and deferred tax assets and are presented by geographic location.
None of the customers represented more than 10% of Group’s revenues for the periods presented.
32
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||||||
|---|---|---|---|---|---|---|---|---|
| 23. | Operating costs | |||||||
| --- | --- | |||||||
| Nine months period ended September 30, | Three months period ended September 30, | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 2020 | 2019 | 2020 | 2019 | |||||
| Commission and incentive costs | 1,442,670 | 877,502 | 549,249 | 353,825 | ||||
| Operating losses and provisions | 65,584 | 14,825 | 16,984 | 7,344 | ||||
| Clearing house fees | 240,806 | 141,251 | 104,922 | 54,796 | ||||
| Other costs (a) | 115,003 | 85,389 | 34,865 | 28,993 | ||||
| Total | 1,864,063 | 1,118,967 | 706,020 | 444,958 |
(a) Other cost include third parties'services and other costs.
| 24. | Operating expenses by nature | |||||||
|---|---|---|---|---|---|---|---|---|
| Nine months period ended September 30, | Three months period ended September 30, | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 2020 | 2019 | 2020 | 2019 | |||||
| Selling Expenses (a) | 94,367 | 82,419 | 38,322 | 30,104 | ||||
| Administrative expenses | 2,077,587 | 1,294,039 | 809,596 | 481,605 | ||||
| Personnel expenses | 1,484,596 | 859,653 | 577,614 | 291,485 | ||||
| Compensation | 565,640 | 256,323 | 203,419 | 107,474 | ||||
| Employee profit-sharing and bonus | 566,353 | 466,219 | 240,763 | 127,591 | ||||
| Executives profit-sharing | 156,988 | 50,230 | 52,662 | 20,415 | ||||
| Other personnel expenses (b) | 195,615 | 86,881 | 80,770 | 36,005 | ||||
| Other taxes expenses | 26,193 | 29,699 | 9,907 | 11,419 | ||||
| Depreciation of property and equipment and right-of-use assets | 52,972 | 38,409 | 16,928 | 14,094 | ||||
| Amortization of intangible assets | 52,928 | 23,992 | 19,451 | 9,361 | ||||
| Data processing | 212,074 | 124,260 | 89,018 | 49,775 | ||||
| Technical services | 66,284 | 39,560 | 25,563 | 13,102 | ||||
| Third parties' services | 116,086 | 112,571 | 43,663 | 65,854 | ||||
| Other administrative expenses (c) | 66,454 | 65,895 | 27,452 | 26,515 | ||||
| Total | 2,171,954 | 1,376,458 | 847,918 | 511,709 |
(a) Selling expenses refers to advertising and publicity.
(b) Other personnel expenses include benefits, social charges and others.
(c) Other administrative expenses include rent, communication and travel expenses, legal and judicial and other expenses.
| 25. | Other operating income (expenses), net | |||||||
|---|---|---|---|---|---|---|---|---|
| Nine months period ended September 30, | Three months period ended September 30, | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 2020 | 2019 | 2020 | 2019 | |||||
| Other operating income | 273,809 | 152,674 | 196,445 | 18,588 | ||||
| Revenue from incentives from Tesouro Direto, B3 and Others (a) | 258,306 | 52,069 | 190,900 | 13,020 | ||||
| Other operating income (b) | 15,503 | 100,605 | 5,545 | 5,568 |
33
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||||||
|---|---|---|---|---|---|---|---|---|
| Other operating expenses | (188,823 | ) | (34,187 | ) | (98,644 | ) | (11,230 | ) |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Legal, administrative proceedings and agreement with customers | (43,844 | ) | (3,503 | ) | (36,262 | ) | (1,790 | ) |
| Losses on write-off and disposal of assets | (59,216 | ) | (6,583 | ) | (29,809 | ) | (48 | ) |
| Charity | (40,512 | ) | (5,917 | ) | (13,668 | ) | (1,842 | ) |
| Other operating expenses (c) | (45,251 | ) | (18,184 | ) | (18,905 | ) | (7,550 | ) |
| Total | 84,986 | 118,487 | 97,801 | 7,358 |
(a) Includes incentives received from third parties, mainly due to the joint development of retail products, and also the association of such entities with the XP ecosystem.
(b) Other operating income include recovery of charges and expenses, reversal of operating provisions, interest received on tax and others.
(c) Other operating expenses include fines and penalties, association and regulatory fees and other expenses.
| 26. | Share-based plan |
|---|---|
| a) | Share-based Plan |
| --- | --- |
The establishment of the Plan was approved by the Board of Director’s meeting on December 6, 2019 and the first grant of RSUs and PSUs was on December 10, 2019.
Under the Restricted Stock Unit plan, stocks are awarded at no cost to the recipient upon their grant date. RSUs are granted semi-annually, their vesting conditions are service related and they vest at a rate of 20% after three years, 20% after four years, and 60% after five years. After the vesting periods, common shares will be issued to the recipients. For the PSUs, the vesting is the following: (i) 33% will vest on the third year after the grant, (ii) 33% will vest on the fourth year after the grant and (iii) 34% will vest on the fifth year after the grant date.
Under the Performance Share Unit, stocks are awarded at no cost to eligible participants and their vesting conditions are based on five-year period metrics and also based on the total shareholder return (TSR), including share price growth, dividends and capital returns.
If an eligible participant ceases to be employed by the Company, within the vesting period, the rights will be forfeited, except in limited circumstances that are approved by the board on a case-by-case basis.
Once the PSUs are vested, the shares of common stock that are delivered must be held for an additional one-year period, typically for a total combined vesting and holding period of six years from the grant date.
| b) | Fair value of shares granted |
|---|
Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model and underlying assumptions, which depends on the terms and conditions of the grant and the information available at the grant date.
The Company uses certain methodologies to estimate fair value which include the following:
| • | Estimation of fair value<br>based on equity transactions with third parties close to the grant date; and |
|---|---|
| • | Other valuation techniques<br>including share pricing models such as Monte Carlo. |
| --- | --- |
34
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
These estimates also require determination of the most appropriate inputs to the valuation models including assumptions regarding the expected life of a share-based payment or appreciation right, expected volatility of the price of the Group’s shares and expected dividend yield.
| c) | Outstanding shares granted and valuation inputs |
|---|
The maximum number of shares available for issuance under the share-based plan shall not exceed 5% of the issued and outstanding shares. As of September 30, 2020, the outstanding number of Company reserved under the plans were 5,950,244 (December 31, 2019 - 4,112,046) including 3,759,867 RSUs (December 31, 2019 - 1,921,669) and 2,190,377 PSUs (December 31, 2019 - 2,190,377).
For the nine and three months period ended September 2020 , total compensation expense of both plans were R$113,464 and R$44,352, including R$34,917 and R$12,578 of tax provisions and does not include any tax benefits on total share-based compensation expense once, as this expense is not deductible for tax purposes. The tax benefits will be perceived when the shares are converted into common shares.
The original weighted-average grant-date fair value of RSU and PSU shares was US$27 and US$ 34.56 respectively. In May 2020, the Company decided to update the measurement condition of its PSU shares, replacing the TSR measurement from US Dollars (US$) to Brazilian Reais (R$), being therefore subject to exchange variation. The weighted-average grant-date fair value of PSU shares for the updated plan was US$52.41. The incremental fair value will be recognised as an expense over the period from the modification date to the end of the vesting period. All other conditions of the PSU shares plan has not been modified. The average grant date fair value in the period was US$ 45,92.
During the nine months period ended September 30, 2020, there were 298,750 forfeited RSUs, 1,934,000 RSUs shares granted and no exercised, expired or vested.
| 27. | Earnings per share (basic and diluted) |
|---|
The Company implemented a four-to-one reverse share split (or consolidation), effective as of November 30, 2019. The quantity of shares of the comparative periods were adjusted to give effect to this transaction.
The following table reflects the net income and share data used in the basic and diluted earnings per share (“EPS”) calculations:
| Three months period ended September 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2019 | 2020 | 2019 | |||||
| Net income | 1,475,613 | 692,011 | 540,434 | 257,814 | |||
| Basic weighted average quantity of shares (a) | 551,800 | 509,247 | 551,800 | 509,247 | |||
| Basic earnings per share - R | 2.6742 | 1.3589 | 0.9794 | 0.5063 | |||
| Share-based incentive program | 4,323 | - | 4,774 | - | |||
| Diluted weighted average quantity of shares | 556,574 | 509,247 | 556,574 | 509,247 | |||
| Diluted earnings per share - R | 2.6534 | 1.3589 | 0.9710 | 0.5063 |
All values are in US Dollars.
| (a) | Thousands<br> of shares. |
|---|---|
| 28. | Determination of fair value |
| --- | --- |
The Group measures financial instruments such as certain financial investments and derivatives at fair value at each balance sheet date.
35
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. The financial instruments included in the level 1 consist mainly in public financial instruments and financial instruments negotiated on active markets (i.e. Stock Exchanges).
Level 2: The fair value of financial instruments that are not traded in active markets is determined using valuation techniques, which maximize the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value as instrument are directly or indirectly observable, the instrument is included in level 2. The financial instruments classified as level 2 are composed mainly from private financial instruments and financial instruments negotiated in a secondary market.
Level 3: If one or more of the significant inputs is unobservable, the instrument is included in level 3. This is the case for unlisted equity securities.
Specific valuation techniques used to value financial instruments include:
| • | Financial<br> assets (other than derivatives) - The fair value of securities is determined by reference<br> to their closing prices on the date of presentation of the consolidated financial statements.<br> If there is no market price, fair value is estimated based on the present value of future<br> cash flows discounted using the observable rates and market rates on the date of presentation. |
|---|---|
| • | Swap<br> – These operations swap cash flow based on the comparison of profitability between<br> two indexers. Thus, the agent assumes both positions – put in one indexer and call<br> on another. |
| --- | --- |
| • | Forward<br> - at the market quotation value, and the installments receivable or payable are prefixed<br> to a future date, adjusted to present value, based on market rates published at B3. |
| --- | --- |
| • | Futures<br> – Foreign exchange rates, prices of shares and commodities are commitments to buy<br> or sell a financial instrument at a future date, at a contracted price or yield and may<br> be settled in cash or through delivery. Daily cash settlements of price movements are<br> made for all instruments. |
| --- | --- |
| • | Options<br> - option contracts give the purchaser the right to buy the instrument at a fixed price<br> negotiated at a future date. Those who acquire the right must pay a premium to the seller.<br> This premium is not the price of the instrument, but only an amount paid to have the<br> option (possibility) to buy or sell the instrument at a future date for a previously<br> agreed price. |
| --- | --- |
| • | Other<br> financial assets and liabilities - Fair value, which is determined for disclosure purposes,<br> is calculated based on the present value of the principal and future cash flows, discounted<br> using the observable rates and market rates on the date the financial statements are<br> presented. |
| --- | --- |
| • | Loans– Fair value<br>is determined through the present value of expected future cash flows discounted using the observable rates and market rates on<br>the date the financial statements are presented. |
| --- | --- |
| • | Contingent<br> consideration: Fair value of the contingent consideration liability related to acquisitions<br> is estimated by applying the income approach and discounting the expected future payments<br> to selling shareholders under the terms of the purchase and sale agreements. |
| --- | --- |
Below are the Group financial assets and liabilities by level within the fair value hierarchy. The Group assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels:
36
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Level 1 | Level 2 | Level 3 | Fair Value | Book Value | ||||||
| Financial Assets | ||||||||||
| Financial assets at Fair value through profit or loss | ||||||||||
| Securities | 35,825,631 | 2,875,888 | - | 38,701,519 | 38,701,519 | |||||
| Derivative financial instruments | 7,451 | 13,141,316 | - | 13,148,767 | 13,148,767 | |||||
| Fair value through other comprehensive income | ||||||||||
| Securities | 9,588,773 | - | - | 9,588,773 | 9,588,773 | |||||
| Evaluated at amortized cost | ||||||||||
| Securities | - | 1,371,040 | - | 1,371,040 | 1,366,038 | |||||
| Securities purchased under agreements to resell | - | 18,229,920 | - | 18,229,920 | 18,243,688 | |||||
| Securities trading and intermediation | - | 1,483,507 | - | 1,483,507 | 1,483,507 | |||||
| Accounts receivable | - | 251,194 | - | 251,194 | 251,194 | |||||
| Loan operations | - | 1,392,375 | - | 1,392,375 | 1,369,234 | |||||
| Other financial assets | - | 280,279 | - | 280,279 | 280,279 | |||||
| Financial liabilities | ||||||||||
| Fair value through profit or loss | ||||||||||
| Securities loaned | 1,111,770 | - | - | 1,111,770 | 1,111,770 | |||||
| Derivative financial instruments | 19,745 | 12,709,851 | - | 12,729,596 | 12,729,596 | |||||
| Evaluated at amortized cost | ||||||||||
| Securities sold under repurchase agreements | - | 35,192,715 | - | 35,192,715 | 35,253,928 | |||||
| Securities trading and intermediation | - | 15,159,711 | - | 15,159,711 | 15,159,711 | |||||
| Deposits | - | 1,573,958 | - | 1,573,958 | 1,626,709 | |||||
| Structured operations certificates | - | 1,142,457 | - | 1,142,457 | 1,142,457 | |||||
| Borrowings and lease liabilities | - | 565,723 | - | 565,723 | 511,981 | |||||
| Debentures | - | 331,981 | - | 331,981 | 338,693 | |||||
| Accounts payables | - | 655,117 | - | 655,117 | 655,117 | |||||
| Other financial liabilities | - | 396,878 | 462,000 | 858,878 | 858,878 | |||||
| 46,553,370 | 106,753,910 | 462,000 | 153,769,280 | 153,821,839 | ||||||
| December 31, 2019 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | ||
| Level 1 | Level 2 | Fair Value | Book Value | |||||||
| Financial Assets | ||||||||||
| Financial assets at Fair value through profit or loss | ||||||||||
| Securities | 20,277,031 | 2,166,361 | 22,443,392 | 22,443,392 | ||||||
| Derivative financial instruments | 21,809 | 4,063,195 | 4,085,004 | 4,085,004 | ||||||
| Fair value through other comprehensive income | ||||||||||
| Securities | 2,616,118 | - | 2,616,118 | 2,616,118 | ||||||
| Evaluated at amortized cost | ||||||||||
| Securities | - | 3,914,923 | 3,914,923 | 2,266,971 | ||||||
| Securities purchased under agreements to resell | - | 9,490,090 | 9,490,090 | 9,490,090 | ||||||
| Securities trading and intermediation | - | 504,983 | 504,983 | 504,983 | ||||||
| Accounts receivable | - | 462,029 | 462,029 | 462,029 | ||||||
| Loan operations | - | 386 | 386 | 386 | ||||||
| Other financial assets | - | 19,805 | 19,805 | 19,805 | ||||||
| Financial liabilities | ||||||||||
| Fair value through profit or loss | ||||||||||
| Securities loaned | 2,021,707 | - | 2,021,707 | 2,021,707 | ||||||
| Derivative financial instruments | - | 3,229,236 | 3,229,236 | 3,229,236 | ||||||
| Evaluated at amortized cost | ||||||||||
| Securities sold under repurchase agreements | - | 15,638,407 | 15,638,407 | 15,638,407 | ||||||
| Securities trading and intermediation | - | 9,114,546 | 9,114,546 | 9,114,546 | ||||||
| Borrowings and lease liabilities | - | 633,781 | 633,781 | 637,484 |
37
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | ||||
|---|---|---|---|---|
| Debentures | - | 836,001 | 836,001 | 835,230 |
| --- | --- | --- | --- | --- |
| Accounts payables | - | 266,813 | 266,813 | 266,813 |
| Structured operations certificates | - | 19,474 | 19,474 | 19,474 |
| Other financial liabilities | - | 79,127 | 79,127 | 79,157 |
| 24,936,665 | 50,439,157 | 75,375,822 | 72,979,125 |
As of September 30, 2020, the total contingent consideration liability is reported at fair value and is dependent on the profitability of the acquired associate (VPL) and businesses (Flipper and Antecipa) is classified within Level 3 of the fair value hierarchy. The contigent consideration liability represents the maximum amount payable under the purchase and sale agreements discounted using a weighted average rate of 8.9% p.a. Change in the discount rate by 100 bps would increase/decrease the fair value by R$22,500. The change in the fair value in the contingent consideration between the acquisition date and September 30, 2020 was not material.
Transfers into and out of fair value hierarchy levels are analysed at the end of each consolidated financial statements. As of September 30, 2020 the Group had no transfers between Level 2 and Level 3.
| 29. | Management of financial risks and financial instruments |
|---|
The Group’s activities are exposed to a variety of financial risks: credit risk, liquidity risk, market risk (including currency risk, interest rate risk and price risk), and operating risk. The Group’s overall risk management structure focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to mitigate certain risk exposures. It is the Group’s policy that no trading in derivatives for speculative purposes may be undertaken.
Management has overall responsibility for establishing and supervising the risk management structure of the Group. Risk Management is under a separated structure from business areas, reporting directly to senior management, to ensure exemption of conflict of interest, and segregation of functions appropriate to good corporate governance and market practices.
The risk management policies of the Group are established to identify and analyze the risks faced, to set appropriate risk limits and controls, and to monitor risks and adherence to the limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in the activities of the Group. The Group, through its training and management standards and procedures, developed a disciplined and constructive control environment within which all its employees are aware of their duties and obligations.
Regarding one specific subsidiary XP CCTVM, the organizational structure is based on the recommendations proposed by the Basel Accord, in which procedures, policies and methodology are formalized consistent with risk tolerance and with the business strategy and the various risks inherent to the operations and/or processes, including market, liquidity, credit and operating risks. The Group seek to follow the same risk management practices as those applying to all companies.
Such risk management processes are also related to going concern management procedures, mainly in terms of formulating impact analyses, business continuity plans, contingency plans, backup plans and crisis management.
The unaudited interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group’s annual financial statements as of December 31, 2019. There have been no changes in the risk management department or in any risk management policies since the year-end.
38
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated | |
|---|---|
| 30. | Capital Management |
| --- | --- |
The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and maintain an optimal capital structure to reduce the cost of capital, In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The Group also monitors capital on the basis of the net debt and the gearing ratio. Net debt is calculated as total debt (including borrowings, lease liabilities and debentures as shown in the consolidated balance sheet) less cash and cash equivalent (including cash, Securities purchased under agreements to resell and certificate deposits as shown in the consolidated statement of cash flows). The gearing ratio corresponds to the net debt expressed as a percentage of total capital.
The net debt and corresponding gearing ratios as of September 30, 2020 and December 31, 2019 were as follows:
| September 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|
| Borrowings and lease liabilities | 511,981 | 637,484 | ||||
| Debentures | 338,693 | 835,230 | ||||
| Total debt | 850,674 | 1,472,714 | ||||
| Cash | (642,491 | ) | (109,922 | ) | ||
| Securities purchased under agreements to resell | - | (654,057 | ) | |||
| Certificate deposits (Securities) | (105,204 | ) | (123,817 | ) | ||
| Net debt | 102,979 | 584,918 | ||||
| Total equity | 8,669,470 | 7,153,396 | ||||
| Total capital | 8,772,449 | 7,738,313 | ||||
| Gearing ratio % | 1.17 | % | 7.56 | % | ||
| a) | Minimum capital requirements | |||||
| --- | --- |
Although capital is managed considering the consolidated position, certain subsidiaries are subject to minimum capital requirement from local regulators.
The subsidiary XP CCTVM, leader of the Prudential Conglomerate (which includes Banco XP), under BACEN regulation regime, is required to maintain a minimum capital and follow aspects from the Basel Accord, with the current strategy of maintaining its capital 1% above the minimum capital requirement.
The subsidiary XP Vida e Previdência operates in Private Pension Business and is oversight by the SUSEP, being required to present Adjusted Shareholders' Equity (PLA) equal to or greater than the Minimum Required Capital (“CMR”) and Venture Capital Liquidity (“CR”), CMR is equivalent to the highest value between base capital and venture capital.
At September 30, 2020 the subsidiaries XP CCTVM, Banco XP and XP Vida e Previdência were in compliance with all capital requirements.
39
| XP Inc. and its subsidiaries<br><br>Notes to unaudited interim condensed consolidated financial statements<br><br>As of September 30, 2020<br><br>In thousands of Brazilian Reais, unless otherwise stated |
|---|
There is no requirement for compliance with a minimum capital for the other Group companies.
| b) | Financial covenants |
|---|
In relation to the long-term debt contracts, including multilateral instruments, recorded within “Borrowing and lease liabilities” and “Debentures” (Notes 14 and 15), the Group is required to comply with certain performance conditions, such as profitability and efficiency indexes.
As of September 30, 2020, the contracts under financial covenants corresponds to the amount of R$ 636,091 (December 31, 2019 – R$ 1,217,308). The Group has complied with these covenants throughout the reporting period.
Eventual failure of the Group to comply with such covenants may be considered as breach of contract and, as a result, considered for early settlement of related obligations.
| 31. | Cash flow information | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (i) | Debt reconciliation | |||||||||||
| --- | --- | |||||||||||
| Borrowings | lease liabilities | Debentures | Total | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Total debt as of January 1, 2019 | 469,609 | 148,494 | 406,538 | 1,024,641 | ||||||||
| Acquisitions / Issuance | - | 105,694 | 400,000 | 505,694 | ||||||||
| Payments | (74,853 | ) | (26,194 | ) | - | (101,047 | ) | |||||
| Net foreign exchange differences | - | 6,460 | - | 6,460 | ||||||||
| Interest accrued | 20,869 | 12,447 | 29,284 | 62,600 | ||||||||
| Interest paid | (16,386 | ) | - | - | (16,386 | ) | ||||||
| Total debt as of September 30, 2019 | 399,239 | 246,901 | 835,822 | 1,481,962 | ||||||||
| Total debt as of January 1, 2020 | 382,078 | 255,406 | 835,230 | 1,472,714 | ||||||||
| Acquisitions / Issuance | - | 45,129 | - | 45,129 | ||||||||
| Write-off | - | (78,322 | ) | - | (78,322 | ) | ||||||
| Payments | (84,895 | ) | (45,903 | ) | (400,000 | ) | (530,798 | ) | ||||
| Repurchase (Note 15) | - | - | (64,717 | ) | (64,717 | ) | ||||||
| Revaluation (Note 11(c)) | - | (10,050 | ) | - | (10,050 | ) | ||||||
| Net foreign exchange differences | - | 32,675 | - | 32,675 | ||||||||
| Interest accrued | 10,281 | 15,648 | 20,128 | 46,057 | ||||||||
| Interest paid | (10,067 | ) | - | (51,948 | ) | (62,015 | ) | |||||
| Total debt as of September 30, 2020 | 297,397 | 214,583 | 338,693 | 850,673 | ||||||||
| (ii) | Non-cash investing and financing activities | |||||||||||
| --- | --- |
Non-cash investing and financing activities disclosed in other notes are: (i) related to business acquisitions through accounts payables and contingent consideration – see note 2(f) – 28,183, and (ii) related to Acquisition of investment in associates through accounts payables and contingent consideration – see note 10 – 492,800.
40