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 August, 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: August 11, 2020

 

 

EXHIBIT INDEX

 

Exhibit No. Description
99.1 Earnings Release dated August 11, 2020 – XP Inc. Reports 2Q20 Financial Results
99.2 2Q20 Earnings Presentation
99.3 XP Inc. – Unaudited interim condensed consolidated financial statements for the six months ended June 30, 2020

 

 

 

 

 

Exhibit 99.1

 

 

 

 

 

 

 

 

XP Inc. Reports 2Q20 Financial Results

 

São Paulo, Brazil, August 11, 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 second quarter of 2020.

 

To our shareholders:

 

We reached the end of a very challenging semester, but with a feeling of “mission accomplished”. Amid the global crisis and many uncertainties, we took the time to consolidate our culture, strengthen our purpose and demonstrate to the entire team that when we stand firm and work hard with our feet on the ground, we can achieve extraordinary results.

 

Our financial and operational performance results reinforce our belief that we are moving in the right direction, consolidating our path without shortcuts and with humility to change course when necessary. More than ever, we believe in the strength and potential of our business model and our people. As we often say, we are sure that we are only at the beginning of a long journey.

 

During the second quarter of 2020, we made a series of important announcements regarding various initiatives, with the common goal of strengthening our ecosystem and generating sustainable long-term value.

 

The permanent adoption of our remote work model and the idealization of Villa XP were influenced by the perception that the world is changing, and that the rapid adaptation of a new corporate lifestyle will drive competitive advantages. Many paradigms have been broken and we continue to increasingly challenge the status quo in the face of a crisis.

 

In this sense, the pandemic and its consequences, especially the isolation, brought an opportunity to rethink concepts of relationships, work, productivity and quality of life. To take this step, we carefully listened to our nearly 3,000 employees and thoroughly analyzed the merits and risks of the model. Although we are still in the initial stage of this project, we are very excited and confident that this could be a transformational moment for the Company.

 

In terms of sustainability, we recently created an ESG Board with the objective of organizing the company's existing initiatives and developing an ambitious and comprehensive plan to meet the high level of international requirements and best practices. Leaving a better world for future generations is one way of inspiring our teams, bringing us closer to our customers and, above all, demonstrating to society that we must lead this movement and stop blaming others for things that bother us. We believe that a great company, in addition to delivering solid results, should mobilize its structure to positively impact its surroundings, generating value for society and, consequently, achieving greater satisfaction for its customers and employees. Organizations that do not understand this role are at risk of losing their relevance and competitiveness in the coming years. Recently announced actions include the creation of ESG funds, as well as establishing a goal of women representing 50% of our workforce by 2025, with other initiatives in the pipeline.

 

Another recent milestone was the successful realization of the first Expert held 100% digitally and free of charge. In just a few weeks we were forced to rethink the entire event. Initially, 50,000 people were expected to attend, but the shifting landscape ended up presenting us with a greater opportunity to reach a much broader audience. The 10th edition of the largest investment event in the world reached more than 5 million people, reinforcing the irreversible acceleration of digitalization and the demand for quality content and financial education. The event was available on multiple platforms and social networks, with more than 200 speakers, among them: Tony Blair, Magic Johnson, Malala, Howard Marks, Ray Dalio, and Paulo Guedes, among others, discussing various subjects. The event improved the visibility of our brand and drove an increase in the volume of account openings. The mindset of empowering and inspiring Brazilians with knowledge is one of our competitive advantages since our inception that represents a powerful tool in prospecting and retaining customers.

 

Regarding new businesses and M&A activity, we recently announced four high potential transactions for our ecosystem: Fliper, DM10, Antecipa and DuAgro. The association with entrepreneurs aligned with our culture and

 

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with disruptive ideas and businesses represents a great opportunity to accelerate strategic projects and enhance our growth. Within the wholesale channel, we recently hired José Berenguer (Former CEO of JP Morgan Brasil) as partner and member of our executive committee. Mr. Berenguer is taking over our Issuer Services and corporate and private banking businesses. We are increasingly convinced that the same disruption we started in the retail universe can also be carried out in the corporate and high-net worth individuals’ markets, with the launch of our bank and other transactional services, that until now were only offered by traditional banks.

 

Additionally, a few weeks ago we announced the start of the test period for our XP Visa Infinite credit card. The card, which will feature Investback, and revert purchase fractions directly to our product platform, is one of the main pillars of our digital bank, which will launch key transactional features by the end of 2020. The strengthening of our value proposition with banking products and services brings us even closer to our customers and allows them the ability to concentrate all their investments within the XP's platform and brands. We have no doubt that one of our greatest short-term opportunities is to significantly increase the share of wallet of our investors, which will drive incremental growth and further diversify revenues.

 

In line with our commitment to constantly develop the Brazilian capital markets, we continue to innovate and further expand the possibilities for our customers, always striving for transparency and service. From now on, XP will offer, in addition to the traditional transactions-based commissions model (with full transparency of the amounts paid by customers), a fixed fee option based on services provided, whereby product commissions are reverted to the client’s portfolio. This alternative option ensures a differentiated customer experience, allowing, above all, flexible pricing structures based on investor preferences.

 

It is also worth highlighting all the investments we are making to retain and strengthen both our direct channel and our Independent Financial Advisor network. We will spare no financial, operational and intellectual efforts to increasingly improve and demonstrate that we are the best and most reliable ecosystem in the Brazilian financial market.

 

Fortunately, all these initiatives are happening during a historic period for Brazil, with low interest rates enhancing the search for financial education and better investment alternatives. Since the beginning of the Real plan (1994), average annual interest rates in Brazil have been over 13%, leading Brazilians to remain conservative, focused on the short term and, above all, driving rising concentration of assets with the largest banks in our country. With the current Selic rate at 2.00%, the incentive to take risks, diversify portfolios and adopt a longer-term vision become essential to generating meaningful financial returns. The record number of individuals investing in stocks in Brazil confirms this trend and, when we compare Brazil’s equity penetration with other countries, the size of the potential becomes increasingly clear.

 

I would also like to mention the encouraging behavioral shift of Brazilians driven by the current macroeconomic environment. In recent years, most of Brazil’s economic growth has been driven by the government. Now, more than ever, individuals have been empowered with low interest rates, driving accelerating growth in the number of entrepreneurs and enabling a structural inversion of this equation. We remain optimistic about our country and confident in its ongoing transformation.

 

Finally, I would like to reinforce that my partners and I remain totally committed to transforming the financial market to improve peoples' lives.

 

Thank you for your support.

 

Guilherme Benchimol, CEO

 

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2Q20 KPIs

 

  2Q20 2Q19 YoY 1Q20 QoQ
           

Operating and Financial Metrics (unaudited)          
Retail – AUC (in R$ bn) 436 274 59% 366 19%
Retail – active clients (in '000s) 2,360 1,304 81% 2,039 16%
Retail – gross total revenues (in R$ mn) 1,475 871 69% 1,254 18%
Institutional – gross total revenues (in R$ mn) 333 177 88% 331 1%
Issuer Services – gross total revenues (in R$ mn) 65 87 -25% 132 -51%
Digital Content – gross total revenues (in R$ mn) 46 32 42% 27 70%
Other – gross total revenues (in R$ mn) 123 69 79% 113 9%
Company Financial Metrics          
Gross revenue (in R$ mn) 2,041 1,236 65% 1,856 10%
Net Revenue (in R$ mn) 1,921 1,147 68% 1,735 11%
Gross Profit (in R$ mn) 1,342 780 72% 1,156 16%
Gross Margin 69.8% 68.1% 178 bps 66.6% 321 bps
Adjusted Net Income¹ (in R$ mn) 565 228 148% 415 36%
Adjusted Net Margin 29.4% 19.9% 951 bps 23.9% 550 bps

¹ See appendix for a reconciliation of Adjusted Net Income.

 

Total AUC

R$436 bn

+59% YoY

 

Active Clients

2,360 k

+8% YoY

 

IFAs

7,000+

 

NPS

71

 

Gross Revenue

R$2,041 mn

+65% YoY

 

Adjusted Net Income

R$565 mn

+148% YoY

 

 

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Operational Performance

Assets Under Custody (in R$ bn)

 

 

Total AUC reached R$436 billion at June 30, 2020, up 59% year-over-year and 19% quarter-over-quarter. The R$70 billion sequential increase is shown on the bridge chart below and was driven by: (1) R$41 billion of market appreciation and (2) R$29 billion of net inflows in the quarter.

 

Assets Under Custody 1Q20-2Q20 Bridge (in R$ bn)

 

 

Monthly average net inflow was about R$10 billion in 2Q20. As anticipated, the COVID-19 pandemic and consequent lockdown weighed on net new money dynamics in the beginning of 2Q20 due to commercial and operational bottlenecks. Hence, our monthly average net inflow was R$7.6 billion in April-May, down 36% vs the 1Q20 average, but recovered to R$14 billion in June, reflecting improved business conditions in Brazil.

 

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Active Clients (in 000’s)

 

 

Active clients totaled 2.4 million at the end of 2Q20, up 81% from 1.3 million at the end of 2Q19. Similar to the previous quarter, our Clear brand led the way in 2Q20 fueled by the ongoing equitization trend in Brazil, with more individual investors investing in equities and derivatives.

 

Monthly average active client net additions remained stable at approximately 107,000 in 2Q20 (versus 112,000 in 1Q20). This modest sequential decline was mainly driven by a mild deceleration in the IFA channel, which was an expected consequence of the lockdown and the restrictions on commercial activities such as events and meetings. Trends, however, improved in May and particularly June and we are confident looking ahead to the second half of the year.

 

Net Promoter Score (NPS)

 

NPS, a widely known survey methodology used to measure customer satisfaction, reached 71 in 2Q20. Maintaining a high NPS score is a priority for XP since our business model is built around client experience. The NPS calculation as of a given date reflects the average scores in the prior six months.

 

 

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2Q20 Revenue Breakdown

 

 

Note: Other Revenue represented 6% of Total Gross Revenues in 2Q20.

 

Total Gross Revenue (in R$ mn)

 

 

Total Gross Revenue increased 65% from R$1.2 billion in 2Q19 to R$2.0 billion in 2Q20, mainly driven by strong growth across the Retail and Institutional businesses.

 

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Retail

Retail Revenue (in R$ mn)

 

 

Retail revenue grew 69% from R$871 million in 2Q19 to R$1.5 billion in 2Q20. The main growth drivers included, in order of contribution: (1) equity and futures, reflecting consistently high trading volumes and growing participation of retail investors at B3; (2) fixed income, which benefited from the steepening of the yield curve; and (3) Financial Products, represented by COEs (structured notes) and equity-linked derivatives, saw increased demand in a volatile quarter. New products, such as COEs issued by Banco XP, Resgate and Limite Express collateralized loans and Derivatives for Corporate clients are also increasing their contribution to Retail revenue.

 

LTM Take Rate (LTM Retail Revenue / Average AUC)

 

 

The last twelve months Take Rate (or Revenue Yield) was stable in 2Q20 vs 1Q20 as equity, futures and fixed income revenue growth offset lower distribution fees from primary offerings and the average AUC sequential expansion.

 

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Institutional

Institutional Revenue (in R$ mn)

 

 

Institutional gross revenue totaled R$333 million in 2Q20, up 88% from R$177 million in 2Q19. Higher equity trading volume was the main driver, following similar dynamics in 1Q20. Broader market equity trading volumes, as reported by B3, expanded 90% year-over-year in 2Q20.

 

Issuer Services

Issuer Services Revenue (in R$ mn)

 

 

Issuer Services revenue decreased 25% year-over-year from R$87 million in 2Q19 to R$65 million in 2Q20. The decline was expected as the window for capital market deals closed during April and May due to the effects of the COVID-19 pandemic. For 2H20, following the recovery in May and June, XP maintains a robust pipeline of equity, debt and REITs transactions boding well for higher investment banking and distribution revenues. With José Berenguer joining XP to lead our Issuer Services business, we believe we will be able to further explore cross-selling opportunities in our ecosystem, expand our Investment Banking franchise and continue to disrupt this market in Brazil, as we did with Retail investments.

 

Digital Content and Other

Digital Content Revenue

 

Gross revenue totaled R$46 million in 2Q20, up 42% from R$32 million in 2Q19 mainly driven by the increase in students accessing our online courses and MBA programs.

 

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In 2Q20 we reached the following milestones: (1) InfoMoney, our leading financial web portal, attracted 14 million unique visitors, up 20% compared to 1Q20 and (2) our Retail Research Platform generated 1.3 million unique visitors, up 10% versus 1Q20.

 

Additionally, XP held its main event in July. Held 100% digitally and free of charge for the first time, Expert, which was already considered the largest investment event in the world, impacted more than five million people, up exponentially from prior years. The event had more than 200 speakers and a total of more than 200 hours of content on investments, innovation, technology, economics, politics, sustainability, and culture, among others.

 

Other Revenue

 

Other revenue grew 79% in 2Q20 vs 2Q19, from R$69 million to R$123 million, primarily driven by an increase in adjusted gross financial assets from R$3.0 billion at the end of 2Q19 to R$9.3 billion at June 30, 2020.

 

COGS

COGS (in R$ mn) and Gross Margin

 

 

COGS rose 58% from R$366 million in 2Q19 to R$579 million in 2Q20 driven by the increase in Retail revenue. Gross margin expanded to 69.8% in 2Q20 vs 68.1% in 2Q19, due to product mix and the ongoing equitization process that is accelerating the growth of our direct channel, mainly Clear.

 

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SG&A Expenses

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

 

 

SG&A expenses totaled R$678 million in 2Q20, up 61%, or slightly below the growth rate for total gross revenues, from R$422 million in 2Q19. As a percentage of net revenue, SG&A expenses represented 35.3% in 2Q20 vs 36.8% in 2Q19, with efficiency gains arising from our model’s operating leverage.

 

Adjusted Net Income

 

Adjusted Net Income¹ (in R$ mn) and Margin

 

 

In 2Q20, Adjusted Net Income grew 148% vs 2Q19 and reached R$565 million. The adjusted net margin expanded from 19.9% in 2Q19 to 29.4%, reflecting: (1) strong growth in Retail Revenue, which was mainly driven by equity, derivatives and fixed income and (2) a lower consolidated tax rate due to XP Inc.’s post-IPO corporate structure.

 

¹ See appendix for a reconciliation of Adjusted Net Income.

 

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Cash Flow

 

Cash Flow Data 2Q20 2Q19 1Q20
(R$ mn)      
       
Income before income tax 610 312 517
Adjustments to reconcile income before income tax 127 52 80
Income tax paid 130 (107) (197)
Contingencies paid (0) (1) (0)
Interest paid (17) (12) (1)
Changes in working capital assets and liabilities 540 147 (2)
Adjusted net cash flow (used in) from operating activities 1,388 392 398
Net cash flow (used in) from securities, repos, derivatives (857) (509) (537)
Net cash flows from operating activities 531 (117) (139)
Net cash flows from investing activities (37) (31) (41)
Net cash flows from financing activities (95) 359 (28)

 

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) increased to R$1,388 million for 2Q20 from R$392 million in 2Q19, and R$398 million in 1Q20 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);

 

·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;

 

·Increased net cash from changes in working capital derived from our banking activities such as loans operations, other financial liabilities which include customer deposits and financial bills, and structure operations certificates (COEs); and

 

·Our income before tax of R$736 million in 2Q20 combined with non-cash expenses consisting primarily of (i) share based plan of R$24 million (ii) depreciation and amortization of R$38 million and (iii) Losses on impairment and write-off of property, equipment and intangible assets of R$29 million. The total amount of adjustments to reconcile income before income taxes for 2Q20 was R$127 million.

 

Net Cash Flow Used in Investing Activities

 

Our net cash used in investing activities increased from R$31 million in 2Q19 to R$37 million in 2Q20 and decreased from R$41 million in 1Q20, primarily affected by:

 

·increased from R$7 million in 2Q19 to R$23 million in 2Q20 and from R$21 million in 1Q20 to R$ 23 million in 2Q20, mainly regarding the additions in facilities 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 decreased from R$24 million in 2Q19 to R$13 million in 2Q20 and decreased from R$20 million in 1Q20 to R$13 million in 2Q20.

 

Net Cash Provided by Financing Activities

 

Our net cash flows from financing activities decreased from R$359 million in 2Q19 to R$95 million in 2Q20, and increased from R$28 million in 1Q20 to R$95 million in 2Q20, primarily due to:

 

·R$66 million related to a partial repurchase of the second series of non-convertible debentures;

 

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·R$27 million in 2Q20, R$40 million in 2Q19 and R$26 million in 1Q20 related to Payments of borrowings and lease liabilities;

 

·R$400 million related to proceeds from issuance of debentures in 2Q19.

 

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

 

Floating Balance (=net uninvested clients' balances)   2Q20    1Q20 
Assets   (1,949)   (1,016)
(-) Securities trading and intermediation   (1,949)   (1,016)
Liabilities   14,851    13,334 
(+) Securities trading and intermediation   14,851    13,334 
(=) Floating Balance   12,902    12,318 

 

Adjusted Gross Financial Assets (=cash and equivalents, net of floating)   2Q20    1Q20 
Assets   55,007    54,937 
(+) Cash   346    250 
(+) Securities - Fair value through profit or loss   26,453    25,092 
(+) Securities - Fair value through other comprehensive income   5,252    4,896 
(+) Securities - Evaluated at amortized cost   1,226    1,268 
(+) Derivative financial instruments   15,589    8,515 
(+) Securities purchased under agreements to resell   6,142    14,917 
Liabilities   (32,789)   (34,514)
(-) Securities loaned   (473)   (721)
(-) Derivative financial instruments   (15,005)   (7,526)
(-) Securities sold under repurchase agreements   (10,118)   (21,111)
(-) Private Pension Liabilities   (7,194)   (5,155)
(-) Floating Balance   (12,902)   (12,318)
(=) Adjusted Gross Financial Assets   9,316    8,106 

 

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.

 

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Other Information

 

Web Meeting

 

The Company will host a webcast to discuss its second quarter 2020 financial results on Tuesday, August 11, 2020 at 5:00pm ET (6:00pm BRT). To participate in the earnings webcast please subscribe at: 2Q20 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

 

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

 

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or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction.

 

This release was prepared by the Company. Neither the Company nor any of its affiliates, officers, employees or agents, make any representation or warranty, express or implied, in relation to the fairness, reasonableness, adequacy, accuracy or completeness of the information, statements or opinions, whichever their source, contained in this release or any oral information provided in connection herewith, or any data it generates and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. The information and opinions contained in this release are provided as at the date of this release, are subject to change without notice and do not purport to contain all information that may be required to evaluate the Company. The information in this release is in draft form and has not been independently verified. The Company and its affiliates, officers, employees and agents expressly disclaim any and all liability which may be based on this release and any errors therein or omissions therefrom. Neither the Company nor any of its affiliates, officers, employees or agents makes any representation or warranty, express or implied, as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any.

 

The information contained in this release does not purport to be comprehensive and has not been subject to any independent audit or review. Certain of the financial information as of and for the periods ended December 31, 2019, 2018 and 2017 has been derived from audited financial statements and all other financial information has been derived from unaudited interim financial statements. A significant portion of the information contained in this release is based on estimates or expectations of the Company, and there can be no assurance that these estimates or expectations are or will prove to be accurate. The Company’s internal estimates have not been verified by an external expert, and the Company cannot guarantee that a third party using different methods to assemble, analyze or compute market information and data would obtain or generate the same results.

 

Statements in the release, including those regarding the possible or assumed future or other performance of the Company or its industry or other trend projections, constitute forward-looking statements. These statements are generally identified by the use of words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others. By their nature, forward-looking statements are necessarily subject to a high degree of uncertainty and involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company. Such factors may cause actual results, performance or developments to differ materially from those expressed or implied by such forward-looking statements and there can be no assurance that such forward-looking statements will prove to be correct. These risks and uncertainties include factors relating to: (1) general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business; (2) fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future; (3) competition in the financial services industry; (4) our ability to implement our business strategy; (5) our ability to adapt to the rapid pace of technological changes in the financial services industry; (6) the reliability, performance, functionality and quality of our products and services and the investment performance of investment funds managed by third parties or by our asset managers; (7) the availability of government authorizations on terms and conditions and within periods acceptable to us; (8) our ability to continue attracting and retaining new appropriately-skilled employees; (9) our capitalization and level of indebtedness; (10) the interests of our controlling shareholders; (11) changes in government regulations applicable to the financial services industry in Brazil and elsewhere; (12) our ability to compete and conduct our business in the future; (13) the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors; (14) changes in consumer demands regarding financial products, customer experience related to investments and technological advances, and our ability to innovate to respond to such changes; (15) changes in labor, distribution and other operating costs; (16) our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us; (17) other factors that may affect our financial condition, liquidity and results of operations. Accordingly, you should not place undue reliance on forward-looking statements. The forward-looking statements included herein speak only as at the date of this release and the Company does not undertake any obligation to update these forward-looking statements. Past performance does not guarantee or predict future performance. Moreover, the Company and its affiliates, officers, employees and agents do not undertake any obligation to review, update or confirm expectations or estimates or to release any revisions to any forward-looking statements to reflect events that occur or circumstances that arise in relation to the content of the release. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented and we do not intend to update any of these forward-looking statements.

 

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.

 

15 

 

 

 

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)

 

  2Q20 2Q19 YoY 1Q20 QoQ
Managerial Income Statement          

Total Gross Revenue   2,041    1,236    65%   1,856    10%
Retail   1,475    871    69%   1,254    18%
Institutional   333    177    88%   331    1%
Issuer Services   65    87    -25%   132    -51%
Digital Content   46    32    42%   27    70%
Other   123    69    79%   113    9%
Net Revenue   1,921    1,147    68%   1,735    11%
COGS   (579)   (366)   58%   (579)   0%
As a % of Net Revenue   (30.2%)   (31.9%)   1.8 p.p    (33.4%)   3.2 p.p 
Gross Profit   1,342    780    72%   1,156    16%
Gross Margin   69.8%   68.1%   1.8 p.p    66.6%   3.2 p.p 
SG&A   (638)   (422)   51%   (561)   14%
Share Based Compensation   (41)   —      n.a.    (28)   43%
EBITDA   663    358    85%   567    17%
EBITDA Margin   34.5%   31.2%   3.3 p.p    32.7%   1.8 p.p 
D&A   (38)   (24)   60%   (32)   21%
EBIT   625    334    87%   536    17%
Interest expense on debt   (16)   (23)   -31%   (19)   -17%
EBT   610    312    96%   517    18%
Income tax expense   (69)   (84)   -17%   (119)   -42%
Effective Tax Rate   (11.4%)   (26.8%)   15.4 p.p    (23.0%)   11.7 p.p 
Net Income   540    228    137%   398    36%
Net Margin   28.1%   19.9%   8.2 p.p    22.9%   5.2 p.p 
Non-Recurring Items   24    —      n.a.    17    43%
Adjusted Net Income   565    228    148%   415    36%
Adjusted Net Margin   29.4%   19.9%   9.5 p.p    23.9%   5.5 p.p 

 

 

 

17 

 

 

 

Accounting Income Statement (in R$ mn)

 

  2Q20 2Q19 YoY
Accounting Income Statement      

Net revenue from services rendered   1,064    798    33%
Brokerage commission   543    298    82%
Securities placement   186    205    -9%
Management fees   280    244    15%
Insurance brokerage fee   27    23    17%
Educational services   44    29    56%
Other services   85    84    2%
Taxes and contributions on services   (102)   (84)   22%
Net income from financial instruments at amortized cost and at fair value through other comprehensive income   (93)   112    -184%
Net income from financial instruments at fair value through profit or loss   951    237    301%
Total revenue and income   1,921    1,147    68%
Operating costs   (579)   (366)   58%
Selling expenses   (28)   (28)   -1%
Administrative expenses   (690)   (444)   55%
Other operating revenues (expenses), net   1    26    -96%
Interest expense on debt   (16)   (23)   -31%
Income before income tax   609    312    96%
Income tax expense   (69)   (84)   -17%
Effective tax rate   (11.4%)   (26.8%)   15.4 p.p 
Net income for the period   540    228    137%

 

Balance Sheet (in R$ mn)

 

   2Q20   1Q20 

Assets         

Cash   346    250 
Financial assets   57,381    56,217 
Fair value through profit or loss   42,042    33,607 
Securities   26,453    25,092 
Derivative financial instruments   15,589    8,515 

 

 

18 

 

 

 

Fair value through other comprehensive income   5,252    4,896 
Securities   5,252    4,896 
Evaluated at amortized cost   10,087    17,714 
Securities   1,226    1,268 
Securities purchased under agreements to resell   6,142    14,917 
Securities trading and intermediation   1,949    1,016 
Accounts receivable   346    425 
Loan Operations   377    64 
Other financial assets   47    25 
Other assets   712    603 
Recoverable taxes   225    227 
Rights-of-use assets   245    236 
Prepaid expenses   167    105 
Other   75    35 
Deferred tax assets   401    262 
Property and equipment   131    155 
Intangible assets   567    560 
Total Assets   59,537    58,046 

 

 

 

 

    2Q20    1Q20 
Liabilities          
Financial liabilities   43,013    44,628 
Fair value through profit or loss   15,478    8,247 
Securities   473    721 
Derivative financial instruments   15,005    7,526 
Evaluated at amortized cost   27,536    36,381 
Securities sold under repurchase agreements   10,118    21,111 
Securities trading and intermediation   14,851    13,334 
Borrowings and lease liabilities   640    644 

 

19 

 

 

 

Debentures   777    844 
Accounts payables   325    265 
Structured operations certificates   639    150 
Other financial liabilities   187    31 
Other liabilities   8,379    5,811 
Social and statutory obligations   583    275 
Taxes and social security obligations   395    170 
Private pension liabilities   7,194    5,155 
Provisions and contingent liabilities   15    15 
Other   192    196 
Deferred tax liabilities   —      —   
Total Liabilities   51,392    50,439 
Equity attributable to owners of the Parent company   8,143    7,605 
Issued capital   0    0 
Capital reserve   6,990    6,967 
Other comprehensive income   218    241 
Retained earnings   935    397 
Non-controlling interest   2    2 
Total equity   8,145    7,607 
Total liabilities and equity   59,537    58,046 

 

Adjusted Net Income (in R$ mn)

 

  2Q20 2Q19 YoY 1Q20 QoQ
Net Income 540 228 137% 398 36%
(+) Share Based Compensation 41 - n.a. 28 42%
(+/-) Taxes (16) - n.a. (11) 43%
Adj. Net Income 565 228 148% 415 36%

 

20 

 

 

 

Adjusted EBITDA (in R$ mn)

 

  2Q20 2Q19 YoY 1Q20 QoQ
Net Income 540 228 137% 398 36%
(+) Income Tax 69 84 -17% 119 -42%
(+) Depreciation and Amortization 38 24 60% 32 21%
(+) Interest Expense on Debt 16 23 -31% 19 -17%
(-) Interest Revenue on Adjusted Gross Financial Assets (62) (36) 72% (72) -15%
Adjusted EBITDA 601 322 87% 495 22%

 

 

 

21 

 

 

 

 

 

 

Exhibit 99.2

 

2Q20 Earnings Presentation August 2020

 

 

2 Important Disclosure IN REVIEWING THE INFORMATION CONTAINED IN THIS PRESENTATION, YOU ARE AGREEING TO ABIDE BY THE TERMS OF THIS DISCLAIMER . THIS INFORMATION IS BEING MADE AVAILABLE TO EACH RECIPIENT SOLELY FOR ITS INFORMATION AND IS SUBJECT TO AMENDMENT . This presentation is prepared by XP Inc . (the “Company,” “we” or “our”), is solely for informational purposes . This presentation does not constitute a prospectus and does not constitute an offer to sell or the solicitation of an offer to buy any securities . In addition, this document and any materials distributed in connection with this presentation are not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction . This presentation was prepared by the Company . Neither the Company nor any of its affiliates, officers, employees or agents, make any representation or warranty, express or implied, in relation to the fairness, reasonableness, adequacy, accuracy or completeness of the information, statements or opinions, whichever their source, contained in this presentation or any oral information provided in connection herewith, or any data it generates and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information . The information and opinions contained in this presentation are provided as at the date of this presentation, are subject to change without notice and do not purport to contain all information that may be required to evaluate the Company . The information in this presentation is in draft form and has not been independently verified . The Company and its affiliates, officers, employees and agents expressly disclaim any and all liability which may be based on this presentation and any errors therein or omissions therefrom . Neither the Company nor any of its affiliates, officers, employees or agents makes any representation or warranty, express or implied, as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any . The information contained in this presentation does not purport to be comprehensive and has not been subject to any independent audit or review . Certain of the financial information as of and for the periods ended December 31 , 2019 , 2018 and 2017 has been derived from audited financial statements and all other financial information has been derived from unaudited interim financial statements . A significant portion of the information contained in this presentation is based on estimates or expectations of the Company, and there can be no assurance that these estimates or expectations are or will prove to be accurate . The Company’s internal estimates have not been verified by an external expert, and the Company cannot guarantee that a third party using different methods to assemble, analyze or compute market information and data would obtain or generate the same results . Statements in the presentation, including those regarding the possible or assumed future or other performance of the Company or its industry or other trend projections, constitute forward - looking statements . These statements are generally identified by the use of words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others . By their nature, forward - looking statements are necessarily subject to a high degree of uncertainty and involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company . Such factors may cause actual results, performance or developments to differ materially from those expressed or implied by such forward - looking statements and there can be no assurance that such forward - looking statements will prove to be correct . These risks and uncertainties include factors relating to : ( 1 ) general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business ; ( 2 ) fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future ; ( 3 ) competition in the financial services industry ; ( 4 ) our ability to implement our business strategy ; ( 5 ) our ability to adapt to the rapid pace of technological changes in the financial services industry ; ( 6 ) the reliability, performance, functionality and quality of our products and services and the investment performance of investment funds managed by third parties or by our asset managers ; ( 7 ) the availability of government authorizations on terms and conditions and within periods acceptable to us ; ( 8 ) our ability to continue attracting and retaining new appropriately - skilled employees ; ( 9 ) our capitalization and level of indebtedness ; ( 10 ) the interests of our controlling shareholders ; ( 11 ) changes in government regulations applicable to the financial services industry in Brazil and elsewhere ; ( 12 ) our ability to compete and conduct our business in the future ; ( 13 ) the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors ; ( 14 ) changes in consumer demands regarding financial products, customer experience related to investments and technological advances, and our ability to innovate to respond to such changes ; ( 15 ) changes in labor, distribution and other operating costs ; ( 16 ) our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us ; ( 17 ) the negative impacts of the COVID - 19 pandemic on global, regional and national economies and the related market volatility and protracted economic downturn ; and ( 18 ) other factors that may affect our financial condition, liquidity and results of operations . Accordingly, you should not place undue reliance on forward - looking statements . The forward - looking statements included herein speak only as at the date of this presentation and the Company does not undertake any obligation to update these forward - looking statements . Past performance does not guarantee or predict future performance . Moreover, the Company and its affiliates, officers, employees and agents do not undertake any obligation to review, update or confirm expectations or estimates or to release any revisions to any forward - looking statements to reflect events that occur or circumstances that arise in relation to the content of the presentation . You are cautioned not to unduly rely on such forward - looking statements when evaluating the information presented and we do not intend to update any of these forward - looking statements . Market data and industry information used throughout this presentation are based on management’s knowledge of the industry and the good faith estimates of management . The Company also relied, to the extent available, upon management’s review of industry surveys and publications and other publicly available information prepared by a number of third party sources . All of the market data and industry information used in this presentation involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates . Although the Company believes that these sources are reliable, there can be no assurance as to the accuracy or completeness of this information, and the Company has not independently verified this information . The contents hereof should not be construed as investment, legal, tax or other advice and you should consult your own advisers as to legal, business, tax and other related matters concerning an investment in the Company . The Company is not acting on your behalf and does not regard you as a customer or a client . It will not be responsible to you for providing protections afforded to clients or for advising you on the relevant transaction . This presentation also includes certain non - GAAP financial information . We believe that such information is meaningful and useful in understanding the activities and business metrics of the Company’s operations . We also believe that these non - GAAP financial measures reflect an additional way of viewing aspects of the Company’s business that, when viewed with our International Financial Reporting Standards (“IFRS”) results, as issued by the International Accounting Standards Board, provide a more complete understanding of factors and trends affecting the Company’s business . Further, investors regularly rely on non - GAAP financial measures to assess operating performance and such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with IFRS . We also believe that certain non - GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in the Company’s industry, many of which present these measures when reporting their results . The non - GAAP financial information is presented for informational purposes and to enhance understanding of the IFRS financial statements . The non - GAAP measures should be considered in addition to results prepared in accordance with IFRS, but not as a substitute for, or superior to, IFRS results . As other companies may determine or calculate this non - GAAP financial information differently, the usefulness of these measures for comparative purposes is limited . A reconciliation of such non - GAAP financial measures to the nearest GAAP measure is included in this presentation . For purposes of this presentation : “Active Clients” means the total number of retail clients served through our XP Investimentos, Rico, Clear, XP Investments and XP Private (Europe) brands, with an AUC above R $ 100 . 00 or that have transacted at least once in the last thirty days . For purposes of calculating this metric, if a client holds an account in more than one of the aforementioned entities, such client will be counted as one “active client” for each such account . For example, if a client holds an account in each of XP Investimentos and Rico, such client will count as two “active clients” for purposes of this metric . “Assets Under Custody (AUC)” means the market value of all client assets invested through XP’s platform, including equities, fixed income securities, mutual funds (including those managed by XP Gestão de Recursos Ltda . , XP Advisory Gestão Recursos Ltda . and XP Vista Asset Management Ltda . , as well as by third - party asset managers), pension funds (including those from XP Vida e Previdência S . A . , as well as by third - party insurance companies), exchange traded funds, COEs (Structured Notes), REITs, and uninvested cash balances (Floating Balances), among others . 2

 

 

3 Index 0 1 2Q20 KPIs and Financials 0 2 Recent Developments 0 3 Q&A 0 4 Opening Remarks

 

 

1 Opening Remarks

 

 

5 CULTURE CONSOLIDATION Opening Remarks ECOSYSTEM REINFORCED Key YTD achievements reinforcing our secular growth story Higher eNPS in our history Villa XP Wealth Services M&As International Funds XP Visa Infinite Credit Card New board Juntos Transformamos ESG Investment Funds launched Commitment to gender diversification ESG INITIATIVES Significant growth in all KPIs Record 6 - month results Net Inflow Recovery in June/July STRONG RESULTS DIGITALIZATION AND EDUCATION Expert 2020 Xpeed Source: XP Inc.

 

 

2 2Q20 KPIs and Financials

 

 

7 KPIs AUC, Active Clients and NPS Assets Under Custody (AUC) (R$ in bn) Active Clients (‘000) 2Q19 2Q20 2,360 1,304 +81% 2,039 2Q20 1Q20 2,360 +16% 274 436 2Q19 2Q20 +59% 366 436 1Q20 2Q20 +19% 144 187 1H20 Jul - 20 +30% 7 8 14 Apr - 20 May - 20 Jun - 20 Monthly Avg. Activated Accounts (‘000) Net Inflow (R$ in bn) 12 Guidance top range

 

 

8 KPIs Average Trades and NPS Note: NPS, is an independent widely known survey methodology that measures the willingness of customers to recommend a Compan y’s products and services. The NPS calculation as of a given date reflects the average of the answers in the previous six months Retail Equity Daily Trades (million) 1H20 Jul - 20 2.9 2.2 +31% 2Q19 2Q20 0.9 2.7 +187% NPS June - 20: 71

 

 

9 2 Q20 Revenue and Breakdown RETAIL INSTITUTIONAL ISSUER SERVICES DIGITAL CONTENT 72 % 16 % 3 % 2 % Other Revenue represented 6% of Total Gross Revenues Total Gross Revenues (in R$ mn) Highlights ▪ Growth was mainly driven by strong performance in Retail and Institutional businesses . of 2Q20 Total Gross Revenue 2,041 2Q19 2Q20 1,236 +65% 1,980 Guidance top range

 

 

10 Retail Revenue and Take Rate Retail was the main revenue driver of 2Q20 following equitization trend in Brazil LTM Take Rate (LTM Retail Revenue / Average AUC) Retail Revenue (in R$ mn) 1.4% 1Q20 2Q20 1.4% 871 2Q19 1,475 2Q20 +69% Highlights ▪ Stable take rate as equity, futures and fixed income revenue growth offset lower distribution fees from primary offerings and the average AUC sequential expansion . Highlights ▪ Key revenue growth drivers were : ( 1 ) Equity and futures ; ( 2 ) Fixed Income and ( 3 ) Financial Products .

 

 

11 Highlights ▪ Decline was expected as the window for capital market deals was closed during April and May ; ▪ For 2 H 20 , following the recovery seen in May and June, we expect a robust pipeline of capital market transactions . 87 65 2Q20 2Q19 - 25% Highlights ▪ Higher equity trading volume was the main driver, following similar dynamics from 1 Q 20 ; ▪ Overall equity trading volume in the market, as reported by B 3 , expanded 90 % year - over - year in 2 Q 20 . 177 333 2Q20 2Q19 88% Institutional and Issuer Services Institutional benefited from market volumes and Issuer Services impacted by Covid - 19, as expected Issuer Services Revenue (in R$ mn) Institutional Revenue (in R$ mn)

 

 

12 Highlights ▪ Result primarily driven by the increase in adjusted gross financial assets, from R $ 3 . 0 bn in 2 Q 19 to R $ 9 . 3 bn in 2 Q 20 . 69 123 2Q20 2Q19 78% Highlights ▪ YoY growth driven by courses and MBAs, which are now under our new brand Xpeed School by XP Inc . 32 46 2Q19 2Q20 42% 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)

 

 

13 Adjusted Net Income and Margin Net margin expansion driven by strong growth across Retail and Institutional and a lower tax rate Highlights ▪ Year - over - year growth in Adjusted Net Income and margin driven by ( 1 ) strong performance of Retail and Institutional businesses and ( 2 ) lower consolidated tax rate . Adjusted Net Income (in R$ mn) Adjusted Net Margin Note :: 1 – We calculate Adjusted Net Income as net income, plus Itaú Transaction and deal related expenses, plus IPO process related expenses, plus our Share Based Plan expenses, minus one - time tax claim recognition ( 2010 - 2017 ) plus/minus taxes . See appendix for a reconciliation of Adjusted Net Income . 2 – Adjusted Net Margin is calculated as Adjusted Net Income divided by net revenue . See appendix for a reconciliation of Adjusted Net Margin .. 2Q19 29.4% 2Q20 19.9% 228 565 2Q19 2Q20 148% 28% Soft guidance top range 520 Guidance top range

 

 

3 Recent Developments

 

 

15 Recent Developments (1/2) XP Visa Infinite card began its test phase in July CREDIT CARD DCM / ECM / REITs Despite the challenging scenario, 67 deals were executed YTD, totaling R$62bn What’s new in our business roadmap 45 funds available in the platform, which reached R$6 billion in AUC, +500% YTD New offers: Bridgewater, Oaktree, Moneda and Ashmore INTERNATIONAL FUNDS XP clients can choose between commission - based and fixed fee models FIXED FEE

 

 

16 Recent Developments (2/2) What’s new in our business roadmap RECOGNITION Datafolha awarded XP as the best financial advisory in São Paulo during the lockdown period Highest access (logins) number ever in XP, Rico and Clear, +67% YoY in July Online searches for our brands also highest ever RECORD ENGAGEMENT 10 th Edition was held 100% digitally and impacted more than 5 million people EXPERT 2020 Commitment to reach 50% of women workforce by 2025 2 investments funds launched ESG

 

 

17 Closing Remarks XP is accelerating the disruption of four large markets in Brazil while maintaining its mission and values as core Retail Investments ~R$8 trillion TAM 90% of the market share with 5 largest banks Equitization Equity represents only ~10% of the retail asset allocation Penetration of individuals in the stock market is still less <2% of Brazilian population Pension Industry ~R$1 trillion TAM (open) 86% of the market share with 5 largest banks Top 2 pension player of net inflows in the first year of operation Corporate Banking ~R$1.6 trillion TAM New head appointed ECM and DCM recovering along with expansion of products and services Dream Big Retail Investments ~R$9 trillion TAM 90% of the market share with 5 banks Historic period for Brazil with lowest interest rates ever Transform the financial markets in Brazil to improve the lives of people in our country Open Mind Entrepreneurial Spirit Source: Oliver Wyman, SUSEP, Anbima , Brazilian Central Bank

 

 

Q&A

 

 

Investor Relations Carlos Lazar André Martins ir@xpi.com.br IR Website: investors.xpinc.com

 

 

Appendix

 

 

21 COGS and SG&A Gross margin expansion and efficiency gains COGS (in R$ mn) Operating Expenses (in R$ mn) Highlights ▪ Year - over - year gross margin expansion due to product mix and equitization accelerating direct channel growth . 366 579 2Q19 2Q20 58% 69.8% 68.1% Gross Margin 35.3% 36.8% % of Net Revenue 2Q19 0 41 2Q20 422 678 61% Share Based Compensation Highlights ▪ Efficiency gains arising mainly from our business model’s operating leverage .

 

 

22 Non - GAAP Financial Information Adjusted Net Income and Adjusted Gross Financial Assets 22 Adjusted Gross Financial Assets (in R $ mn ) Adjusted Net Income (in R $ mn ) 2Q20 2Q19 YoY 1Q20 QoQ Net Income 540 228 137% 398 36% (+) Share Based Compensation 41 - n.a. 28 42% (+/ - ) Taxes (16) - n.a. (11) 43% Adj. Net Income 565 228 148% 415 36% Floating Balance (=net uninvested clients’ balances) 2Q20 1Q20 Assets (1,949) (1,016) ( - ) Securities trading and intermediation (1,949) (1,016) Liabilities 14,851 13,334 (+) Securities trading and intermediation 14,851 13,334 (=) Floating Balance 12,902 12,318 Adjusted Gross Financial Assets (=cash and equivalents, net of floating) 2Q20 1Q20 Assets 55,007 54,937 (+) Cash 346 250 (+) Securities - Fair value through profit or loss 26,453 25,092 (+) Securities - Fair value through other comprehensive income 5,252 4,896 (+) Securities - Evaluated at amortized cost 1,226 1,268 (+) Derivative financial instruments 15,589 8,515 (+) Securities purchased under agreements to resell 6,142 14,917 Liabilities (32,789) (34,514) ( - ) Securities loaned (473) (721) ( - ) Derivative financial instruments (15,005) (7,526) ( - ) Securities sold under repurchase agreements (10,118) (21,111) ( - ) Private Pension Liabilities (7,194) (5,155) ( - ) Floating Balance (12,902) (12,318) (=) Adjusted Gross Financial Assets 9,316 8,106

 

Exhibit 99.3

 

 

 

 

 

 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated balance sheets

As of June 30, 2020 and December 31, 2019

In thousands of Brazilian Reais

 

 

   Note 

June 30,

2020

  December 31, 2019
          
Cash      345,868    109,922 
              
Financial assets      57,380,593    41,888,778 
              
Fair value through profit or loss      42,041,901    26,528,396 
Securities  4   26,453,321    22,443,392 
Derivative financial instruments  5   15,588,580    4,085,004 
              
Fair value through other comprehensive income      5,251,605    2,616,118 
Securities  4   5,251,605    2,616,118 
              
Evaluated at amortized cost      10,087,087    12,744,264 
Securities  4   1,225,873    2,266,971 
Securities purchased under agreements to resell  3   6,141,566    9,490,090 
Securities trading and intermediation  7   1,949,144    504,983 
Accounts receivable      346,062    462,029 
Loan operations      377,444    386 
Other financial assets      46,998    19,805 
              
Other assets      711,808    643,619 
Recoverable taxes      224,982    243,320 
Rights-of-use assets  8   245,121    227,478 
Prepaid expenses      166,824    89,684 
Other      74,881    83,137 
              
Deferred tax assets  13   400,967    284,533 
Property and equipment  8   130,675    142,464 
Intangible assets  8   567,222    553,452 
              
              
Total assets      59,537,133    43,622,768 

 

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

 

2

 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated balance sheets

As of June 30, 2020 and December 31, 2019

In thousands of Brazilian Reais

 

 

   Note 

June 30,

2020

  December 31, 2019
          
Financial liabilities      43,013,197    31,842,054 
              
Fair value through profit or loss      15,477,690    5,250,943 
Securities  4   472,761    2,021,707 
Derivative financial instruments  5   15,004,929    3,229,236 
              
Evaluated at amortized cost      27,535,507    26,591,111 
Securities sold under repurchase agreements  3   10,117,579    15,638,407 
Securities trading and intermediation  7   14,850,660    9,114,546 
Borrowings and lease liabilities  9   639,982    637,484 
Debentures  10   776,724    835,230 
Accounts payables      324,575    266,813 
Structured operations certificates      638,754    19,474 
Other financial liabilities  11   187,233    79,157 
              
Other liabilities      8,379,083    4,619,623 
Social and statutory obligations      582,689    492,723 
Taxes and social security obligations      395,405    345,331 
Private pension liabilities  12   7,193,719    3,759,090 
Provisions and contingent liabilities  16   15,479    15,193 
Other      191,791    7,286 
              
Deferred tax liabilities  13 (b)   -      5,132 
              
Total liabilities      51,392,280    36,466,809 
              
              
Equity attributable to owners of the Parent company      8,142,972    7,153,396 
Issued capital      23    23 
Capital reserve      6,990,221    6,943,446 
Other comprehensive income      217,549    209,927 
Retained earnings      935,179    -   
              
Non-controlling interest      1,881    2,563 
              
Total equity      8,144,853    7,155,959 
              
Total liabilities and equity      59,537,133    43,622,768 

 

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

 

3

 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated statements

of income and of comprehensive income

For the six months ended June 30, 2020 and 2019

In thousands of Brazilian Reais, except earnings per share

 

 

        Six months period ended June 30,   Three months period ended June 30,
    Note   2020   2019   2020   2019
                     
Net revenue from services rendered   17(a)   2,215,486   1,397,062   1,063,540   797,815
Net income from financial instruments at  amortized cost and at fair value through other  comprehensive income   17(b)   109,058   177,510   (93,439)   111,688
Net income from financial instruments  at fair value through profit or loss   17(b)   1,331,226   506,017   950,828   237,094
Total revenue and income       3,655,770   2,080,589   1,920,929   1,146,597
                     
Operating costs   18   (1,158,042)   (674,009)   (579,226)   (366,253)
Selling expenses   19   (56,045)   (52,315)   (27,569)   (27,797)
Administrative expenses   19   (1,267,991)   (812,434)   (689,875)   (444,149)
Other operating income (expenses), net       20   (12,815)   111,129   1,068   25,953
Interest expense on debt       (34,800)   (38,150)   (15,781)   (22,768)
                     
Income before income tax       1,126,077   614,810   609,546   311,583
                     
Income tax expense      13   (188,260)   (176,310)   (69,283)   (83,521)
                     
Net income for the period       937,817   438,500   540,263   228,062
                     
Other comprehensive income                    
Items that can be subsequently reclassified to income                    
Foreign exchange variation of investees located abroad       69,675   (3,065)   13,115   (4,390)
Gains (losses) on net investment hedge   6   (72,839)   2,083   (16,343)   2,925
Changes in the fair value of financial assets at fair value through other comprehensive income       11,158   9,103   (20,332)   10,287
                     
Other comprehensive income (loss) for the period, net of tax       7,994   8,121   (23,560)   8,822
                     
Total comprehensive income for the period       945,811   446,621   516,703   236,884
                     
Net income attributable to:                    
Owners of the Parent company       935,179   434,197   538,319   224,982
Non-controlling interest       2,638   4,302   1,944   3,080
                     
Total comprehensive income attributable to:                    
Owners of the Parent company       943,173   442,319   514,759   233,804
Non-controlling interest       2,638   4,303   1,944   3,080
                     
Earnings per share from total income attributable to the ordinary equity holders of  the company                    
Basic earnings per share   22   1.6996   0.8611   0.9791   0.4478
Diluted earnings per share   22   1.6870   0.8611   0.9719   0.4478

 

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

 

4

 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated statements of changes in equity

For the six months ended June 30, 2020 and 2019

In thousands of Brazilian Reais

 

 

      Atributable to owners of the Parent      
        

 Capital reserve

               
   Notes  Issued Capital  Additional paid-in capital  Other Reserves  Other comprehensive income  Retained Earnings  Total  Non-Controlling interest  Total Equity
                            
Balances at December 31, 2018      21    927,895    947,696    209,165    -      2,084,777    6,935    2,091,712 
                                            
Comprehensive income for the year                                           
Net income for the period      -      -      -      -      434,197    434,197    4,303    438,500 
Other comprehensive income, net      -      -      -      8,121    -      8,121    -      8,121 
Transactions with shareholders - contributions and distributions                                           
Gain (loss) in changes in interest of subsidiaries, net      -      -      -      283    -      283    767    1,050 
Allocations of the net income for the year                                           
Dividends distributed      -      -      -      -      -      -      (3,619)   (3,619)
Balances at June 30, 2019      21    927,895    947,696    217,569    434,197    2,527,378    8,386    2,535,764 
                                            
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      -      -      -      -      935,179    935,179    2,638    937,817 
Other comprehensive income, net      -      -      -      7,994    -      7,994    -      7,994 
Transactions with shareholders - contributions and distributions                                           
Grant of share based incentive plan  21   -      -      46,775    -      -      46,775    (8)   46,767 
Gain (loss) in changes in interest of subsidiaries, net      -      -      -      (372)   -      (372)   1,310    938 
Allocations of the net income for the year                                           
Dividends distributed      -      -      -      -      -      -      (4,622)   (4,622)
Balances at June, 2020      23    5,409,895    1,580,326    217,549    935,179    8,142,972    1,881    8,144,853 

 

Unaudited interim condensed consolidate

 

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

 

5

 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated statements of cash flows

For the six months ended June 30, 2020 and 2019

In thousands of Brazilian Reais

 

  

     

Six months ended

June 30,

   Note  2020  2019
Operating activities         
Income before income tax      1,126,077    614,810 
              
Adjustments to reconcile income before income taxes             
Depreciation of property and equipment and right-of-use assets  8   36,043    24,315 
Amortization of intangible assets  8   33,477    14,631 
Loss on impairment and write-off of property, equipment and intangible assets  8   32,320    7,971 
Expected credit losses on accounts receivable and other financial assets      28,630    7,480 
(Reversal of) Provision for contingencies, net  16   (308)   67 
Net foreign exchange differences      2,277    409 
Share based plan      46,767    -   
Interest accrued      27,975    31,001 
              
Changes in assets and liabilities             
Securities (assets and liabilities)      (7,109,777)   (3,421,858)
Derivative financial instruments (assets and liabilities)      161,755    361,741 
Securities trading and intermediation (assets and liabilities)      4,291,953    1,546,953 
Securities purchased (sold) under resale (repurchase) agreements      (2,172,304)   102,779 
Accounts receivable      90,607    (60,574)
Loan operations      (379,021)   -   
Prepaid expenses      (77,140)   (17,751)
Other assets and other financial assets      (19,264)   (1,758)
Structured operations certificates      619,280    -   
Accounts payable      57,045    80,446 
Social and statutory obligations      89,966    145,178 
Tax and social security obligations      (127,333)   (82,429)
Private pension liabilities      3,434,629    668,452 
Other liabilities and other financial liabilities      283,707    (4,092)
              
Cash from operations      477,361    17,771 
              
Income tax paid      (66,985)   (193,218)
Contingencies paid  16   (379)   (1,060)
Interest paid      (17,909)   (14,955)
Net cash flows from operating activities      392,088    (191,462)
              
Investing activities             
Acquisition of intangible assets  8   (44,099)   (18,471)
Acquisition of property and equipment  8   (32,897)   (32,411)
Investment in joint venture, net of cash acquired      (980)   -   
Net cash flows used in investing activities      (77,976)   (50,882)
              
Financing activities             
Payments of borrowings and lease liabilities  26   (53,266)   (71,324)
Repurchase of debentures      (65,843)     
Proceeds of debentures      -      400,000 
Transactions with non-controlling interests      938    1,050 
Dividends paid to non-controlling interests      (4,622)   (3,619)
Net cash flows from (used in) financing activities      (122,793)   326,107 
              
Net increase in cash and cash equivalents      191,319    83,763 
              
Cash and cash equivalents at the beginning of the period      887,796    626,863 
Effects of exchange rate changes on cash and cash equivalents      42,999    (2,004)
Cash and cash equivalents at the end of the period      1,122,116    708,622 
              
Cash      345,868    107,774 
Securities purchased under agreements to resell  3   527,000    126,595 
Interbank certificate deposits  4   249,248    474,253 

 

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

 

6

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 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 held 54.79% of voting rights on June 30, 2020, and whose is ultimately controlled by a group of individuals. After the public offering which was concluded on July 1, 2020, as described on Note 27, XP Controle holds 53.38% of voting rights.

 

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 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 six months period ended June 30, 2020 were approved by the Board of Director’s meeting on August 07, 2020.

 

7

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 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 June 30, 2020 and for the six months ended June 30, 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 June 30,
2020
December  31, 2019
         
Indirectly controlled        
XP LT Gestão de Recursos Ltda. (ii) Brazil Equity asset management 92.00% -
         

 

(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)    Interests in a joint ventures

 

On June 23, 2020, the Company acquired 49% interest in DuAgro Holdings S.A. (“DuAgro”), a joint venture involved in the agribusiness. DuAgro is an integrated platform that utilizes technology to finance the purchase of agricultural inputs. The focus is on small- and medium-sized producers.

 

The Company’s interest in DuAgro is accounted for using the equity method in the unaudited interim condensed consolidated financial statements. DuAgro cannot distribute its profits without the consent from the two venture partners.

 

As the contribution date was June 23, 2020, this joint venture has not contributed net revenue and net income before tax from continuing operations to the Company.

 

8

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

d)    Business development

 

The acquisition date fair value of each major class of consideration, including the allocation of the purchase price has not been completed by the Group as of the date of these unaudited interim condensed consolidated financial statements. The impact on revenue and income of the combined entity for the current period as if the acquisition date had been as of the beginning of the annual reporting period is not available as the Group recently concluded the acquisition. Therefore, the unaudited interim condensed consolidated financial statements do not include this information.

 

Acquisition of Carteira Online Controle de Investimentos Ltda.-ME (“Fliper”)

 

On June 5, 2020, the Group entered into an agreement, through its for the acquisition of 100% of total share capital of Carteira Online Controle de Investimentos Ltda.-ME (“Fliper”). Fliper is an automated investment consolidation platform that offers its users connectivity and tools to perform intuitive and intelligent financial self-management. The transaction allows the Group to offer its customers additional resources to manage their investments, as the open banking trend continues to accelerate in Brazil. On July 13, 2020, acquisition was consummated, through approval of Central Bank (BACEN).

 

Acquisition of DM10 Corretora de Seguros e Assessoria Ltda. (“DM10”)

 

On June 9, 2020, the Group entered into an agreement, through its for the acquisition of 100% of total share capital of DM10 Corretora de Seguros e Assessoria Ltda. (“DM10”). DM10 is an marketplace that connects hundreds of independent distributors with the best Life Insurance and Pension Plan products, adding value through technology and education. With the transaction, the Group enhances its distribution network in the insurance division. On June 30, 2020 the transaction it is subject to compliance with certain precedent conditions, including prior authorization from the Central Bank.

 

Acquisition of Antecipa S.A. (“Antecipa”)

 

On June 29, 2020, the Group entered into an agreement, through its for the acquisition of 100% of total share capital of Antecipa S.A. (“Antecipa”). Antecipa is a digital platform for the financing of receivables.Antecipa's central objective is to offer an efficient alternative for companies to optimize cash flow management. For the Group, the acquisition represents an opportunity to further expand its product range and reinforce the company’s presence in the Small to Medium Enterprise (SME) and corporate segments in Brazil, similar to XP’s transformational initiatives across the Retail, High-Income and Private Market channels. On June 30, 2020, the transaction was pending the approval of the Central Bank.

 

e)    Segment reporting

 

In reviewing the operational performance of the Group and allocating resources, the chief operating decision maker of the Group (“CODM”), who is the Group’s Chief Executive Officer (“CEO”) and the Board of Directors (“BoD”), represented by statutory directors holders of ordinary shares of the immediate parent of the Company, reviews selected items of the statement of income and of comprehensive income.

 

The CODM considers the whole Group as a single operating and reportable segment, monitoring operations, making decisions on fund allocation and evaluating performance based on a single operating segment. The CODM reviews relevant financial data on a combined basis for all subsidiaries and joint ventures. Disaggregated information is only reviewed at the revenue level (Note 17), with no corresponding detail at any margin or profitability levels.

 

9

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

The Group’s revenue, results and assets for this one reportable segment can be determined by reference to the unaudited interim condensed consolidated statements of income and of comprehensive income and unaudited interim condensed consolidated balance sheet.

 

See Note 17 (c) for a breakdown of total revenue and income and selected assets by geographic location

 

f)     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, national and regional 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 however has not identified relevant impact to the financial performance or position of the group as June, 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 June 30, 2020, the Group is monitoring COVID-19 effects on its business, which are still uncertain and will depend on the severity of the coronavirus and the actions to contain or treat its impact, among others.

 

As a consequence of this pandemic, most of the Group’s employees is working from home. Based on thorough assessments about the well-being and performance of our workforce, management announced on June 11, 2020, the permanent and company-wide adoption of the home-office model. The reduction in such footprint and the potential financial consequences of such actions are being analyzed by management.

 

Additionally, XP Inc announced its intention to establish new corporate headquarters outside the city of São Paulo ("Villa XP"), with an innovative architecture comprising workstations, meeting rooms and common areas. The financial impacts of such initiative are still under evaluation.

 

g)    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 June 30, 2020, and have not been early adopted by the group. These standards are not expected to have a material impact on the entity in the current or future financial statements periods and on foreseeable future transactions.

 

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

 

h)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.

 

10

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

In preparing these unaudited interim condensed consolidated financial statements, the significant judgements and estimates made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that are set the consolidated financial statements for the year ended December 31, 2019.

 

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

 

a)      Securities purchased under agreements to resell

 

  

June 30,

2020

  December 31, 2019
       
Available portfolio   3,361,671    971,991 
National Treasury Notes (NTNs)   -      771,099 
Financial Treasury Bills (LFTs)   -      195,980 
National Treasury Bills (LTNs)   3,361,671    4,912 
           
Collateral held   2,730,443    8,518,099 
National Treasury Bills (LTNs)   -      1,764,410 
National Treasury Notes (NTNs)   2,730,443    6,753,689 
           
Collateral sold   49,452    -   
National Treasury Bills (LTNs)   49,452    -   
           
Total   6,141,566    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 3.46% p.a. (December 31, 2019 – 4.63% p.a.).

 

As of June 30, 2020, R$527,000 (December 31, 2019 - R$ 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

 

  

June 30,

2020

 

December 31,

2019

National Treasury Bills (LTNs)   6,958,427    8,533,113 
National Treasury Notes (NTNs)   3,080,488    5,653,994 
Financial Treasury Bills (LFTs)   -      1,451,300 
Agribusiness receivables certificates (CRA)   78,664    -   
Total   10,117,579    15,638,407 
           

As of June 30, 2020, securities sold under repurchase agreements were agreed with average interest rates of 2.13% p.a. (December 31, 2019 – 4.48% p.a.), with assets pledged as collateral.

 

11

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 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

 

  

June 30,

2020

 

December 31,

2019

   Gross carrying amount 

Fair

value

  Gross carrying amount 

Fair

Value

Financial assets            
At fair value through profit and loss   26,204,506    26,453,321    22,332,936    22,443,392 
Agribusiness receivables certificates   596,993    595,896    598,085    589,525 
Bank deposit certificates (i)   364,515    366,175    244,071    246,827 
Brazilian government bonds   15,365,866    15,559,668    15,404,300    15,494,046 
Certificate of real estate receivable   120,137    116,533    75,922    75,123 
Debentures   1,059,146    1,039,558    885,344    885,068 
Financial credit bills   83,096    82,705    98,068    106,759 
Investment funds (ii)   6,191,644    6,191,644    3,047,198    3,047,198 
United States government bonds   906,812    906,812    -      -   
Real estate credit bill   1,230    1,253    1,282    1,300 
Stocks issued by public-held company   860,652    860,652    1,562,965    1,562,965 
Structured operations certificate   482,659    527,292    237,112    256,381 
Others (iii)   171,756    205,133    178,589    178,200 
                     
At fair value through other comprehensive income   5,225,373    5,251,605    2,608,325    2,616,118 
National treasury bill   5,225,373    5,251,605    2,608,325    2,616,118 

 

(i)Bank deposit certificates include R$249,248 (December 31, 2019 – R$123,817) is being presented as cash equivalents in the statements of cash flows.

 

(ii)Investments funds include R$7,193,719 (December 31, 2019 – R$3,759,090) amounts related to Specially Constituted Investment Fund (“FIE”) as presented in Note 12.

 

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

 

b)Securities evaluated at amortized cost

 

   June 30, 2020  December 31, 2019
   Gross carrying amount 

Book

Value

  Gross carrying amount 

Book

Value

Financial assets            
At amortized cost   1,225,873    1,225,873    2,266,971    2,266,971 
Bonds   1,225,873    1,225,873    2,266,971    2,266,971 

 

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

 

   June 30, 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   472,761    472,761    2,021,707    2,021,707 

 

12

 

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

d)      Securities classified by maturity

 

   Assets  Liabilities
   June 30, 2020  December 31, 2019  June 30, 2020  December 31, 2019
             
Financial assets            
At fair value through P&L and at OCI            
Current   9,589,019    9,804,819    472,761    2,021,707 
Non-stated maturity   7,250,116    4,999,333    472,761    2,021,707 
Up to 3 months   1,074,953    257,544    -      -   
From 3 to 12 months   1,263,950    4,547,942    -      -   
                     
Non-current   22,115,907    15,254,691    -      -   
After one year   22,115,907    15,254,691    -      -   
                     
Evaluated at amortized cost                    
Current   1,225,873    2,266,971    -      -   
Up to 3 months   374,044    807,218         -   
From 3 to 12 months   851,829    1,459,753         -   
              -        
Total   32,930,799    27,326,481    472,761    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:

 

   June 30, 2020
  

Notional

 

Fair Value

 

%

 

Up to 3 

months

 

From 3 to 12 months

 

Above 12 months

Assets                  
Options   528,778,111    6,718,432    43%   2,766,235    1,308,126    2,644,071 
Swap contracts   3,146,458    518,872    3%   23,160    104,623    391,089 
Forward contracts   11,576,144    8,351,080    53%   8,321,445    19,542    10,093 
Future contracts   93,914    196    1%   196    -      -   
Total   543,594,627    15,588,580    100%   11,111,036    1,432,291    3,045,253 
                               
Liabilities                              
Options   599,650,125    6,347,693    42%   2,356,819    987,713    3,003,161 
Swap contracts   4,323,776    585,329    4%   68,016    104,268    413,045 
Forward contracts   11,655,738    8,063,631    53%   8,047,386    15,696    549 
Future contracts   9,450,168    8,276    1%   8,276    -      -   
Total   625,079,807    15,004,929    100%   10,480,497    1,107,677    3,416,755 

 

  

 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 

 

13

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

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 
                               

 

6.Hedge accounting

 

In the six months period ended June 30, 2020 and in the year ended December 31, 2019, the objective for the Group was to hedge the risk generated by the US$ variation from the investments in United States, 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   
Strategies  Assets  Liabilities  value recognized in Other comprehensive income  Nominal value  Variation in the
amounts used to
calculate hedge
ineffectiveness
             
June 30, 2020               
Foreign exchange risk               
Hedge of net investment in foreign operations   225,638    -      64,506    351,833    (72,839)
Total   225,638    -      64,506    351,833    (72,839)
                          
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)
                          

For the periods ended of June 30, 2020 and December 31, 2019, there was no ineffectiveness 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.

 

  

June 30,

2020

  December 31, 2019
Cash and settlement records   355,360    13,823 

 

 

14

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

 

Debtors pending settlement   1,529,056    477,646 
Other   64,728    13,514 
Total Assets   1,949,144    504,983 
           
Cash and settlement records   423,277    474,759 
Creditors pending settlement   14,427,383    8,639,787 
Total Liabilities   14,850,660    9,114,546 

 

8.Property, equipment, intangible assets and lease

 

a)    Changes in the period

 

   Property and  Intangible
   equipment  assets
       
As of January 1, 2019   99,127    504,915 
Additions   32,411    18,471 
Write-offs   (7,915)   (56)
Transfers   (128)   128 
Depreciations / Amortization in the period   (9,876)   (14,631)
As of June 30, 2019   113,619    508,827 
Cost   123,482    523,458 
Accumulated depreciation / amortization   (9,863)   (14,631)
           
As of January 1, 2020   142,464    553,452 
Additions   32,897    44,099 
Write-offs   (69)   (186)
Transfers   (3,334)   3,334 
Impairment (i)   (28,290)   -   
Depreciations / Amortization in the period   (12,993)   (33,477)
As of June 30, 2020   130,675    567,222 
Cost   143,502    608,816 
Accumulated depreciation / amortization   (12,827)   (41,594)

 

(i)As previously mentioned on Note 2(f), as an effect of COVID-19 pandemic, the company decided to implement a permanent remote work model, which has resulted in initiatives to reduce some of its offices in the city of São Paulo.

 

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 June 30, 2020, there were no indicators of a potential impairment of goodwill.

 

15

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

c)    Leases

 

Set out below, are the carrying amounts of the Group’s right-of-use assets and lease liabilities and the movements during the period.

 

   Right-of-use assets  Lease liabilities
       
As of January 1, 2019   133,870    148,494 
Additions (i)   87,271    92,612 
Depreciation expense   (14,439)   -   
Interest expense   -      8,749 
Effects of exchange rate   (740)   (331)
Payment of lease liabilities   -      (21,257)
As of June 30, 2019   205,962    228,267 
           
As of January 1, 2020   227,478    255,406 
Additions (i)   35,342    35,562 
Depreciation expense   (23,050)   -   
Write-offs (ii)   (8,532)   (8,532)
Interest expense   -      11,224 
Revaluation (iii)   (9,118)   (10,052)
Impairment   (3,775)   -   
Effects of exchange rate   26,776    29,053 
Payment of lease liabilities   -      (32,266)
As of June 30, 2020   245,121    280,395 
Current   -      36,076 
Non-current   245,121    244,319 

 

(i)Additions to right-of-use assets in the period include prepayments to lessors and accrued liabilities.

 

(ii)The expected residual values are reviewed to reflect actual residual values achieved on comparable assets and expectations about future prices.

 

(iii)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$ 1,093 for the period ended June 30, 2020. The total rent expense of R$ 2,258, include other expenses related to leased offices such as condominium.

 

Depreciation and amortization expense has been charged in the following line items of consolidated statement of income:

 

   Six months period ended June 30,  Three months period ended June 30,
   2020  2019  2020  2019
Property and equipment            
Depreciation in the period   12,993    9,876    6,738    5,204 
                     
Leases                    
Depreciation in the period   23,050    14,439    13,428    11,009 
                     
Intangible assets                    
Amortization in the period   33,477    14,631    17,829    7,576 
    69,521    38,946    37,995    23,789 

 

 

16

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

9.Borrowings and lease liabilities

 

  Interest rate %   Maturity   June 30, 2020   December 31, 2019
               
Bank borrowings – domestic (i) 113% of CDI(*)   March 2021   31,586   52,668
Related parties         31,586   52,668
               
Financial institution (ii) CDI (*)+ 0.774%   April 2023   328,001   329,410
Third parties         328,001   329,410
               
Total borrowings         359,587   382,078
               
Lease liabilities         280,395   255,406
               
Total borrowings and lease liabilities       639,982   637,484
               
Current         88,648   116,450
Non-current         551,334   521,034

 

(*) Brazilian Interbank Offering Rate (CDI)

 

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

(ii) Loan agreement entered into on March 28, 2018 with the International Finance Corporation (IFC). The principal amount is due on the maturity date and accrued interests payable at every six months.

 

All the obligations above contain financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 25 (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 June 30, 2020, the total balance is comprised of the following issuances:

 

Issuance

 

Quantity Issued (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$1,102.63   441,526 
 2st   400,000   107.5% CDI  5/15/2019  5/15/2022  R$ 1,000.00  R$1,003.53   335,198 
 Total    800,000                   776,724 
                            

 

  

June 30,

2020

  December 31, 2019
Principal   800,000    800,000 
Interest   62,988    47,127 
Payments   (20,421)   (11,897)
Repurchase (a)   (65,843)   -   
Total   776,724    835,230 
           
Current   376,724    435,230 
Non-current   400,000    400,000 

 

(a)As of June 30, 2020 the Group repurchase of 65.611 units of the second series of non-convertible debentures.

 

17

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

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 interest amounts paid in the period ended of June 30, 2020.

 

Debentures are subject to financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 25(b)).

 

11.Other financial liabilities

 

   June 30,
2020
  December 31, 2019
Customer deposits   142,435    70,194 
Demand deposits   33,974    70,190 
Time deposits (i)   108,461    4 
Foreign exchange portfolio   29,405    8,963 
Financial bills (i)   15,381    -   
Credit cards operations (i)   12    -   
Total   187,233    79,157 
           
Current   63,390    79,157 
Non-current   123,843    -   

 

(i)Related to operations of Banco XP S.A.

 

12.Private pension liabilities

 

As of June 30, 2020, active plans are principally accumulation of financial resources through products PGBL and VGBL structured in the form of variable contribution, for the purpose of granting participants with returns based on the accumulated capital in the form of monthly withdraws for a certain term or temporary monthly withdraws.

 

In this respect, such financial products represent investment contracts that have the legal form of private pension plans but which do not transfer insurance risk to the Group. Therefore, contributions received from participants are accounted for as liabilities and balance consists of the balance of the participant in the linked Specially Constituted Investment Fund (“FIE”) at the reporting date (Note 4 (a)).

 

a)    Changes in the period

 

  

Six months period ended

June 30,

  

2020

 

2019

As of January 1   3,759,090    16,059 
Contributions received   513,115    78,893 
Transfer with third party plans   3,005,132    574,457 
Redemptions paid   (66,700)   (205)
Gain (loss) from FIE   (16,918)   6,440 
As of June 30   7,193,719    675,644 

 

18

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

13.Income tax

 

a)    Deferred income tax

 

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

 

   Balance Sheet
   June 30, 2020  December 31, 2019
       
Tax losses carryforwards   13,847    17,146 
Goodwill on business combinations (i)   34,291    22,303 
Provisions for IFAs’ commissions   70,504    68,041 
Revaluations of financial assets at fair value   (13,505)   25,259 
Expected credit losses   16,330    5,666 
Profit sharing plan   176,999    141,136 
Net gain on hedge instruments   27,122    (36,384)
Share based plan   30,291    2,950 
Other provisions   45,088    33,284 
Total   400,967    279,401 
           
Deferred tax assets   400,967    284,533 
Deferred tax liabilities   -      (5,132)

 

   Six months period
ended June 30,
  Three months period
ended June 30,
   2020  2019  2020  2019
             
Tax losses carryforwards   (3,299)   (34,661)   (25,452)   (5,051)
Goodwill on business combinations (i)   11,988    (17,692)   19,578    (8,625)
Provisions for IFAs’ commissions   2,463    13,405    5,835    13,404 
Revaluations of financial assets at fair value   (38,765)   (8,196)   12,864    (5,710)
Expected credit losses   10,664    152    2,635    227 
Financial instruments taxed on redemption   -      7,343    -      (2,509)
Profit sharing plan   35,863    114,400    105,690    62,906 
Net gain (loss) on hedge instruments   63,506    (5,560)   4,415    (4,480)
Share based plan   27,341    -      16,104    -   
Other provisions   11,805    4,903    (2,213)   4,130 
Total   121,566    74,094    139,456    54,292 

 

(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:

 

  

Six months period ended

June 30,

  

2020

 

2019

       
As of January 1   279,401    140,400 
Foreign exchange variations   279,582    54,178 
Charges to statement of income   (188,260)   18,643 

 

19

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

Tax relating to components of other comprehensive income   30,244    1,273 
As of June 30   400,967    214,494 
           

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$ 17,188 (June 30, 2019 - R$ 15,512) mainly in respect of losses from subsidiaries overseas and that can be carried forward and used against future taxable income. A deferred tax asset was not recorded as taxable income is not expected.

 

b)Income tax expense reconciliation

 

The tax on the Group's pre-tax profit differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities. The following is a reconciliation of income tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the period ended June 30:

 

  Six months period   Three months period
 ended June 30,    ended June 30,
  2020 2019   2020 2019
           
Income before taxes 1,126,077 614,810   609,546 311,583
Combined tax rate in Brazil (i) 34% 34%   34% 34%
Tax expense at the combined rate 382,866 209,035   207,246 105,938
           
Income (loss) from entities not subject to taxation (8,728) (4,569)   518 (4,521)
Effects from entities taxed at different rates 19,162 9,038   4,875 2,533
Effects from entities taxed at different taxation regimes (ii) (174,468) (15,678)   (109,790) (10,710)
Intercompany transactions with different taxation (27,130) (22,278)   (17,974) (14,511)
Tax incentives 2,030 -   1,425 -
Non deductible expenses (non-taxable income), net (9,259) 4,377   (15,845) 3,660
Others 3,787 (3,615)   (1,172) 1,132
Total 188,260 176,310   69,283 83,521
Effective tax rate 16.72% 28.68%   11.37% 26.81%
           
Current 257,598 257,021   185,693 145,589
Deferred (69,338) (80,711)   (116,410) (62,068)
Total expense 188,260 176,310   69,283 83,521

 

 

(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. Additionally, some entities and investment funds adopt different taxation regimes according to the applicable rules in their jurisdictions.

 

20

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 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   (3,065)   -      (3,065)
Gains (losses) on net investment hedge   3,156    (1,073)   2,083 
Changes in the fair value of financial assets at fair value   14,583    (5,480)   9,103 
As of June 30, 2019   14,675    (6,553)   8,121 
                
Foreign exchange variation of investees located abroad   69,675    -      69,675 
Gains (losses) on net investment hedge   (110,362)   37,523    (72,839)
Changes in the fair value of financial assets at fair value   18,438    (7,280)   11,158 
As of June 30, 2020   (22,249)   30,243    7,994 

 

14.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 June 30, 2020 and December 31, 2019, the Company have US$ 23 thousand of issued capital which were represented by 354,181,346 Class A common shares and 197,618,980 Class B common shares. In the IPO that took place on December 11, 2019, the Company issued 83,387,238 new Class A common shares, with a corresponding increased of US$ 2 in the issued capital of the Company.

 

(b)Additional paid-in capital and capital reserve

 

In December 2019, immediately prior the completion of the IPO, the Company had 257,456,251,558 Class A common shares and 251,790,558 Class B common shares of its authorized share capital issued. Class A and Class B common shares.

 

At the Board of Directors meetings on November 30, 2019, the Company’s shareholders approved a reverse share split of 4:1 (four for one) for an initial consideration to IPO with a conversion of 2,036,988,542 into 509,247,134 shares. On the same event shareholders also approved the conversion of 30,807,911 Class B common shares of the Company into Class A common shares.

 

21

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

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 21, 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 June 30, 2020 the Company has 1,876,968 (December 31, 2019 – 1,921,669) restricted share units (“RSUs”) and 2,190,377 (December 31, 2019 – 2,190,377) performance restricted units (“PSUs”) to be issued at the vesting date.

 

The additional paid-in capital refers to the difference between the purchase price that the shareholders pay for the shares and their par value. Under Cayman Law, the amount in this type of account may be applied by the Company to pay distributions or dividends to members, pay up unissued shares to be issued as fully paid, for redemptions and repurchases of own shares, for writing off preliminary expenses, recognized expenses, commissions or for other reasons. All distributions are subject to the Cayman Solvency Test which addresses the Company’s ability to pay debts as they fall due in the natural course of business.

 

(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 six months period ended June 30, 2020, 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.

 

15.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)
         Six months period ended June 30,  Three months period ended June 30,
Relation and transaction  June
30, 2020
  December 31, 2019  2020  2019  2020  2019
                   
Shareholders with significant influence   357,570    (732,420)   (23,038)   3,959    3,001    13,798 
Securities   252,771    123,813    7,259    4,364    3,479    2,270 
Securities purchased under agreements to resell   198,999    196,009    2,908    -      32,995    -   
Accounts receivable   1,386    594    389    2,271    (408)   2,209 
Securities sold under repurchase agreements   (64,000)   (1,000,168)   (32,730)   -      (32,730)   -   
Borrowings   (31,586)   (52,668)   (864)   (2,676)   (335)   9,319 

 

22

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

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.

 

16.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.

 

   June 30, 2020  December 31,
2019
Tax contingencies   10,020    9,878 
Civil contingencies   3,202    2,673 
Labor contingencies   2,257    2,642 
Total provision   15,479    15,193 
           
Judicial deposits (i)   10,125    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 six months period

 

   Six months period ended June 30,  Three months period ended June 30,
   2020  2019  2020  2019
At the beginning of period   15,193    17,474    14,897    17,503 
Monetary correction   973    690    648    354 
Provision accrued   579    69    420    58 
Provision reversed   (887)   (2)   (341)   (2)
Payments   (379)   (1,060)   (145)   (742)
At the end of period   15,479    17,171    15,479    17,171 

 

Nature of claims

 

a)Tax

 

As of June 30, 2020, the Group has claims classified as probable risk of loss in the amount of R$ 10,020 (December 31, 2019 - R$ 9,878), regarding social contributions on revenue (PIS and COFINS), questioning the definition of the calculation base of revenues to pay correctly. This proceeding was pending the expert

 

23

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

technical report following the decision of the second instance court to grant the right to provide evidence and send the proceeding back to the lower court. These lawsuits are supported by court deposits in its entirety.

 

b)Civil

 

The majority of the civil claims involve matters that are normal and specific to the business, and refer to demands for indemnity primarily due to: (i) financial losses in the stock market; (ii) portfolio management; and (iii) alleged losses generated from the liquidation of costumers assets in portfolio due to margin cause and/or negative balance. As of June 30, 2020, there were 44 civil claims for which the likelihood of loss has been classified as probable, in the amount of R$ 3,202 (December 31, 2019 - R$ 2,673). An amount of R$ 109 was deposited in court as of June 30, 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 June 30, 2020, the Company and its subsidiaries are the defendants in approximately 9 cases involving labor matters for which the likelihood of loss has been classified as probable, in the amount of R$ 2,257 (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$ 168,851 (December 31, 2019 - R$ 153,951).

 

Below is summarized these possible claims by nature:

 

   June 30, 2020  December 31,
2019
       
Tax (i)   70,409    69,386 
Civil (ii)   93,063    81,414 
Labor   5,379    3,151 
Total   168,851    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 first appeal was denied by the first administrative level of the Revenue Service Office. The Group will provide the ordinary appeal to Administrative Council of Tax Appeals (“CARF”). 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 451 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.

 

24

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

17.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:

 

   Six months period ended
June 30,
  Three months period ended
June 30,
   2020  2019  2020  2019
Major service lines            
Brokerage commission   1,047,573    586,444    542,929    297,625 
Securities placement   533,774    364,974    185,600    204,583 
Management fees   534,671    384,521    279,622    243,663 
Insurance brokerage fee   56,675    42,023    27,449    23,475 
Educational services   70,153    42,255    44,453    28,505 
Other services   179,407    127,486    85,322    83,777 
Gross revenue from services rendered   2,422,253    1,547,703    1,165,375    881,628 
                     
(-) Sales taxes and contributions on services (i)   (206,767)   (150,641)   (101,835)   (83,813)
    2,215,486    1,397,062    1,063,540    797,815 

 

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

 

b)      Net income from financial instruments

 

  

Six months period ended

June 30,

 

Three months period ended

June 30,

   2020  2019  2020  2019
Net income from financial instruments at fair value through profit or loss   1,360,390    517,272    968,702    242,752 
Net income from financial instruments measured at amortized cost and at fair value through other comprehensive income   113,861    177,510    (93,439)   111,688 
Total income from financial instruments   1,474,251    694,782    875,263    354,440 
                     
(-) Taxes and contributions on financial income   (33,967)   (11,255)   (17,874)   (5,658)
    1,440,284    683,527    857,389    348,782 

 

c)       Disaggregation by geographic location

 

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

 

   Six months period ended June 30,  Three months period ended June 30,
   2020  2019  2020  2019
Brazil   3,434,845    1,933,511    1,800,752    1,069,924 
United States   202,214    130,913    110,324    67,955 
Europe   18,711    16,165    9,853    8,718 
Revenues   3,655,770    2,080,589    1,920,929    1,146,597 

 

25

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

   June 30, 2020  December 31, 2019
Brazil   1,245,191    1,208,737 
United States   155,924    224,244 
Europe   8,590    16,476 
Selected assets(i)   1,409,705    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.

 

18.Operating costs

 

   Six months period ended June 30,  Three months period ended June 30,
   2020  2019  2020  2019
Commission costs   893,421    523,677    451,469    280,846 
Operating losses and provisions   48,600    7,481    10,297    4,580 
Clearing house fees   135,884    86,455    72,381    51,942 
Other costs (a)   80,137    56,396    45,079    28,883 
Total   1,158,042    674,009    579,226    366,253 

 

(a) Other cost include third parties' services and other costs.

 

19.Operating expenses by nature

 

   Six months period ended June 30,  Three months period ended June 30,
   2020  2019  2020  2019
             
Selling Expenses (a)   56,045    52,315    27,569    27,797 
                     
Administrative expenses   1,267,991    812,434    689,875    444,149 
Personnel expenses   906,982    568,168    506,003    312,324 
Compensation   362,220    148,849    185,101    77,383 
Employee profit-sharing and bonus   325,590    338,628    222,570    188,443 
Executives profit-sharing   104,327    29,815    31,651    19,672 
Other personnel expenses (b)   114,845    50,876    66,681    26,826 
Other taxes expenses   16,286    18,280    9,442    11,643 
Depreciation of property and equipment and right-of-use assets   36,044    24,315    20,166    16,213 
Amortization of intangible assets   33,477    14,631    17,829    7,576 
Data processing   123,056    74,485    67,109    41,159 
Technical services   40,721    26,458    19,953    11,098 
Third parties' services   72,423    46,717    32,230    24,749 
Other administrative expenses (c)   39,002    39,380    17,143    19,387 
Total   1,324,036    864,749    717,444    471,946 

 

26

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

(a) Selling expenses refers to advertising and publicity.

(b) Other personnel expenses include benefits, social charges and others.

(c) Other administrative expenses include rent, communication and travel expenses, legal and judicial and other expenses.

 

20.Other operating income (expenses), net

 

   Six months period ended June 30,  Three months period ended June 30,
   2020  2019  2020  2019
             
Other operating income   77,364    134,087    49,698    43,474 
Revenue from incentives from Tesouro Direto, B3 and Others   67,406    39,049    45,734    30,194 
Other operating income   9,958    95,038    3,964    13,280 
                     
Other operating expenses   (90,179)   (22,958)   (48,630)   (17,521)
Legal proceedings and agreement with customers (a)   (7,582)   (1,713)   2,664    (1,276)
Losses on write-off and disposal of assets   (29,407)   (6,535)   (29,348)   (6,532)
Charity   (26,844)   (4,075)   (10,248)   (2,825)
Other operating expenses   (26,346)   (10,635)   (11,698)   (6,888)
                     
Total   (12,815)   111,129    1,068    25,953 

 

(a) Other operating income include recovery of charges and expenses, reversal of operating provisions, interest received on tax and others.

(b) Other operating expenses include fines and penalties, association and regulatory fees and other expenses.

 

21.Share-based plan

 

a)      Share-based Plan

 

The establishment of the Plan was approved by the Board of Director’s meeting on December 6, 2019 and the first grant of RSUs and PSUs was on December 10, 2019.

 

Under the Restricted Stock Unit plan, stocks are awarded at no cost to the recipient upon their grant date. RSUs are granted semi-annually, their vesting conditions are service related and they vest at a rate of 20% after three years, 20% after four years, and 60% after five years. After the vesting periods, common shares will be issued to the recipients. For the PSUs, the vesting is the following: (i) 33% will vest on the third year after the grant, (ii) 33%% will vest on the fourth year after the grant and (iii) 34% will vest on the fifth year after the grant date.

 

Under the Performance Share Unit, stocks are awarded at no cost to eligible participants and their vesting conditions are based on five-year period metrics and also based on the total shareholder return (TSR), including share price growth, dividends and capital returns.

 

If an eligible participant ceases to be employed by the Company, within the vesting period, the rights will be forfeited, except in limited circumstances that are approved by the board on a case-by-case basis.

 

Once the PSUs are vested, the shares of common stock that are delivered must be held for an additional one-year period, typically for a total combined vesting and holding period of six years from the grant date.

 

27

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 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 June 30, 2020, the outstanding number of Company reserved under the plans were 4,067,345 (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 six and three months period ended 2020, total compensation expense of both plans were R$69,111 and R$40,703, including R$22,336 and R$17,152 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 original weighted-average grant-date fair value of RSU and PSU shares was US$27 and US$ 34.56 respectively. In May 2020, the Company decided to update the measurement condition of its PSU shares, replacing the TSR measurement from US Dollars (US$) to Brazilian Reais (R$), being therefore subject to exchange variation. The weighted-average grant-date fair value of PSU shares for the updated plan was US$52.41. The incremental fair value will be recognised as an expense over the period from the modification date to the end of the vesting period. All other conditions of the PSU shares plan had not been modified.

 

During the six month period ended June 30, 2020, there were 44,701 forfeited RSUs and no shares granted, exercised, expired or vested.

 

22.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:

 

   Six months period ended June 30,  Three months period ended June 30,
   2020  2019  2020  2019
Net income attributable to Parent company   937,817    438,500    540,263    228,062 
Basic weighted average quantity of shares   551,800    509,247    551,800    509,247 
Basic earnings per share - R$   1.6996    0.8611    0.9791    0.4478 
                     

 

 

 

28

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

Share-based incentive program   4,095    -      4,088    -   
Diluted weighted average quantity of shares   555,895    509,247    555,889    509,247 
Diluted earnings per share - R$   1.6870    0.8611    0.9719    0.4478 

 

 

(a)Thousands of shares.

 

23.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 June 30, 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.

 

 

29

 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

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:

 

  

June,

30 2020

   Level 1  Level 2  Fair Value  Book Value
Financial Assets            
Financial assets at Fair value through profit or loss            
Securities   22,053,276    4,400,045    26,453,321    26,453,321 
Derivative financial instruments   196    15,588,384    15,588,580    15,588,580 
Fair value through other comprehensive income                    
Securities   5,251,605    -      5,251,605    5,251,605 
Evaluated at amortized cost                    
Securities   -      1,278,458    1,278,458    1,225,873 
Securities purchased under agreements to resell   -      6,733,041    6,733,041    6,141,566 
Securities trading and intermediation   -      1,949,144    1,949,144    1,949,144 
Accounts receivable   -      346,062    346,062    346,062 
Loan operations   -      377,444    377,444    377,444 
Other financial assets   -      46,998    46,998    46,998 
Financial liabilities                    
Fair value through profit or loss                    
Securities loaned        472,761    472,761    472,761 
Derivative financial instruments   8,277    14,996,652    15,004,929    15,004,929 
Evaluated at amortized cost                    
Securities sold under repurchase agreements   -      10,255,352    10,255,352    10,117,579 
Securities trading and intermediation   -      14,850,660    14,850,660    14,850,660 
Borrowings and lease liabilities   -      639,750    639,750    639,982 
Debentures   -      769,406    769,406    776,724 
Accounts payables   -      324,575    324,575    324,575 
Structured operations certificates   -      638,754    638,754    638,754 
Other financial liabilities   -      187,233    187,233    187,233 

 

   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 

 

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XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of June 30, 2020

In thousands of Brazilian Reais

 

 

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 

 

24.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.

 

25.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)

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