UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of May, 2020

 

Commission File Number: 001-39155

 

XP Inc.

(Exact name of registrant as specified in its charter)

 

Av. Chedid Jafet, 75, Torre Sul, 30th floor,

Vila Olímpia – São Paulo

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: May 12, 2020

 

 

 

EXHIBIT INDEX

 

Exhibit No. Description
99.1 Earnings Release dated May 12, 2020 – XP Inc. Reports 1Q20 Financial Results
99.2 1Q20 Earnings Presentation
99.3 XP Inc. – Unaudited interim condensed consolidated financial statements for the three months ended March 31, 2020

 

 

 

 

 

  

 

 

São Paulo, Brazil, May 12, 2020 – XP Inc. (NASDAQ: XP) (“XP” or the “Company”), a leading, technology-driven financial services platform and a trusted pioneer in providing low-fee financial products and services in Brazil, today reported its financial results for the first quarter of 2020.

 

To our shareholders:

 

In the first quarter of 2020, the world was hit by the rapid spread of COVID-19 and every effort was made to save lives and keep businesses operating. At XP, our initial priority was the health and well-being of our employees. In a matter of days after the arrival of the pandemic in Brazil, more than 90% of our employees were already working from home, with adequate infrastructure, timely information on home-office best practices and the “digital” proximity of all our leaders.

 

At first, when working remotely and social distancing measures were implemented, we were concerned with the company's performance. However, it only took a few days to realize that we were better than before, more organized, disciplined and that the “pressure” of the moment would help us achieve a new standard of performance and efficiency across all levels.

 

Every crisis opens a range of opportunities to improve the business, get closer to customers and evolve further. Despite the challenging environment, our spirit of ownership, supported by our partnership structure, has helped our team evolve and be able, as a high-performance athlete in an Olympics final, to get the best out of each one of us.

 

The great challenge of every crisis is to keep an open mind, feet on the ground and quickly adapt to the new scenario.

 

Our business is privileged, among all others. We do not depend on physical contact, our services were already delivered digitally and, more than ever, people are at home, available to connect with us and learn about the new economic environment that is developing.

 

In the first days of the pandemic, we observed in Brazil a significant increase in interest in investments. In this context, we relied on our educational DNA and commitment to producing high quality content to deliver an even better experience for our customers. As a result, our Retail Research Platform and our financial portal, InfoMoney, reached record audiences, which reinforces the lack of financial education in Brazil and XP's vital role as a catalyst for this movement.

 

Our solid operational performance in the first quarter of 2020, combined with the important milestone of two million active clients achieved at the end of March, gives us confidence that we are moving in the right direction, but still in the beginning of our long-term journey.

 

Our business model, which is supported by a differentiated network of independent and internal financial advisors, allows us to keep in touch with customers and provide content and information in an efficient, specialized and recurring manner. We believe this is an important factor in preserving our NPS well above the industry average and increasing the reach and loyalty of our brands.

 

Additionally, we believe that our investment platform is unique, offering best-in-class products, services and tools in the industry for all investor profiles. We are constantly looking for and evaluating new solutions to complement the XP Inc. ecosystem. One recent example was the launching of XP Wealth Services, which will be an important tool for retaining and attracting new customer profiles seeking differentiated advice.

 

Although we cannot predict when the pandemic will be contained and life will return to "normal", we are more confident than ever that we will come out of this chapter stronger than we entered. Furthermore, while we recognize the seriousness of the current situation, we truly believe in XP’s business growth prospects in the short, medium and long-term.

 

The market opportunity remains massive and our mission is essential, especially when considering the concentration in Brazil, with five large banks controlling 90% of investment assets. Also, we cannot forget the culture of high interest rates that have long prevailed in our country. Since 1994, annualized interest rates remained above 13% on average and, therefore, the incentive for diversification and long-term orientation has

 

2 

 

remained low. The current Selic rate, 3.0% per year with a downward trend, seems to be a catalyst for secular change in the behavior of Brazilian investors.

 

In this environment, XP will remain focused on providing the best experience, content and tools to its clients to help them reach their financial and life goals.

 

Regarding new projects, we are particularly enthusiastic about the evolution of our payments project. It will enable us, still in 2020, to offer a complete banking solution which will allow customers to cut ties with banks and concentrate 100% of their investments with XP.

 

We also want to highlight the “juntostransformamos” initiative that we launched right after the first cases of COVID-19 in Brazil. XP donated R$30 million to aid communities impacted by the pandemic and the consequent lockdown. We are aware of our role in society and we will never deny our responsibilities.

 

Finally, I would like to reinforce our values: Dream Big, Open Mind, and Entrepreneurial Spirit, and ratify our purpose of transforming the financial market to improve peoples' lives. I end by and quoting our idol and great source of inspiration, Ayrton Senna: “in adversity some give up, while others break records”.

 

Thank you for your support.

 

Guilherme Benchimol, CEO

 

3 

 

1Q20 KPIs

 

 

  1Q20 1Q19 YoY 4Q19 QoQ
           
Operating and Financial Metrics (unaudited)          
Retail – AUC (in R$ bn) 366 232 58% 409 -11%
Retail – active clients (in '000s) 2,039 1,126 81% 1,702 20%
Retail – gross total revenues (in R$ mn) 1,254 700 79% 1,155 9%
Institutional – gross total revenues (in R$ mn) 331 147 126% 306 8%
Issuer Services – gross total revenues (in R$ mn) 132 56 137% 221 -40%
Digital Content – gross total revenues (in R$ mn) 27 16 70% 30 -10%
Other – gross total revenues (in R$ mn) 113 88 28% 111 2%
Company Financial Metrics          
Gross revenue (in R$ mn) 1,856 1,006 84% 1,823 2%
Net Revenue (in R$ mn) 1,735 934 86% 1,691 3%
Gross Profit (in R$ mn) 1,156 626 84% 1,204 -4%
Gross Margin 66.6% 67.0% -41 bps 71.2% -457 bps
Adjusted Net Income (in R$ mn)¹ 415 168 147% 417 -1%
Adjusted Net Margin¹ 23.9% 18.0% 591 bps 24.6% -74 bps

 

¹ See appendix for a reconciliation of Adjusted Net Income.

 

 

Total AUC 

R$366 bn

+58% YoY 

Active Clients

2,039 k 

+81% YoY

   

IFAs 

6,887

NPS 

72

   

Gross Revenue

R$1,856 mn 

+84% YoY

 

Adjusted Net Income

R$415 mn 

+147% YoY

 

4 

 

Operational Performance

 

Assets Under Custody (in R$ bn)

 

 

Total AUC reached R$366 billion at March 31, 2020, up 58% year-over-year and down 11% quarter-over-quarter. The R$43 billion decline versus 4Q19 is shown on the bridge chart below and was driven by: (1) R$58 billion of market depreciation and (2) R$21 billion from a one-off client outflow triggered by a corporate restructuring, partially offset by R$36 billion of net inflows in the quarter.

 

 

Assets Under Custody 4Q19-1Q20 Bridge (in R$ bn)

 

 

Monthly average net inflows were R$12 billion in 1Q20, up from R$11 billion in 4Q19. For 2Q20, however, we expect a more challenging outlook due to commercial and operational limitations related to a prolonged lockdown. More specifically, investors should likely continue to avoid visiting bank branches to authorize large amount transfers, which is a step required by the banks even when a client is transferring to his/her own broker account.

 

5 

 

Active Clients (in 000’s)

 

 

Active clients totaled 2.0 million at the end of 1Q20, up 81% from 1.1 million at the end of 1Q19. The growth was driven by the expansion of our direct and B2B channels and our three retail brands, particularly Clear following the increased number of individual investors trading on the stock market.

 

Net Promoter Score (NPS)

 

NPS, a widely known survey methodology used to measure customer satisfaction, reached 72 in 1Q20. 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.

 

1Q20 Revenue Breakdown

 

 

Note: Other Revenue represented 6% of Total Gross Revenues in 1Q20.

 

6 

 

Total Gross Revenue (in R$ mn)

 

 

Total Gross Revenue increased 84% from R$1.0 billion in 1Q19 to R$1.9 billion in 1Q20 reflecting strong growth across all our businesses.

 

 

Retail

 

Retail Revenue (in R$ mn)

 

 

Retail revenue grew 79% from R$700 million in 1Q19 to R$1.3 billion in 1Q20. The main growth drivers included, in order of contribution: (1) equity brokerage reflecting record retail trading volumes; (2) rising management fees from Funds due to AUC growth; (3) REITs and (4) Fixed Income.

 

7 

 

LTM Take Rate (LTM Retail Revenue / Average AUC)

 

 

The last twelve months Take Rate (or Revenue Yield) was 1.4% in 1Q20 vs 1.2% in 4Q19. The expansion was mainly due to: (1) record volumes in the equity market boosting Retail Revenue in 1Q20 and (2) AUC growth lagging Retail Revenue growth in the period reflecting market depreciation and the one-off corporate outflow which had an immaterial impact on revenue.

 

 

 

Institutional

 

Institutional Revenue (in R$ mn)

 

 

Institutional gross revenue totaled R$331 million in 1Q20, up 126% from R$147 million in 1Q19. The growth was primarily attributable to rising volumes across our Brazilian trading desks following the overall step-up in B3 volumes (+74% in equities ADTV and +61% in listed derivatives vs 1Q19).

 

8 

 

Issuer Services

 

Issuer Services Revenue (in R$ mn)

 

 

Issuer Services revenue grew 137% year-over-year from R$56 million in 1Q19 to R$132 million in 1Q20, reflecting strong deal flow in January and February for REITS, DCM and ECM, in order of contribution to revenue.

 

While capital markets activity remains limited due to the COVID-19 crisis and heightened market volatility, we believe XP is well positioned to capitalize on reaccelerating transaction volumes and play a key role in raising funds for corporate clients over time.

 

 

 

Digital Content and Other

 

Digital Content Revenue

 

Gross revenue totaled R$27 million in 1Q20, up 70% from R$16 million in 1Q19 mainly driven by the increase in students accessing our online courses and MBA programs. Since the beginning of the COVID-19 crisis until the end of March, almost 200 live videos were broadcasted across our channels with 1.8 million views reinforcing the relevance of our Digital Content business as an enabler of XP’s ecosystem and a means to attracting and educating investors across our platforms.

 

In March 2020, (1) InfoMoney, our leading finance web portal, had 14 million unique visitors, up more than 40% compared to January and February; (2) our Retail Research Platform generated 2.1 million unique visitors, three times more than in prior months; and (3) XP Investimentos’ Instagram account reached 1 million followers.

 

Maintaining solid client relationships remains a priority and we believe these relationships and the company will be even stronger when the crisis ends.

 

Other Revenue

 

Other revenue grew 28% in 1Q20 vs 1Q19, from R$88 million to R$113 million, primarily driven by increase in adjusted gross financial assets from R$2.3 billion at the end of 1Q19 to R$8.1 billion at March 31, 2020.

 

9 

 

COGS

 

COGS (in R$ mn) and Gross Margin

 

 

COGS rose 89% from R$308 million in 1Q19 to R$581 million in 1Q20, following the increase in revenue. The gross margin for the 1Q20 was 66.5% vs 67.0% in 1Q19.

 

 

 

SG&A Expenses

 

SG&A Expense (in R$ mn) and as a % of Net Revenue

 

 

SG&A expenses totaled R$587 million in 1Q20, up 101% from R$292 million in 1Q19. As a percentage of net revenue, SG&A expenses were 33.8% in 1Q20 vs 31.3% in 1Q19, with the increase primarily driven by: (1) positive R$71 million pre-tax effect of one-time tax claim recognition (non-recurring) in 1Q19 and (2) R$28 million of share-based compensation expense in 1Q20. Adjusting for the non-recurring item, SG&A expanded 61% year-over-year and represented 38.9% of Net Revenue in 1Q19 vs 33.8% in 1Q20, revealing efficiency gains on the last twelve months.

 

10 

 

Adjusted Net Income

 

Adjusted Net Income¹ (in R$ mn) and Margin

 

 

In 1Q20, Adjusted Net Income grew 147% vs 1Q19 and reached R$415 million. The adjusted net margin expanded from 18.0% in 1Q19 to 23.9% in 1Q20, reflecting: (1) the increase in total revenues, particularly equity brokerage across the Retail and Institutional businesses, and (2) a lower consolidated tax rate.

 

¹ See appendix for a reconciliation of Adjusted Net Income.

 

Cash Flow

 

Cash Flow Data 1Q20 1Q19 4Q19
(R$ mn)      
       
Income before income tax            517          303            547
Adjustments to reconcile income before income tax              80            34              67
Income tax paid (197)          (87)            (47)
Contingencies paid              (0)           (0)              (2)
Interest paid              (1)            (3)            (12)
Changes in working capital assets and liabilities              (2)          (88)            116
Adjusted net cash flow (used in) from operating activities            398          159            668
Net cash flow (used in) from securities, repos, derivatives         (537)        (233)      (4,501)
Net cash flows from operating activities         (139)         (74)      (3,832)
Net cash flows from investing activities           (41)         (19)          (78)
Net cash flows from financing activities           (28)         (33)         3,945

11 

 

Net Cash Flow Used in Operating 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) for 1Q20 was R$398 million, increasing from R$159 million in 1Q19 and decreasing from R$668 million in 4Q19, primarily driven by:

 

·Higher balance of securities and derivatives that we hold in the ordinary course of our business as a Retail investment distribution platform and as an Institutional broker dealer (with respect to the sale of fixed income securities and structured notes); and

 

·our strategy to allocate excess cash and cash equivalents from treasury funds, from Floating Balances and from private pension balances to securities and other financial assets. These balances may fluctuate substantially from quarter to quarter and were the key drivers to the net cash flow from operating activities figures.

 

Net Cash Flow Used in Investing Activities

 

Our net cash used in investing activities increased from R$19 million in 1Q19 to R$41 million in 1Q20 and decreased to R$78 million in 4Q19 to R$ 41 million in 1Q20, primarily affected by:

 

·increased from R$11 million in 1Q19 to R$21 million in 1Q20 and decreased from R$29 million in 4Q19 to R$ 21 million in 1Q20, mainly related to the relocation of our principal executive offices to our current address in the city of São Paulo;

 

·the investment in intangible assets, mostly IT infrastructure and software, which increased from R$8 million in 1Q19 to R$20 million in 1Q20 and decreased R$49 million in 4Q19 to R$20 million to 1Q20.

 

Net Cash Provided by Financing Activities

 

Our net cash flows from financing activities decreased from R$ 33 million in 1Q19 to R$ 28 million in 1Q20, and from R$ 3,945 million in 4Q19 to R$ 28 million in 1Q20, primarily due to:

 

·R$4,482 million related to the initial public offering proceeds in December 2019;

 

·R$500 million related to cash dividend payments in 4Q19;

 

·R$ 26 million in 1Q20, R$ 32 million in 1Q19 and R$ 48 million related to Payments of borrowings and lease liabilities.

 

12 

 

Floating Balance and Adjusted Gross Financial Assets (in R$ mn)

 

Floating Balance (=net uninvested clients' deposits) 1Q20 4Q19
Assets (1,016) (505)
(-) Securities trading and intermediation   (1,016) (505)
Liabilities 13,334 9,115
(+) Securities trading and intermediation   13,334 9,115
(=) Floating Balance 12,318 8,610
     
Adjusted Gross Financial Assets (=cash and equivalents, net of floating) 1Q20 4Q19
Assets 54,937 41,011
(+) Cash 250 110
(+) Securities - Fair value through profit or loss 25,092 22,443
(+) Securities - Fair value through other comprehensive income 4,896 2,616
(+) Securities - Evaluated at amortized cost 1,268 2,267
(+) Derivative financial instruments 8,515 4,085
(+) Securities purchased under agreements to resell 14,917 9,490
Liabilities (34,514) (24,648)
(-) Securities loaned (721) (2,022)
(-) Derivative financial instruments (7,526) (3,229)
(-) Securities sold under repurchase agreements (21,111) (15,638)
(-) Private Pension Liabilities (5,155) (3,759)
(-) Floating Balance (12,318) (8,610)
(=) Adjusted Gross Financial Assets 8,106 7,753

 

 

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), less (2) Financial Liabilities (comprised of the sum of Securities loaned, Derivative financial instruments, Securities sold under repurchase agreements and Private pension liabilities), 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.

 

13 

 

Other Information

 

Web Meeting

 

The Company will host a webcast to discuss its first quarter 2020 financial results on Tuesday, May 12, 2020 at 5:00pm ET (6:00pm BRT). To participate in the earnings webcast please subscribe at: 1Q20 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

 

ir@xpi.com.br

 

14 

 

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

 

15 

 

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.

 

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.

 

16 

 

Unaudited Managerial Income Statement (in R$ mn)

 

  1Q20 1Q19 YoY 4Q19 QoQ
Managerial Income Statement          
Total Gross Revenue 1,856 1,006 84% 1,823 2%
Retail 1,254 700 79% 1,155 9%
Institutional 331 147 126% 306 8%
Issuer Services 132 56 137% 221 -40%
Digital Content 27 16 70% 30 -10%
Other 113 88 28% 111 2%
Net Revenue 1,735 934 86% 1,691 3%
COGS (579) (308) 88% (487) 19%
As a % of Net Revenue (33.4%) (33.0%) -0.4 p.p (28.8%) -4.6 p.p
Gross Profit 1,156 626 85% 1,204 -4%
Gross Margin 66.6% 67.0% -0.4 p.p 71.2% -4.6 p.p
SG&A (561) (292) 92% (598) -6%
Share Based Compensation (28) - n.a (8) n.a
EBITDA 567 334 70% 598 -5%
EBITDA Margin 32.7% 35.7% -3.0 p.p 35.4% -2.7 p.p
D&A (32) (15) 108% (29) 8%
EBIT 536 319 68% 569 -6%
Interest expense on debt (19) (15) 24% (22) -13%
EBT 517 303 70% 547 -6%
Income tax expense    (119) (93) 28% (157) -24%
Effective Tax Rate (23.0%) (30.6%) 7.6 p.p (28.7%) 5.7 p.p
Net Income 398 210 89% 390 2%
Net Margin 22.9% 22.5% 0.4 p.p 23.1% -0.2 p.p
Non-Recurring Items 17 (42) - 27 -
Adjusted Net Income 415 168 147% 417 -1%
Adjusted Net Margin  23.9%  18.0% 5.9 p.p  24.6% -0.7 p.p

 

 

17 

 

Accounting Income Statement (in R$ mn)

 

  1Q20 1Q19
Net revenue from services rendered 1,152 599
Brokerage commission 505 289
Securities placement 348 160
Management fees 255 141
Insurance brokerage fee 29 19
Educational services 26 14
Other services 94 44
Taxes and contributions on services (105) (67)
Net income from financial instruments at amortized cost and at fair value through other comprehensive income 202 66
Net income from financial instruments at fair value through profit or loss 380 269
Total revenue and income 1,735 934
Operating costs (579) (308)
Selling expenses (28) (25)
Administrative expenses (578) (368)
Other operating income (expenses), net     (14) 85
Interest expense on debt (19) (15)
Income before income tax 517 303
Income tax expense    (119) (93)
Effective tax rate 23.03% 30.60%
Net income for the period 398 210

18 

 

Balance Sheet (in R$ mn)

 

Assets 1Q20 4Q19
Cash 250 110
Financial assets 56,217 41,889
Fair value through profit or loss 33,607 26,528
Securities 25,092 22,443
Derivative financial instruments 8,515 4,085
Fair value through other comprehensive income 4,896 2,616
Securities 4,896 2,616
Evaluated at amortized cost 17,714 12,744
Securities 1,268 2,267
Securities purchased under agreements to resell 14,917 9,490
Securities trading and intermediation 1,016 505
Accounts receivable 425 462
Loan operations 64 0
Other financial assets 25 20
Other assets 603 644
Recoverable taxes 227 243
Rights-of-use assets 236 227
Prepaid expenses 105 90
Other 35 83
Deferred tax assets 262 285
Property and equipment 155 142
Intangible assets 560 553
Total assets 58,046 43,623
   

19 

 

Liabilities 1Q20 4Q19
Financial liabilities 44,628 31,842
Fair value through profit or loss 8,247 5,251
Securities 721 2,022
Derivative financial instruments 7,526 3,229
Evaluated at amortized cost 36,381 26,591
Securities sold under repurchase agreements 21,111 15,638
Securities trading and intermediation   13,334 9,115
Borrowings and lease liabilities 644 637
Debentures 844 835
Accounts payables 265 267
Structured operations certificates 150 19
Other financial liabilities 31 79
Other liabilities 5,811 4,620
Social and statutory obligations 275 493
Taxes and social security obligations   170 345
Private pension liabilities 5,155 3,759
Provisions and contingent liabilities 15 15
Other 196 7
Deferred tax liabilities - 5
Total liabilities 50,439 36,467
Equity attributable to owners of the Parent company 7,605 7,153
Issued capital 0.23 0.23
Capital reserve 6,967 6,943
Other comprehensive income 241 210
Retained earnings 397 -
Non-controlling interest 2 3
Total equity 7,607 7,156
Total liabilities and equity 58,046 43,623

20 

 

Adjusted Net Income (in R$ mn)

 

  1Q20 1Q19 YoY 4Q19 QoQ
Net Income 398 210 89% 390 2%
(+) Share Based Compensation 28 - - 8 278%
(+) IPO expenses - - - 22 -100%
(-) One-time tax claim recognition - (71) - - -
(+/-) Taxes (11) 28 -140% -3 279%
Adj. Net Income 415 168 147% 417 -1%

 

Adjusted EBITDA (in R$ mn)

 

  1Q20 1Q19 YoY 4Q19 QoQ
Net Income 398 210 89% 390 2%
(+) Income Tax 119 93 28% 157 -24%
(+) Depreciation and Amortization 32 15 108% 29 8%
(+) Interest Expense on Debt 19 15 43% 22 -13%
(-) Interest Revenue on Adjusted Gross Financial Assets (72) (31) 136% (44) 65%
Adjusted EBITDA 495 303 64% 554 -11%

 

 

21 

 

Exhibit 99.2

 

1Q20 Earnings Presentation May 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 01 1Q20 KPIs and Financials 02 COVID - 19 Update 03 Closing Remarks and Q&A 04 Opening Remarks

 

 

1 Opening Remarks

 

 

5 UNIQUE PLATFORM EDUCATION DNA Opening Remarks CLOSER TO CLIENTS Sustained by our competitive advantages, crises create opportunities for improvement ADDRESSABLE MARKET LONG - TERM VIEW Increased interest for investments in Brazil reflected in record audience in our platforms in Mar - Apr Supported by our network, we are closer than ever to clients, providing specialized advisory in an efficient and recurring manner Our ecosystem embraces all profiles of clients and offers the best investment options Massive and concentrated industry coupled with all - time low interest rates Although we recognize the challenges ahead, we remain confident about the long - term prospects for XP

 

 

2 1Q20 KPIs and Financials

 

 

7 (58) KPIs AUC, Active Clients and NPS Assets Under Custody (AUC) (R$ in bn) Highlights ▪ AUC decrease versus 4 Q 19 was mainly driven by market depreciation and a single one - off corporate outflow ; ▪ R $ 12 billion monthly net inflow pace in 1 Q 20 vs R $ 11 billion in 4 Q 19 . Active Clients (‘000) Highlights ▪ Growth was driven by expansion across all our channels and brands, particularly Clear . 1Q20 1Q19 2,039 1,126 +81% 2,039 4Q19 1Q20 1,702 +20% NPS Mar/2020: 72 232 366 1Q19 1Q20 +58% 409 366 Market Depreciatio n 4Q19 (21) One - Off Corporat e Outflow (58) 36 Net Inflow 1Q20 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

 

 

8 1Q20 Revenue and Breakdown RETAIL INSTITUTIONAL ISSUER SERVICES DIGITAL CONTENT 68 % 18 % 7 % 1 % Other Revenue represented 6% of Total Gross Revenues Total Gross Revenues (in R$ mn) Highlights ▪ Growth was driven by : ( 1 ) increased trading volume in equity and derivatives, impacting Retail and Institutional revenues ; ( 2 ) YoY increase in average AUC and ( 3 ) capital market deals, especially in January and February . of 1Q20 Total Gross Revenue 1Q20 1Q19 1,856 1,006 84%

 

 

9 Retail Revenue and Take Rate Strong performance driven by record volumes in equities and higher management fees following AUC growth LTM Take Rate (LTM Retail Revenue / Average AUC) Retail Revenue (in R$ mn) Highlights ▪ The increase in sequential LTM take rate reflects : ( 1 ) record retail volumes in equities and derivatives, which boosted revenue and ( 2 ) AUC growth lagging revenue growth in the 4 Q 19 - 1 Q 20 period . 700 1Q19 1Q20 1,254 +79% 1.4% 4Q19 1Q20 1.2% Highlights ▪ Key revenue growth drivers were : ( 1 ) Equities ; ( 2 ) Funds ; ( 3 ) REITs and ( 4 ) Fixed Income .

 

 

10 Institutional and Issuer Services Strong volumes persist and intense deal activity until late February Issuer Services Revenue (in R$ mn) Institutional Revenue (in R$ mn) Highlights ▪ ( 1 ) REITs ; ( 2 ) DCM and ( 3 ) ECM, with deals concentrated especially in January and February . Highlights ▪ ( 1 ) Rising volumes across our Brazilian trading desks, following the overall expansion in B 3 volumes . 147 331 1Q19 1Q20 +126% 56 132 1Q19 1Q20 +137%

 

 

11 Digital Content and Other Solid growth following the expansion of XP’s platforms and ecosystem Other Revenue (in R$ mn) Digital Content Revenue (in R$ mn) Highlights ▪ Mainly driven by increase in adjusted gross financial assets from R $ 2 . 3 billion at the end of 1 Q 19 to R $ 8 . 1 billion at March 31 , 2020 1 . 88 113 1Q19 1Q20 +28% Highlights ▪ Increase in students accessing our online courses and MBA programs . 16 27 1Q20 1Q19 +70% 1 – 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), le s s (2) Financial Liabilities (comprised of the sum of Securities loaned, Derivative financial instruments, Securities sold under repurchase agreements and Private pension liabilities), and (3) less Floating Balance. See appendix for a reconciliatio n o f Adjusted Gross Financial Assets.

 

 

12 COGS and SG&A Gross margin stability and efficiency gains on G&A COGS (in R$ mn) Operating Expenses (in R$ mn) 308 579 1Q19 1Q20 +88% 66.6% Gross Margin 67.0% 33.9% % Net Revenue 38.9% 71 1Q19 28 1Q20 363 589 62% Share Based Compensation Non - Recurring Item Highlights ▪ Adjusting for the non - recurring tax claim recognition (R $ 71 million) in 1 Q 19 , there were efficiency gains recognized across most expense lines . Highlights ▪ Gross margin stability reflecting the absence of meaningful changes in product mix .

 

 

13 1Q19 1Q20 1Q20 1Q19 Adjusted Net Income and Margin Strong margin expansion in 1Q20 vs 1Q19 Highlights ▪ Growth in Adjusted Net Income driven by ( 1 ) accelerating increase in total revenues, especially brokerage in Retail and Institutional businesses and ( 2 ) lower consolidated tax rate . 168 415 +147% 23.9% 18.0% Adjusted Net Income (in R$ mn) Adjusted Net Margin +5.9 p.p. 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 ..

 

 

3 COVID - 19 Update

 

 

15 COVID - 19 Update | April 2020 Despite challenging scenario in April, growth remained healthy AUC (in R$ bn) ▪ R $ 19 billion increase in AUC in April - 2020 was driven by R $ 7 billion net inflow and R $ 12 billion market appreciation . ▪ As expected, monthly net inflow pace decelerated in April relative to 1 Q 20 ; ▪ Result was mainly a consequence of the operational bottlenecks from a prolonged lockdown . Monthly Net Inflow (in R$ bn) 10.7 4Q19 2020 YTD¹ 11.0 409 385 43 (46) 4Q19 Net Inflow Market Depreciatio n One - Off Corporat e Outflow (21) 2020 YTD 1 Excludes one - off outflow from corporate client

 

 

16 COVID - 19 Update | April 2020 Client base kept growing consistently in April Active Clients (‘000) ▪ Active Clients totaled 2 . 1 million in April, up 24 % vs 4 Q 19 . ▪ New Active Clients per month accelerated in 2020 versus 4 Q 19 . New Active Clients per month (‘000) 4Q19 1,702 2020 YTD 2,112 +24% NPS Apr - 20: 72 55 103 4Q19 2020 YTD +87% 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

 

 

17 COVID - 19 Update | April 2020 XP Inc. continues to reinforce its competitive advantages AWARDS x XP elected best investment advisory company by São Paulo residents ( DataFolha ) RECORDS x Retail Equity Custody Market Share x Retail Equity Volume Market Share x Research Platform Audience x Organic Social Media Leads RANKINGS #1 retail equity custody in April #1 retail equity volume in April #1 retail derivatives volume in April Source: XP Inc.

 

 

4 Closing Remarks

 

 

19 XP Inc. will continue its mission to transform the financial markets in Brazil Closing Remarks LARGE AND CONCENTRATED MARKET DIFFERENTIATE D TECH - ENABLED PLATFORM MISSION - DRIVEN CULTURE STRONG BALANCE SHEET POSITION Investment assets of over R$8 trillion¹ with ~90% controlled by 5 banks Customer centric model with a broad portfolio of products and IFA network Entrepreneurial and long - term vision in a meritocratic environment Although we recognize the challenges ahead, we remain confident about the long - term prospects for XP We are only in the beginning of our journey! ¹ Oliver Wyman Report - December 2019

 

 

Q&A

 

 

21 Closing Remarks XP ´ s first office in Porto Alegre, Brazil

 

 

Investor Relations Carlos Lazar André Martins 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 ) 1Q20 1Q19 YoY 4Q19 QoQ Net Income 398 210 89% 390 2% (+) Share Based Compensation 28 - - 8 278% (+) IPO expenses - - - 22 - 100% ( - ) One - time tax claim recognition - (71) - - 0% (+/ - ) Taxes (11) 28 - 140% - 3 279% Adj. Net Income 415 168 147% 417 - 1% Floating Balance (=net uninvested clients' deposits) 1Q20 4Q19 Assets (1,016) (505) ( - ) Securities trading and intermediation (1,016) (505) Liabilities 13,334 9,115 (+) Securities trading and intermediation 13,334 9,115 (=) Floating Balance 12,318 8,610 Adjusted Gross Financial Assets (=cash and equivalents, net of floating) 1Q20 4Q19 Assets 54,937 41,011 (+) Cash 250 110 (+) Securities - Fair value through profit or loss 25,092 22,443 (+) Securities - Fair value through other comprehensive income 4,896 2,616 (+) Securities - Evaluated at amortized cost 1,268 2,267 (+) Derivative financial instruments 8,515 4,085 (+) Securities purchased under agreements to resell 14,917 9,490 Liabilities (34,514) (24,648) ( - ) Securities loaned (721) (2,022) ( - ) Derivative financial instruments (7,526) (3,229) ( - ) Securities sold under repurchase agreements (21,111) (15,638) ( - ) Private Pension Liabilities (5,155) (3,759) ( - ) Floating Balance (12,318) (8,610) (=) Adjusted Gross Financial Assets 8,106 7,753

 

Exhibit 99.3

 

       

 

 

 

Index

 

Report on review of interim condensed consolidated financial statements 3
Unaudited interim condensed consolidated balance sheets 4
Unaudited interim condensed consolidated statements of income and other comprehensive income 6
Unaudited interim condensed consolidated statements of changes in equity 7
Unaudited interim condensed consolidated statements of cash flows 8
1.   Operations 9
2.   Basis of preparation of the financial statements and changes to the Group’s accounting policies 10
3.   Securities purchased (sold) under resale (repurchase) agreements 12
4.   Securities 13
5.   Derivative financial instruments 14
6.   Hedge accounting 16
7.   Securities trading and intermediation (receivable and payable) 16
8.   Property, equipment, intangible assets and lease 17
9.   Borrowings and lease liabilities 18
10.   Debentures 19
11.   Private pension liabilities 19
12.   Income tax 20
13.   Equity 22
14.   Related party transactions 23
15.   Provisions and contingent liabilities 24
16.   Total revenue and income 25
17.   Operating costs 27
18.   Operating expenses by nature 27
19.   Other operating income (expenses), net 28
20.   Share-based plan 28
21.   Earnings per share (basic and diluted) 29
22.   Determination of fair value 30
23.   Management of financial risks and financial instruments 32
24.   Capital Management 32
25.   Cash flow information 34

 

 

Report on review of interim condensed consolidated financial statements

 

Report on review of interim condensed
consolidated 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 March 31, 2020 and the related interim condensed consolidated statements of income and of comprehensive income, of changes in equity and cash flows for the three-month period then ended, and a summary of significant accounting policies and other explanatory notes.

 

Management is responsible for the preparation and fair 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, May 12, 2020     

 

 

 

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 

Unaudited interim condensed consolidated balance sheets  

As of March 31, 2020 and December 31, 2019 

In thousands of Brazilian Reais  

 

   Note  March 31, 2020  December 31, 2019
          
Cash        249,950    109,922 
                
Financial assets        56,217,071    41,888,778 
                
Fair value through profit or loss        33,606,516    26,528,396 
Securities   4    25,091,723    22,443,392 
Derivative financial instruments   5    8,514,793    4,085,004 
                
Fair value through other comprehensive income        4,896,387    2,616,118 
Securities   4    4,896,387    2,616,118 
                
Evaluated at amortized cost        17,714,168    12,744,264 
Securities   4    1,267,826    2,266,971 
Securities purchased under agreements to resell   3    14,916,794    9,490,090 
Securities trading and intermediation   7    1,015,785    504,983 
Accounts receivable        424,702    462,029 
Loan operations        63,589    386 
Other financial assets        25,472    19,805 
                
Other assets        602,934    643,619 
Recoverable taxes        226,645    243,320 
Rights-of-use assets   8    236,136    227,478 
Prepaid expenses        105,495    89,684 
Other        34,659    83,137 
                
Deferred tax assets   12    261,512    284,533 
Property and equipment   8    154,548    142,464 
Intangible assets   8    559,801    553,452 
                
                
Total assets        58,045,816    43,622,768 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

 

 

 

XP Inc. and its subsidiaries 

Unaudited interim condensed consolidated balance sheets  

As of March 31, 2020 and December 31, 2019 

In thousands of Brazilian Reais  

 

   Note  March 31, 2020  December 31, 2019
          
Financial liabilities        44,627,989    31,842,054 
                
Fair value through profit or loss        8,247,206    5,250,943 
Securities   4    721,131    2,021,707 
Derivative financial instruments   5    7,526,075    3,229,236 
                
Evaluated at amortized cost        36,380,783    26,591,111 
Securities sold under repurchase agreements   3    21,111,301    15,638,407 
Securities trading and intermediation   7    13,333,539    9,114,546 
Borrowings and lease liabilities   9    644,439    637,484 
Debentures   10    844,361    835,230 
Accounts payables        265,197    266,813 
Structured operations certificates        150,461    19,474 
Other financial liabilities        31,485    79,157 
                
Other liabilities        5,811,128    4,619,623 
Social and statutory obligations        274,752    492,723 
Taxes and social security obligations        170,422    345,331 
Private pension liabilities   11    5,155,088    3,759,090 
Provisions and contingent liabilities   15    14,897    15,193 
Other        195,969    7,286 
                
Deferred tax liabilities   12    -    5,132 
                
Total liabilities        50,439,117    36,466,809 
                
                
Equity attributable to owners of the Parent company   13    7,604,948    7,153,396 
Issued capital        23    23 
Capital reserve        6,966,667    6,943,446 
Other comprehensive income        241,398    209,927 
Retained earnings        396,860    - 
                
Non-controlling interest        1,751    2,563 
                
Total equity        7,606,699    7,155,959 
                
Total liabilities and equity        58,045,816    43,622,768 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

 

 

Unaudited interim condensed consolidated statements of income and other

XP Inc. and its subsidiaries 

Unaudited interim condensed consolidated statements

of income and of comprehensive income  

For the three months ended March 31, 2020 and 2019

In thousands of Brazilian Reais, except earnings per share 

ehensive income

 

     

Three months period ended

March 31,

   Note  2020  2019
          
Net revenue from services rendered   16(a)   1,151,946    599,247 
Net income from financial instruments at amortized cost and at fair value through other comprehensive income   16(b)   202,497    65,822 
Net income from financial instruments at fair value through profit or loss   16(b)   380,398    268,923 
Total revenue and income        1,734,841    933,992 
                
Operating costs   17    (578,816)   (307,756)
Selling expenses   18    (28,476)   (24,518)
Administrative expenses   18    (578,116)   (368,285)
Other operating income (expenses), net   19    (13,883)   85,176 
Interest expense on debt        (19,019)   (15,382)
                
Income before income tax        516,531    303,227 
                
Income tax expense   12    (118,977)   (92,789)
                
Net income for the period        397,554    210,438 
                
Other comprehensive income               
Items that can be subsequently reclassified to income               
Foreign exchange variation of investees located abroad        56,560    1,325 
Gains (losses) on net investment hedge        (56,496)   (843)
Changes in the fair value of financial assets at fair value through other comprehensive income        31,490    (1,183)
                
Other comprehensive income (loss) for the period, net of tax        31,554    (701)
                
Total comprehensive income for the period        429,108    209,737 
                
Net income attributable to:               
Owners of the Parent company        396,860    209,215 
Non-controlling interest        694    1,223 
                
Total comprehensive income attributable to:               
Owners of the Parent company        428,414    208,514 
Non-controlling interest        694    1,223 
                
Earnings per share from total income attributable to the ordinary equity holders of  the company               
Basic earnings per share   21    0.7192    0.4108 
Diluted earnings per share        0.7139    0.4108 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

6 

 

Unaudited interim condensed consolidated statements of changes in equity

XP Inc. and its subsidiaries 

Unaudited interim condensed consolidated statements of changes in equity  

For the three months ended March 31, 2019 and 2020 

In thousands of Brazilian Reais 

 

   Attributable to owners of the Parent      
         Capital reserve               
   Note  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        -    -    -    -    209,215    209,215    1,223    210,438 
Other comprehensive income, net        -    -    -    (701)   -    (701)   -    (701)
Transactions with shareholders - contributions and distributions                                             
Gain (loss) in changes in interest of subsidiaries, net        -    -    -    258    -    258    (349)   (91)
Allocations of the net income for the period                                             
Dividends distributed        -    -    -    -    -    -    (490)   (490)
Balances at March 31, 2019        21    927,895    947,696    208,722    209,215    2,293,549    7,319    2,300,868 
                                              
                                              
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 year                                             
Net income for the period        -    -    -    -    396,860    396,860    694    397,554 
Other comprehensive income, net        -    -    -    31,554    -    31,554    -    31,554 
Transactions with shareholders - contributions and distributions                                             
Share based plan   20    -    -    23,221    -    -    23,221    (7)   23,214 
Gain (loss) in changes in interest of subsidiaries, net        -    -    -    (83)   -    (83)   1,933    1,850 
Allocations of the net income for the period                                             
Dividends distributed        -    -    -    -    -    -    (3,432)   (3,432)
Balances at March 31, 2020        23    5,409,895    1,556,772    241,398    396,860    7,604,948    1,751    7,606,699 
                                              

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

7 

 

Unaudited interim condensed consolidated statements of cash flows

XP Inc. and its subsidiaries 

Unaudited interim condensed consolidated statements of cash flows

For the three months ended March 31, 2020 and 2019 

In thousands of Brazilian Reai 

 

      Three months ended March 31,
   Note  2020  2019
Operating activities               
Income before income tax        516,531    303,227 
                
Adjustments to reconcile income before income taxes               
Depreciation of property and equipment and right-of-use assets   8    15,878    8,102 
Amortization of intangible assets   8    15,648    7,055 
Loss on write-off of property, equipment and intangible assets   8    3,452    112 
Expected credit losses on accounts receivable and other financial assets        21,962    (180)
(Reversal of) Provision for contingencies, net   15    (387)   11 
Net foreign exchange differences        (19,510)   1,528 
Share based plan        23,221    - 
Interest accrued        20,087    16,898 
                
Changes in assets and liabilities               
Securities (assets and liabilities)        (6,676,164)   605,953 
Derivative financial instruments (assets and liabilities)        988,979    95,830 
Securities trading and intermediation (assets and liabilities)        3,708,191    840,841 
Securities purchased (sold) under resale (repurchase) agreements        46,190    (1,809,388)
Accounts receivable        6,197    62,708 
Loan operations        (63,520)   - 
Prepaid expenses        (15,811)   2,776 
Other assets and other financial assets        52,295    13,173 
Structured operations certificates        130,987    - 
Accounts payable        (1,616)   (1,482)
Social and statutory obligations        (217,971)   (73,134)
Tax and social security obligations        (33,554)   (82,429)
Private pension liabilities        1,395,998    33,867 
Other liabilities and other financial liabilities        141,012    (9,598)
                
Cash from operations        58,095    15,870 
                
Income tax paid        (196,585)   (86,579)
Contingencies paid   15    (234)   (318)
Interest paid        (572)   (3,141)
Net cash flows from operating activities        (139,296)   (74,168)
                
Investing activities               
Acquisition of property and equipment   8    (20,746)   (11,375)
Acquisition of intangible assets   8    (19,914)   (8,061)
Net cash flows used in investing activities        (40,660)   (19,436)
                
Financing activities               
Payments of borrowings and lease liabilities   25    (26,058)   (32,276)
Transactions with non-controlling interests        1,844    (92)
Dividends paid to non-controlling interests        (3,432)   (490)
Net cash flows from (used in) financing activities        (27,646)   (32,858)
                
Net increase in cash and cash equivalents        (207,602)   (126,462)
                
Cash and cash equivalents at the beginning of the period        887,796    626,863 
Effects of exchange rate changes on cash and cash equivalents        31,009    70 
Cash and cash equivalents at the end of the period        711,203    500,471 
                
Cash        249,950    224,997 
Securities purchased under agreements to resell   3    309,053    133,028 
Interbank certificate deposits   4    152,200    142,446 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

8 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

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 64.61% of Class B common shares and whose is ultimately controlled by a group of individuals.

 

XP Inc. and its subsidiaries (collectively, the “Company”, “Group” or “XP Group”) are principally engaged in providing its customers, represented by individuals and legal entities in Brazil and abroad, various financial products and services, mainly acting as broker-dealer, including securities brokerage, banking, private pension plans and financial advisory services, through three retail brands (XP Investimentos, Rico and Clear) 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 21) and per share data as if the reverse share split had been in effect for all periods presented.

 

1.1Initial Public Offering and resulting transactions

 

On December 13, 2019, the Company completed its Initial Public Offering (“IPO”), offering 72,510,641 of Class A common shares out, 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 underwrites 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 out of, which R$21,902 thousand was recognized directly in income statements and the amount of R$22,824 in equity as transaction cost.

 

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”.

 

These unaudited interim condensed consolidated financial statements for the three months period ended March 31, 2020 were approved by the Board of Director’s meeting on May 8, 2020.

 

9 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

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 March 31, 2020 and for the three months ended March 31, 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 accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period.

 

The unaudited interim condensed consolidated financial statements are presented in Brazilian reais (“R$”), and all amounts disclosed in the financial statements and notes have been rounded off to the nearest thousand currency units unless otherwise stated.

 

b)Basis of consolidation

 

There were no changes since December 31, 2019 in the accounting practices adopted for consolidation and in the direct and indirect interests of Company in its subsidiaries for the purposes of these unaudited interim condensed consolidated financial statements, except for the following item:

 

      % of Group’s interest (i)
Entity name Country of incorporation Principal activities March 31, 2020 December  31, 2019
         
Indirectly controlled        
XP PE Gestão de Recursos Ltda. (ii) Brazil Private equity asset management 99.10% -
         
(i)The percentage of participation represents the Group’s interest in total capital and voting capital of its subsidiaries.

(ii)New operating subsidiaries incorporated in 2020.

 

c)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. Disaggregated information is only reviewed at the revenue level (Note 16), 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.

 

10 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

See Note 16 (c) for a breakdown of total revenue and income and selected assets by geographic location

 

d)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 is expected to have a negative impact on global, regional and national economies and to disrupt 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 but has not identified relevant impact to the financial performance or position of the group as March 31, 2020. The company has sufficient headroom to enable it to conform to 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 March 31, 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.

 

e)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 that are not mandatory for the period ended March 31, 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.

 

The Group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards.

 

f)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.

 

11 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

3.Securities purchased (sold) under resale (repurchase) agreements

 

a)Securities purchased under agreements to resell

 

 

March 31,

2020

 

December 31,

2019

       
Available portfolio 3,294,442   971,991
National Treasury Notes (NTNs) 3,221,176   771,099
Financial Treasury Bills (LFTs) -   195,980
National Treasury Bills (LTNs) 73,266   4,912
     
       
Collateral held 11,622,352   8,518,099
National Treasury Bills (LTNs) 293,787   1,764,410
National Treasury Notes (NTNs) 11,328,565   6,753,689
       
Total 14,916,794   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 3.68% p.a. (December 31, 2019 – 4.63% p.a.).

 

As of March 31, 2020, R$ 309,053 (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

 

 

March 31,

2020

 

December 31,

2019

National Treasury Bills (LTNs) 16,829,549   8,533,113
National Treasury Notes (NTNs) 3,057,813   5,653,994
Financial Treasury Bills (LFTs) 1,220,908   1,451,300
Agribusiness receivables certificates (CRA) 3,031   -
Total 21,111,301   15,638,407
       

As of March 31, 2020, securities sold under repurchase agreements were agreed with average interest rates of 3.64% p.a. (December 31, 2019 – 4.48% p.a.), with assets pledged as collateral.

 

12 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

4.Securities

 

a)Securities classified at fair value through profit and loss and at fair value through other comprehensive income

 

   March 31, 2020  December 31, 2019
   Gross carrying amount 

Fair

value

  Gross carrying amount 

Fair

Value

Financial assets            
At fair value through profit and loss   24,911,824    25,091,723    22,332,936    22,443,392 
Agribusiness receivables certificates   532,281    515,994    598,085    589,525 
Bank deposit certificates (i)   270,022    272,972    244,071    246,827 
Brazilian government bonds   15,461,665    15,669,359    15,404,300    15,494,046 
Certificate of real estate receivable   211,458    205,546    75,922    75,123 
Debentures   1,017,997    973,503    885,344    885,068 
Financial credit bills   83,762    82,765    98,068    106,759 
Investment funds   4,525,734    4,525,734    3,047,198    3,047,198 
USA government bonds   1,856,714    1,857,216    -    - 
Real estate credit bill   1,367    1,392    1,282    1,300 
Stocks issued by public-held company   312,547    312,547    1,562,965    1,562,965 
Structured transaction certificate   305,188    332,039    237,112    256,381 
Others (ii)   333,089    342,656    178,589    178,200 
                     
At fair value through other comprehensive income   4,836,127    4,896,387    2,608,325    2,616,118 
National treasury bill   4,836,127    4,896,387    2,608,325    2,616,118 
                     
(i)Bank deposit certificates include R$ 152,200 (December 31, 2019 – R$ 123,817) is being presented as cash equivalents in the statements of cash flows.

(ii)Mainly related to bonds issued and traded overseas.

 

b)Securities evaluated at amortized cost

 

   March 31, 2020  December 31, 2019
   Gross carrying amount 

Book

Value

  Gross carrying amount 

Book

Value

Financial assets                    
At amortized cost   1,267,826    1,267,826    2,266,971    2,266,971 
Bonds   1,267,826    1,267,826    2,266,971    2,266,971 
                     

13 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

c)Securities on the financial liabilities classified at fair value through profit or loss

 

   March 31, 2020  December 31, 2019
   Gross carrying amount 

Book

value

  Gross carrying amount 

Book

Value

Financial liabilities                    
At fair value through profit or loss                    
Securities loaned   721,131    721,131    2,021,707    2,021,707 

 

 

d)Securities classified by maturity

 

      Assets     Liabilities
   March 31, 2020  December 31, 2019  March 31, 2020  December 31, 2019
             
Financial assets            
At fair value through P&L and at OCI            
Current   8,417,190    9,804,819    721,131    2,021,707 
Non-stated maturity   5,405,233    4,999,333    721,131    2,021,707 
Up to 3 months   1,814,839    257,544    -    - 
From 3 to 12 months   1,197,118    4,547,942    -    - 
                     
Non-current   21,570,920    15,254,691    -    - 
After one year   21,570,920    15,254,691    -    - 
                     
Evaluated at amortized cost                    
Current   1,267,826    2,266,971    -    - 
Up to 3 months   423,837    807,218    -    - 
From 3 to 12 months   843,989    1,459,753    -    - 
                     
Total   31,255,936    27,326,481    721,131    2,021,707 

 

 

5.Derivative financial instruments

 

The Group uses the derivatives to manage its overall exposures of foreign exchange rates, interest rates and price of shares.

 

Below is the composition of the derivative financial instruments portfolio (assets and liabilities) by type of instrument, stated fair value and by maturity:

 

   March 31, 2020
   Notional  Fair Value  % 

Up to 3

months

  From 3 to 12 months  Above 12 months
Assets                  
Options   380,556,621    7,156,611    84    2,612,257    2,482,728    2,061,626 
Swap contracts   3,864,467    789,707    8    392,631    11,953    385,123 
Forward contracts   707,973    567,259    7    545,521    3,679    18,059 
Future contracts   6,201    1,216    1    1,216    -    - 
Total   385,135,262    8,514,793    100    3,551,625    2,498,360    2,464,808 
                               

14 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

Liabilities

 

                  
Options   439,211,735    6,469,055    86    1,932,259    2,354,129    2,182,667 
Swap contracts   2,915,357    425,108    6    22,309    13,866    388,933 
Forward contracts   4,223,982    631,912    8    558,697    73,152    63 
Total   446,351,074    7,526,075    100    2,513,265    2,441,147    2,571,663 
                               

 

 

   December 31, 2019
   Notional  Fair Value  %  Up to 3 months  From 3 to 12 months  Above 12 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 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

6.Hedge accounting

 

In the three months period ended March 31, 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 the investments in USA, XP Holding 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  Variation in value recognized in Other comprehensive income  Nominal value  Variation in the
amounts used to
calculate hedge
ineffectiveness
Strategies  Assets  Liabilities         
March 31, 2020               
Foreign exchange risk                         
Hedge of net investment in foreign operations   228,563    -    52,428    385,484    (56,496)
Total   228,563    -    52,428    385,484    (56,496)
                          
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)
                          

 

There was no ineffectiveness during March 31, 2020 and December 31, 2019 in relation to the foreign net investment hedge.

 

7.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.

 

   March 31, 2020  December 31, 2019
Cash and settlement records   49    13,823 
Debtors pending settlement   956,760    477,646 
Other   58,976    13,514 
Total Assets   1,015,785    504,983 
           
Cash and settlement records   557,632    474,759 
Creditors pending settlement   12,775,907    8,639,787 
Total Liabilities   13,333,539    9,114,546 

16 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

8.Property, equipment, intangible assets and lease

 

a)Changes in the period

 

  

Property and

equipment

 

Intangible

assets

       
As of January 1, 2019   99,127    504,915 
Additions   11,375    8,061 
Write-offs   (56)   (56)
Depreciation / amortization in the period   (4,672)   (7,055)
As of March 31, 2019   105,774    505,865 
Cost   146,865    626,921 
Accumulated depreciation / amortization   (41,092)   (121,056)
           
As of January 1, 2020   142,464    553,452 
Additions   20,746    19,914 
Write-offs   (324)   - 
Transfers   (2,083)   2,083 
Depreciation / amortization in the period   (6,255)   (15,648)
As of March 31, 2020   154,548    559,801 
Cost   211,839    672,045 
Accumulated depreciation / amortization   (57,291)   (112,244)
           
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 March 31, 2020, there were no indicators of a potential impairment of goodwill. Additionally, there are no significant changes to the assumptions in the annual consolidated financial statements for the year ended December 31, 2019.

 

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:

 

17 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

  

Right-of-use

assets

 

Lease

liabilities

       
As of January 1, 2019   133,870    148,494 
Depreciation expense   (3,430)   - 
Interest expense   -    2,328 
Effects of exchange rate   (1,281)   134 
Payment of lease liabilities   -    (7,490)
As of March 31, 2019   129,159    143,466 
           
As of December 31, 2019   227,478    255,406 
Additions (i)   19,273    19,361 
Depreciation expense   (9,623)   - 
Interest expense   -    6,145 
Revaluation (ii)   (19,968)   (19,968)
Impairment   (3,040)   - 
Effects of exchange rate   22,016    23,561 
Payment of lease liabilities   -    (15,558)
As of March 31, 2020   236,136    268,947 
Current   -    56,581 
Non-current   236,136    212,367 
(i)Additions to right-of-use assets in the period include prepayments to lessors and accrued liabilities.

(ii)Revaluation of discount rate that represent the current market assessment.

 

The Group recognized rent expense from short-term leases and low-value assets of R$ 1,746 for the period ended December 31, 2019. The total rent expense of R$ 9,225, include other expenses related to leased offices such as condominium.

 

9.Borrowings and lease liabilities

 

  Interest rate %   Maturity   March 31, 2020   December 31, 2019
               
Bank borrowings – domestic (i) 113% of CDI   March 2021   42,124   52,668
Related parties         42,124   52,668
               
Financial institution (ii) CDI + 0.774%   April 2023   333,368   329,410
Third parties         333,368   329,410
               
Total borrowings         375,492   382,078
               
Lease liabilities         268,947   255,406
               
Total borrowings and lease liabilities       644.439   637,484
               
Current         405,498   116,450
Non-current         238,941   521,034

 

(*) Brazilian Interbank Offering Rate (CDI)

 

(i) Loan agreement with Itaú Unibanco with maturity on March 8, 2021, payable in 36 monthly installments.

 

18 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

(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 24 (b)).

 

10.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 March 31, 2020, the total balance is comprised of the following issuances:

 

Issuance  Quantity (units) 

Annual

rate

  Issuance date  Maturity date  Unit value at issuance  Unit value at period-end 

Book

value

1st   400,000   108.0% CDI  9/28/2018  9/28/2020  R$1,000.00   R$1,093.87    438,010 
2st   400,000   107.5% CDI  5/15/2019  5/15/2022  R$1,000.00   R$1,016.83    406,351 
Total   800,000                       844,361 
                              

 

 

  

March 31, 2020

  December 31, 2019
Principal   800,000    800,000 
Interest   56,258    47,127 
Payments   (11,897)   (11,897)
Total   844,361    835,230 
           
Current   444,361    435,230 
Non-current   400,000    400,000 

 

The principal amount and accrued interest payables 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 amounts paid in 2019.

 

Debentures are subject to financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 24(b)).

 

11.Private pension liabilities

 

As of March 31, 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 FIE at the reporting date (Note 4 (a)).

 

19 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

a)Changes in the period

 

   Three months period ended March 31,
   2020  2019
As of January 1   3,759,090    16,059 
Contributions received   278,357    1,766 
Transfer with third party plans   1,636,370    31,777 
Redemptions paid   (46,585)   - 
Gain (loss) from FIE   (472,144)   324 
As of March 31   5,155,088    49,926 
           
Contributions invested in FIEs (Note 4 (a))   5,155,088    49,926 
           
12.Income tax

 

a)Deferred income tax

 

Deferred tax assets (DTA) and deferred tax liabilities (DTL) are comprised of the main following components:

 

   Balance Sheet  Net change in the three months period ended
   March 31, 2020  December 31, 2019  March 31, 2020 

March 31,

2019

             
Tax losses carryforwards   39,298    17,146    22,152    (29,611)
Goodwill on business combinations (i)   14,714    22,303    (7,589)   (9,068)
Provisions for IFAs’ commissions   64,669    68,041    (3,372)   - 
Revaluations of financial assets at fair value   (26,370)   25,259    (51,629)   (2,486)
Expected credit losses   13,695    5,666    8,029    (75)
Financial instruments taxed on redemption   -    -    -    9,852 
Profit sharing plan   71,309    141,136    (69,828)   51,494 
Net gain on hedge instruments   22,706    (36,384)   59,091    (1,080)
Share based plan   14,187    2,950    11,237    - 
Other provisions   47,304    33,284    14,019    776 
Total   261,512    279,401    (17,890)   19,802 
Deferred tax assets   261,512    284,533           
Deferred tax liabilities   -    (5,132)          

 

(i)For tax purposes, goodwill is amortized over 5 years on a straight-line basis when the entity acquired is sold or merged into another entity.

 

The changes in the net deferred tax were recognized as follows:

 

   Three months period ended March 31,
   2020  2019
       
As of January 1   279,401    140,400 
Foreign exchange variations   21,055    (114)
Charges to statement of income   (47,072)   18,643 
Tax relating to components of other comprehensive income   8,128    1,273 
As of March 31   261,512    160,202 
           

20 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

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$ 12,237 (December 31, 2019 - R$ 18,402) mainly in respect of losses from subsidiaries overseas and that can be carried forward and used against future taxable income.

 

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 tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the period ended March 31:

 

  

Three months period

ended March 31,

   2020  2019
       
Income before taxes   516,531    303,227 
Combined tax rate in Brazil (i)   34%   34%
Tax expense at the combined rate   175,620    103,097 
           
Income (loss) from entities not subject to taxation   (9,246)   (48)
Effects from entities taxed at different rates   14,287    6,505 
Effects from entities taxed at different method (ii)   (64,678)   (4,968)
Intercompany transactions with different taxation   (9,156)   (7,767)
Tax incentives   605    - 
Non deductible expenses (non-taxable income), net   6,586    717 
Others   4,959    (4,747)
Total   118,977    92,789 
Effective tax rate   23.03%   30.60%
           
Current   71,905    111,432 
Deferred   47,072    (18,643)
Total expense   118,977    92,789 
           
(i)Considering that XP Inc. is domiciled in Cayman and there is no income tax in that jurisdiction, the combined tax rate of 34% demonstrated above is the current rate applied to XP Investimentos S.A. which is the holding company of all operating entities of XP Inc. in Brazil.

 

(ii)Certain eligible subsidiaries adopted the PPM tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries.

 

21 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

Other comprehensive income

 

The tax (charge)/credit relating to components of other comprehensive income is as follows:

 

   Before tax 

(Charge)

/ Credit

  After tax
          
Foreign exchange variation of investees located abroad   1,325    -    1,325 
Gains (losses) on net investment hedge   (1,277)   434    (843)
Changes in the fair value of financial assets at fair value   (2,021)   838    (1,183)
As of March 31, 2019   (1,973)   1,272    (701)
                
Foreign exchange variation of investees located abroad   56,560    -    56,560 
Gains (losses) on net investment hedge   (85,600)   29,104    (56,496)
Changes in the fair value of financial assets at fair value   52,467    (20,977)   31,490 
As of March 31, 2020   23,427    8,127    31,554 

 

13.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 shares are designated as Class A common shares and issued; and

 

·1,000,000,000 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 March 31, 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 20, 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 March 31, 2020 the Company has 1,906,024 (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,

 

22 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

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.

 

(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 three months period ended March 31, 2020 and 2019, the Company has not declared and paid dividends to the controlling 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.

 

14.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)
         Three months period ended March 31,
Relation and transaction  March 31, 2020  December 31, 2019  2020  2019
             
Shareholders with significant influence (i)   175,859    (732,420)   (26,039)   (9,841)
Securities   152,636    123,813    3,780    2,094 
Securities purchased under agreements to resell   64,999    196,009    (30,087)   - 
Accounts receivable   348    594    797    61 
Securities sold under repurchase agreements   -    (1,000,168)   -    - 
Borrowings   (42,124)   (52,668)   (529)   (11,996)

 

(i)These transactions are related to Itaú Unibanco who became shareholder of the Company in 2018 and since then 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.

 

23 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

15.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 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.

 

   March 31, 2020  December 31,
2019
Tax contingencies   9,956    9,878 
Civil contingencies   2,412    2,673 
Labor contingencies   2,529    2,642 
Total provision   14,897    15,193 
           
Judicial deposits (i)   10,050    18,403 

 

(i)There are circumstances in which the Group is questioning the legitimacy of certain litigations or claims filed against it. As a result, either because of a judicial order or based on the strategy adopted by management, the Group might be required to secure part or the whole amount in question by means of judicial deposits, without this being characterized as the settlement of the liability. These amounts are classified as “Other assets” on the consolidated balance sheets and referred above for information.

 

Changes in the provision during the three months period

 

   Three months period ended March 31,
   2020  2019
       
As of January 1   15,193    17,474 
Monetary correction   325    336 
Provisions accrued   159    11 
Provisions reversed   (546)   - 
Payments   (234)   (318)
As of March 31   14,897    17,503 
           

 

Nature of claims

 

a)Tax

 

As of March 31, 2020, the Group has claims classified as probable risk of loss in the amount of R$ 9,956 (December 31, 2019 - R$ 9,878), regarding social contributions on revenue (PIS and COFINS), questioning the exclusion of this own taxes on the calculation basis over revenues. In accordance with Brazilian laws and tax regulations, this practice is legal for VAT (ICMS) taxes, and other companies have recently obtained significant success in applying this concept for PIS and COFINS taxes. 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;

 

24 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

and (iii) alleged losses generated from the liquidation of costumers assets in portfolio due to margin cause and/or negative balance. As of March 31, 2020, there were 34 civil claims for which the likelihood of loss has been classified as probable, in the amount of R$ 2,412 (December 31, 2019 - R$ 2,673). An amount of R$ 100 was deposited in court as of March 31, 2020 (December 31, 2019 – R$ 9,744).

 

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 March 31, 2020, the Company and its subsidiaries are the defendants in approximately 10 cases involving labor matters for which the likelihood of loss has been classified as probable, in the amount of R$ 2,529 (December 31, 2019 - R$ 2,642).

 

Contingent liabilities - 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, and the contingencies amount to approximately R$ 163,982 (December 31, 2019 - R$ 153,951).

 

Below is summarized these possible claims by nature:

 

  

March 31,

2020

 

December 31,

2019

       
Tax (i)   69,963    69,386 
Civil (ii)   89,419    81,414 
Labor   4,600    3,151 
Total   163,982    153,951 
           
(i)In December 2019, the Group was notified by tax authorities for a requirement of social security contributions due to employee profit sharing payments related to the calendar year 2015, allegedly in violation of Brazilian Law 10,101/00. Currently, the case at administrative level in assessment by the Administrative Council of Tax Appeals (“CARF”), awaiting the decision on the Group’s appeal. There are other favorable CARF precedents on the subject and the Group obtained legal opinions that support the Group’s defense and current practice.

 

(ii)The Group is defendant in 456 civil claims by customers and investment agents, mainly related to portfolio management, risk rating, copyrights and contract termination. The total amount represents the collective maximum value to which the Group is exposed based on the claims’ amounts monetarily restated.

 

16.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:

 

25 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

  

Three months period ended

March 31,

   2020  2019
Major service lines          
Brokerage commission   504,644    288,819 
Securities placement   348,174    160,391 
Management fees   255,049    140,858 
Insurance brokerage fee   29,226    18,548 
Educational services   25,700    13,750 
Other services   94,085    43,709 
    1,256,878    666,075 
(-) Sales taxes and contributions on revenue (i)   (104,932)   (66,828)
    1,151,946    599,247 
           

 

(i)Mostly related to taxes on services (ISS) and contributions on revenue (PIS and COFINS).

 

b)Net income from financial instruments

 

  

Three months period

ended March 31,

   2020  2019
       
Net Income of financial instruments at fair value through profit or loss   391,689    274,520 
Net Income of financial instruments measured at amortized cost and at fair value through other comprehensive income   207,299    65,822 
(-) Taxes and contributions on financial income   (16,093)   (5,597)
    582,895    334,745 
           
c)Disaggregation by geographic location

 

Breakdown of total net revenue and income and selected assets by geographic location:

 

  

Three months period

ended March 31,

   2020  2019
       
Brazil   1,634,093    863,587 
United Stated of America   91,890    62,958 
Europe   8,858    7,447 
Total revenue and income   1,734,841    933,992 
           
    

March 31,

2020

    

December 31, 2019

 
           
Brazil   1,162,433    1,208,737 
United Stated of America   147,374    224,244 
Europe   7,475    16,476 
Selected assets (i)   1,317,282    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.

 

26 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

17.Operating costs

 

  

Three months period ended

March 31,

   2020  2019
       
Commission costs   441,951    242,831 
Operating losses and provisions   38,303    2,901 
Other costs   98,562    62,024 
Clearing house fees   63,504    34,513 
Third parties’ services   18,148    19,579 
Other   16,910    7,932 
Total   578,816    307,756 
           
18.Operating expenses by nature

 

   Three months period ended March 31,
   2020  2019
       
Selling expenses   28,476    24,518 
Advertising and publicity   28,476    24,518 
           
Administrative expenses   578,116    368,285 
Personnel expenses   400,980    255,844 
Compensation   177,119    71,466 
Employee profit-sharing and bonus   103,020    150,185 
Executives profit-sharing   72,677    10,143 
Benefits   17,549    10,834 
Social charges   30,052    12,515 
Other   563    701 
           
Other taxes expenses   6,843    6,635 
Depreciation of property and equipment and right-of-use assets   15,878    8,102 
Amortization of intangible assets   15,648    7,055 
Other administrative expenses   138,767    90,649 
Data processing   55,947    33,328 
Technical services   20,768    15,360 
Third parties' services   40,193    21,968 
Rent expenses   3,390    6,318 
Communication   4,499    3,454 
Travel   5,699    3,674 
Legal and judicial   677    414 
Other   7,594    6,133 
Total   606,592    392,803 
           

27 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

19.Other operating income (expenses), net

 

   Three months period ended March 31,
   2020  2019
       
Other operating income   27,666    90,613 
Recovery of charges and expenses   501    51,800 
Reversal of operating provisions   704    4,392 
Revenue from incentives from Tesouro Direto, B3 and others   21,672    8,855 
Interest received on tax   2,281    22,931 
Other   2,508    2,635 
           
Other operating expenses   (41,549)   (5,437)
Legal proceedings and agreement with customers   (10,246)   (437)
Losses on write-off and disposal of assets   (59)   (3)
Fines and penalties   (624)   (730)
Associations and regulatory fees   (3,321)   (839)
Charity   (16,596)   (1,250)
Other   (10,703)   (2,178)
           
Total   (13,883)   85,176 
           
20.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 granted 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.

 

28 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

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 based on equity transactions with third parties close to the grant date; and

 

Other valuation techniques including share pricing models such as Monte Carlo.

 

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 March 31, 2020, the outstanding number of Company reserved under the plans were 4,096,401 (December 31, 2019 - 4,112,046) including 1,906,024 RSUs (December 31, 2019 - 1,921,669) and 2,190,377 PSUs (December 31, 2019 - 2,190,377).

 

For the period ended March 31, 2020, total compensation expense of both plans were R$28,408, including R$5,187 of tax provisions and does not include any tax benefits on total share-based compensation expense once, this expense is not deductible for tax purposes. The tax benefits will be perceived when the shares are converted into common shares.

 

The weighted-average grant-date fair value of RSU and PSU shares was US$27 and US$ 34,56 respectively.

 

During the period ended March 31, 2020, there were 15,645 forfeited RSUs and no shares granted, exercised, expired or vested.

 

21.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 March 31,
   2020  2019
Net income attributable to Parent company   396,860    209,215 
Basic weighted average quantity of shares (a)   551,800    509,247 
Basic earnings per share - R$   0.7192    0.4108 
           
Share-based incentive program (a)   4,096    - 
Diluted weighted average quantity of shares   555,896    509,247 
Diluted earnings per share - R$   0.7139    0.4108 
(a)Thousands of shares.

 

29 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

22.Determination of fair value

 

The Group measures financial instruments such as certain financial investments and derivatives at fair value at each balance sheet date.

 

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. As of March 31, 2020 and December 31, 2019, there were no financial instruments classified as level 3.

 

Specific valuation techniques used to value financial instruments include:

 

Financial assets (other than derivatives) - The fair value of securities is determined by reference to their closing prices on the date of presentation of the consolidated financial statements. If there is no market price, fair value is estimated based on the present value of future cash flows discounted using the observable rates and market rates on the date of presentation.

 

Swap – These operations swap cash flow based on the comparison of profitability between two indexers. Thus, the agent assumes both positions – put in one indexer and call on another.

 

Forward - at the market quotation value, and the installments receivable or payable are prefixed to a future date, adjusted to present value, based on market rates published at B3.

 

Futures – Foreign exchange rates, prices of shares and commodities are commitments to buy or sell a financial instrument at a future date, at a contracted price or yield and may be settled in cash or through delivery. Daily cash settlements of price movements are made for all instruments.

 

Options - option contracts give the purchaser the right to buy the instrument at a fixed price negotiated at a future date. Those who acquire the right must pay a premium to the seller. This premium is not the price of the instrument, but only an amount paid to have the option (possibility) to buy or sell the instrument at a future date for a previously agreed price.

 

Other financial assets and liabilities - Fair value, which is determined for disclosure purposes, is calculated based on the present value of the principal and future cash flows, discounted using the observable rates and market rates on the date the financial statements are presented.

 

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:

 

30 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

   March, 31 2020
   Level 1  Level 2  Fair Value  Book Value
Financial Assets                    
Financial assets at Fair value through profit or loss                    
Securities   22,640,753    2,450,970    25,091,723    25,091,723 
Derivative financial instruments   1,215    8,513,577    8,514,793    8,514,793 
Fair value through other comprehensive income                    
Securities   4,896,387    -    4,896,387    4,896,387 
Evaluated at amortized cost                    
Securities   -    1,267,826    1,267,826    1,267,826 
Securities purchased under agreements to resell   -    14,916,794    14,916,794    14,916,794 
Securities trading and intermediation   -    1,015,785    1,015,785    1,015,785 
Accounts receivable   -    424,702    424,702    424,702 
Loan operations   -    63,589    63,589    63,589 
Other financial assets   -    25,472    25,472    25,472 
Financial liabilities                    
Fair value through profit or loss                    
Securities loaned   721,131    -    721,131    721,131 
Derivative financial instruments   -    7,526,075    7,526,075    7,526,075 
Evaluated at amortized cost                    
Securities sold under repurchase agreements   -    21,111,301    21,111,301    21,111,301 
Securities trading and intermediation   -    13,333,539    13,333,539    13,333,539 
Borrowings and lease liabilities   -    644,184    644,184    644,439 
Debentures   -    832,810    832,810    844,361 
Accounts payables   -    265,197    265,197    265,197 
Structured operations certificates   -    150,461    150,461    150,461 
Other financial liabilities   -    31,485    31,485    31,485 

 

 

   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 
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 

31 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

23.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.

 

24.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.

 

32 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

The net debt and corresponding gearing ratios as of March 31, 2020 and December 31, 2019 were as follows:

 

  

March 31,

2020

  December 31, 2019
Borrowings and lease liabilities   644,439    637,484 
Debentures   844,361    835,230 
Total debt   1,488,800    1,472,714 
Cash   (249,950)   (109,922)
Securities purchased under agreements to resell   (309,053)   (654,057)
Certificate deposits (Securities)   (152,200)   (123,817)
Net debt   777,597    584,918 
           
Total equity   7,604,939    7,153,396 
Total capital   8,382,533    7,738,313 
Gearing ratio %   9.28%   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, 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 March 31, 2020 the subsidiaries XP CCTVM and XP Vida e Previdência were in compliance with all capital requirements.

 

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 9 and 10), the Group is required to comply with certain performance conditions, such as profitability and efficiency indexes.

 

As of March 31, 2020, the amount of contracts under financial covenants is R$ 1,219,853 (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.

 

33 

XP Inc. and its subsidiaries 

Notes to unaudited interim condensed consolidated financial statements

As of March 31, 2020 

In thousands of Brazilian Reais 

25.Cash flow information

 

a)Debt reconciliation

 

   Borrowings  lease liabilities  Debentures  Total
Total debt as of January 1, 2019   469,609    148,494    406,538    1,024,641 
Payments   (24,786)   (7,490)   -    (32,276)
Net foreign exchange differences   -    134    -    134 
Interest accrued   7,585    2,328    6,649    16,562 
Interest paid   (3,141)   -    -    (3,141)
Total debt as of March 31, 2019   449,267    143,466    413,187    1,005,920 
                     
Total debt as of January 1, 2020   382,078    255,406    835,230    1,472,714 
Acquisitions / Issuance   -    19,361    -    19,361 
Payments   (10,500)   (15,558)   -    (26,058)
Revaluation   -    (19,968)   -    (19,968)
Net foreign exchange differences   -    23,561    -    23,561 
Interest accrued   4,486    6,145    9,131    19,762 
Interest paid   (572)   -    -    (572)
Total debt as of March 31, 2020   375,492    268,947    844,361    1,488,800 

 

 

*   *   *

 

34