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 November, 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: November 9, 2020

 

 
 

EXHIBIT INDEX

 

Exhibit No. Description
99.1 Earnings Release dated November 9, 2020 – XP Inc. Reports 3Q20 Financial Results
99.2 3Q20 Earnings Presentation
99.3 XP Inc. – Unaudited interim condensed consolidated financial statements for the nine months ended September 30, 2020

 

 

 

 

 

 

Exhibit 99.1

 

 

 

 

 

XP Inc. Reports 3Q20 Financial Results

 

São Paulo, Brazil, November 9, 2020 – XP Inc. (NASDAQ: XP) (“XP” or the “Company”), a leading tech-enabled platform and a trusted pioneer in providing low-fee financial products and services in Brazil, today reported its financial results for the third quarter of 2020.

 

To our shareholders:

 

Today, we are reporting our fourth quarterly results since our IPO back in December 2019. Despite all the challenges imposed by the COVID-19 pandemic in 2020, we generated record revenue in 3Q20 (R$2.2 billion), representing 55% YoY growth, and well above our long-term target (+35%). More important than the most recent quarter’s results, we remain excited about the long journey we have ahead of us. As I have repeatedly emphasized in prior quarterly letters to shareholders, taking a long-term view is essential to how we view our business and the opportunities ahead.

 

Over the last 12 months, we generated Gross Revenue of R$8.0 billion, an increase of 148% when compared to R$3.2 billion for the full year of 2018. Despite the strong growth, we have captured a modest market share of the investments industry, where the incumbent banks still maintain a large majority (~90%). That said, we remain in the early stages of coming to market with additional services through our bank, including collateralized credit, margin loans, structures notes (COE) issuance, and credit cards, amongst others. This process of disruption likely continues for many years to come at an accelerating clip, mainly driven by swifter digitalization and low interest rates in Brazil.

 

With that scenario in mind, we stepped up the pace of investments in technology and people to further strengthen our platform to drive a differentiated customer experience. Our vision integrates an agile model with our strategic initiatives, utilizing more data analysis for decision making and driving greater scalability across our businesses.

 

Examples of recent technology initiatives that meaningfully enhanced the platform without a concurrent step up in related costs include Clear and the IFA tailor-made app Hub. Without meaningful headcount additions, Clear’s Active Clients were up 165% YoY and DARTs were up 141% YoY in 3Q20 reinforcing the stability of the platform. Furthermore, improvements in our Hub app, including the addition of CRM tools to Hub Web and Mobile, formed an integrated multi-channel platform that has substantially improved 2020 performance KPIs such as net inflows (+19%), portfolio diversification (+24%), NPS (+7%) and share of wallet (+3%).

 

Our unique ecosystem, scale across several markets, and financial strength enables us to fund key strategic initiatives, which are primarily expensed through the income statement (very few of these investments are capitalized), while maintaining a healthy level of profitability. While our margins may be modestly impacted in the short term as we continue to invest in technology, we remain focused on enhancing longer-term growth prospects as initiatives mature driving powerful economies of scale over time.

 

In addition to technology, we are intensifying investments to further strengthen our IFA network. By providing additional capital to the offices, they can accelerate hiring and training of new IFAs across Brazil. We maintain more than 659 commercial points that are well positioned to capitalize on opportunities to continue to take market share from the incumbent banks, which continue to close branches, particularly as a result of expanding digitalization during the pandemic. For example, in October alone, we on-boarded more than 500 new IFAs, the highest monthly total on record.

 

Finally, I would like to highlight our key differentiating factor over the long-run: our culture.

 

Ensuring the right people, in the right positions, with challenging goals, long-term alignment with the company and, above all, adhering to our culture (Dream Big, Open Mind and Entrepreneurial Spirit) is what allows us to continue transforming the financial market to improve more people's lives, and build an enduring enterprise.

 

2 

 

Highlights

 

1)Gross Revenue growth of 55% YoY, reaching R$2.2 billion;

2)Direct Channel Active Clients’ growth;

3)New businesses: Expansion of Collateralized Credit and Structures Notes’ issuance.

 

3Q20 KPIs

 

Total AUC

R$563 bn 

+61% YoY

Active Clients

2,645 k 

+72% YoY

   

IFAs

7,000+ 

NPS

70 

   

Gross Revenue

R$2,245 mn 

+55% YoY

Adjusted Net Income

R$570 mn 

+119% YoY

   
  3Q20 3Q19 YoY 2Q20 QoQ
           
Operating and Financial Metrics (unaudited)          
Retail – AUC (in R$ bn) 563 350 61% 436 29%
Retail – active clients (in '000s) 2,645 1,536 72% 2,360 12%
Retail – gross total revenues (in R$ mn) 1,698 944 80% 1,475 15%
Institutional – gross total revenues (in R$ mn) 239 173 38% 333 -28%
Issuer Services – gross total revenues (in R$ mn) 169 143 18% 65 160%
Digital Content – gross total revenues (in R$ mn) 32 35 -8% 46 -30%
Other – gross total revenues (in R$ mn) 107 158 -32% 123 -13%
Company Financial Metrics          
Gross revenue (in R$ mn) 2,245 1,453 55% 2,041 10%
Net Revenue (in R$ mn) 2,101 1,356 55% 1,921 9%
Gross Profit (in R$ mn) 1,395 911 53% 1,342 4%
Gross Margin 66.4% 67.2% -79 bps 69.8% -345 bps
Adjusted Net Income (in R$ mn) 570 261 119% 565 1%
Adjusted Net Margin 27.1% 19.2% 790 bps 29.4% -228 bps

 

¹ See appendix for a reconciliation of Adjusted Net Income.

 

3 

 

Operational Performance

 

Assets Under Custody (in R$ bn)

 

Total AUC reached R$563 billion at September 30, 2020, up 61% year-over-year. The R$212 billion increase over the last twelve months is shown on the bridge chart below and was driven by: (1) R$195 billion of cumulative net inflows and (2) R$18 billion of market appreciation.

 

 

Net Inflow, adjusted by extraordinary equity inflows/outflows, was R$134 billion over the last twelve months, or R$11 billion per month on average, and accelerating to R$13 billion for 3Q20. For both periods, flows were strong across all channels and brands, with the ongoing shift away from fixed income and savings into higher-yielding products continuing to gain momentum due to low interest rates combined with an underpenetrated market.

 

Active Clients (in 000’s)

 

 

Active clients grew 72% in 3Q20 vs 3Q19. Growth was strong across all channels led by our Rico and Clear brands.

 

4 

 

Retail Equity DARTs¹ (million trades)

 

 

¹Daily Average Revenue Trades

 

Retail Equity DARTs increased 189% in 3Q20 vs 3Q19. The number of individuals investing on the stock exchange continues to grow, and we see further room for strong growth ahead as investors in Brazil maintain a relatively low equity penetration rate.

 

Net Promoter Score (NPS)

 

NPS, a widely known survey methodology used to measure customer satisfaction, reached 70 in 3Q20. Maintaining a high NPS score is a priority for XP since our business model is built around client experience. The NPS calculation as of a given date reflects the average scores in the prior six months.

 

5 

 

3Q20 Revenue Breakdown

 

 

Note: Other Revenue represented 5% of Total Gross Revenues in 3Q20.

 

Total Gross Revenue (in R$ mn)

 

 

Total Gross Revenue increased 55% from R$1.5 billion in 3Q19 to R$2.2 billion in 3Q20, mainly driven by strong growth of the Retail business. Over the first nine months of 2020, gross revenue expanded 66% vs. the same period of the previous year.

 

6 

 

Retail

 

Retail Revenue (in R$ mn)

 

 

Retail revenue grew 80% from R$944 million in 3Q19 to R$1.7 billion in 3Q20. The main growth drivers included, in order of contribution: (1) Equities and Futures, reflecting resilient trading volumes and growing participation of retail investors at B3; (2) Financial Products, represented by COEs (structured notes) and equity-linked derivatives and (3) Fixed Income.

 

LTM Take Rate (LTM Retail Revenue / Average AUC)

 

 

The Take Rate (or Revenue Yield) for the last 12 months was stable in 3Q20 vs. 3Q19 as higher Equities and Futures’ trading volumes and rising distribution of Financial Products offset the lower average Selic rate year-over-year and the impact from the recent extraordinary equity inflow. This custody mandate has a marginal contribution to Retail revenue but generates several cross-selling opportunities across our ecosystem, particularly for Private Banking and Issuer Services.

 

7 

 

Institutional

 

Institutional Revenue (in R$ mn)

 

 

Institutional gross revenue totaled R$239 million in 3Q20, up 38% from R$173 million in 3Q19. Higher equity trading volume was the main driver in addition to higher Fixed Income secondary trading.

 

Issuer Services

 

Issuer Services Revenue (in R$ mn)

 

 

Issuer Services revenue expanded 18% year-over-year from R$143 million in 3Q19 to R$169 million in 3Q20. Key highlights for the quarter included: (1) REITs, with eighteen executed deals vs eleven in 3Q19 and (2) the Equity Capital Markets (ECM) division, with participation in fourteen deals vs four in 3Q19.

 

8 

 

Digital Content and Other

 

Digital Content Revenue

 

Gross revenue totaled R$32 million in 3Q20, down 8% from R$35 million in 3Q19, mainly driven by the absence of in-person events and courses compared to the year-ago quarter.

 

Other Revenue

 

Other revenue decreased 32% in 3Q20 vs. 3Q19, from R$158 million to R$107 million, primarily driven by a lower average Selic rate.

 

COGS

 

COGS (in R$ mn) and Gross Margin

 

 

COGS rose 59% from R$445 million in 3Q19 to R$706 million in 3Q20 driven by product mix and higher investments recently made in the IFA network through incentives, which are capitalized and amortized over the life of the signed contracts, in addition to the increase in Active Clients, which for some products drives higher clearinghouse fees. Furthermore, gross margin contracted to 66.4% in 3Q20 from 67.2% in 3Q19.

 

Investments in the network enhance one of our key distribution channels and provide additional capital to our offices for them to attract more professionals, expand operations to new geographies and accelerate net inflow and client acquisitions.

 

9 

 

SG&A Expenses

 

SG&A Expense ex-Share Based Compensation (in R$ mn)

 

 

SG&A expenses totaled R$669 million in 3Q20, up 39% from R$481 million in 3Q19. As a percentage of net revenue, SG&A expenses represented 31.9% in 3Q20 vs. 35.5% in 3Q19, as the expansion in personnel expenses, due to the 67% year-over-year growth in headcount, and in data processing, as a consequence of technology investments, was more than offset by efficiency gains in Marketing and Third-Party Services and Other Administrative Expenses, which were net positive in 3Q20. The latter was impacted by three main factors: (1) higher revenue related to incentives from Tesouro Direto, B3, Visa and other parties; (2) higher losses on write-offs and disposal of assets related to XP Inc.’s recent headquarter footprint reduction in São Paulo; and (3) a one-time fine payable to BSM (B3’s self-regulatory entity) from a disciplinary administrative proceeding started in 2015 which concluded in 2020.

 

As a high-growth company operating in a massive and concentrated market, we are constantly looking for investments that can accelerate our initiatives and strengthen our platforms and infrastructure to support our business’ expansion. Hence, although we remain focused on enhancing efficiency and operating leverage, several near-term expenses including technology across all fronts (headcount, infrastructure, data processing, among others), and the digital bank and trading platforms are expected to drive accelerating revenue growth over the next years. In the last twelve months, these expenses represented approximately 80% of SG&A growth, paving the way for future growth and potential margin improvement in the long term, as we reap the benefits from the enhanced scalability of our business model.

 

10 

 

Adjusted Net Income

 

Adjusted Net Income¹ (in R$ mn) and Margin

 

 

In 3Q20, Adjusted Net Income grew 119% vs 3Q19 and reached R$570 million. The adjusted net margin expanded from 19.2% in 3Q19 to 27.1%, reflecting: (1) strong growth in Retail Revenue, which was mainly driven by Equity, Derivatives, Financial Products and Fixed Income and (2) a lower effective tax rate.

 

¹ See appendix for a reconciliation of Adjusted Net Income.

 

Cash Flow

 

Cash Flow Data 3Q20 3Q19 2Q20
(R$ mn)      
       
Income before income tax 632 382 610
Adjustments to reconcile income before income tax 128 53 127
Income tax paid 19 (162) 130
Contingencies paid (0) (0) (0)
Interest paid (44) (1) (17)
Changes in working capital assets and liabilities (1,910) 37 (21)
Adjusted net cash flow (used in) from operating activities (1,174) 308 828
Net cash flow (used in) from securities, repos, derivatives and banking activities 1,589 (98) (369)
Net cash flows from operating activities 415 210 459
Net cash flows from investing activities (302) (33) (37)
Net cash flows from financing activities (478) (38) (95)

11 

 

Net Cash Flow Used in Operating Activities

 

Our net cash flow used in Operating activities represented by Adjusted net cash flow (used in) from operating activities (which in management’s view is a more useful metric to track the intrinsic cash flow generation of the business) decreased to R$1,174 million for 3Q20 from R$308 million in 3Q19, and decrease from R$828 million in 2Q20 to R$1,174 million in 3Q20 driven by:

 

·Higher 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 in our banking activities from loans operations, deposits mainly derived from time deposits, structure operations certificates (COEs) and other financial liabilities which include financial bills as a result of our expected growth in new financials services verticals.

·Growth of our omni-channel distribution network through our network of IFA partners;

·Our income before tax of R$761 million in 3Q20 combined with non-cash expenses consisting primarily of (i) share based plan of R$32 million (ii) depreciation and amortization of R$36 million, (iii) Losses on impairment and write-off of property, equipment, intangible assets and leases of R$30 million. The total amount of adjustments to reconcile income before income taxes for 3Q20 was R$128 million.

 

Net Cash Flow Used in Investing Activities

 

Our net cash used in investing activities increased from R$33 million in 3Q19 to R$302 million in 3Q20 and R$ 37 million in 2Q20 from R$302 million in 3Q20, primarily affected by:

 

·Our acquisitions of FinTech’s, investments in associates and joint ventures of R$ 260 million in 3Q20;

·the investment in intangible assets, mostly IT infrastructure and capitalization software development which increased from R$22 million in 3Q19 to R$35 million in 3Q20 and from R$24 million in 2Q20 to R$35 million in 3Q20.

 

Net Cash Provided by Financing Activities

 

Our net cash flows from financing activities increased from R$38 million in 3Q19 to R$478 million in 3Q20 and from R$95 million in 2Q20 to R$478 million in 3Q20, primarily due to:

 

·R$400 million related to principal payments of the first series of non-convertible debentures in 3Q20;

·R$66 million related to a partial repurchase of the second series of non-convertible debentures in 2Q20;

·R$78 million in 3Q20, R$27 million in 2Q20 and R$30 million in 3Q19 related to Payments of borrowings and lease liabilities.

 

12 

 

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

 

Floating Balance (=net uninvested clients' deposits) 3Q20 2Q20
Assets (1,484) (1,949)
(-) Securities trading and intermediation   (1,484) (1,949)
Liabilities 15,160 14,851
(+) Securities trading and intermediation   15,160 14,851
(=) Floating Balance 13,676 12,902
     
Adjusted Gross Financial Assets (=cash and equivalents, net of floating) 3Q20 2Q20
Assets 83,061 55,384
(+) Cash 642 346
(+) Securities - Fair value through profit or loss 38,702 26,453
(+) Securities - Fair value through other comprehensive income 9,589 5,252
(+) Securities - Evaluated at amortized cost 1,366 1,226
(+) Derivative financial instruments 13,149 15,589
(+) Securities purchased under agreements to resell 18,244 6,142
(+) Loan Operations* 1,369 377
Liabilities (61,514) (33,570)
(-) Securities loaned (1,112) (473)
(-) Derivative financial instruments (12,730) (15,005)
(-) Securities sold under repurchase agreements (35,254) (10,118)
(-) Private Pension Liabilities (9,649) (7,194)
(-) Deposits* (1,627) (142)
(-) Structured operations certificates* (1,142) (639)
(-) Floating Balance (13,676) (12,902)
(=) Adjusted Gross Financial Assets 7,871 8,913

 

*Banking activities added due to increased relevance in 3Q20

 

We present Adjusted Gross Financial Assets because we believe this metric captures the liquidity that is in fact available to us, net of the portion of liquidity that is related to our Floating Balance (and therefore attributable to clients). We calculate Adjusted Gross Financial Assets as the sum of (1) Cash and Financial Assets (comprised of Cash plus Securities – Fair value through profit or loss, plus Securities – Fair value through other comprehensive income, plus Securities – Evaluated at amortized cost, plus Derivative financial instruments, plus Securities (purchased under agreements to resell), plus Loans, less (2) Financial Liabilities (comprised of the sum of Securities loaned, Derivative financial instruments, Securities sold under repurchase agreements and Private pension liabilities), Deposits, Structured Operation Certificates and (3) less Floating Balance.

 

It is a measure that we track internally on a daily basis, and it more intuitively reflects the effect of the operational profits we generate and the variations between working capital assets and liabilities (cash flows from operating activities), investments in fixed and intangible assets (cash flows from investing activities) and inflows and outflows related to equity and debt securities in our capital structure (cash flows from financing activities).

 

Our management treats all securities and financial instrument assets, net of financial instrument liabilities, as balances that compose our total liquidity, with sub line items (such as, for example, “securities at fair value through profit and loss” and “securities at fair value through other comprehensive income”) expected to fluctuate substantially from quarter to quarter as our treasury manages and allocates our total liquidity to the most suitable financial instruments.

 

13 

 

Other Information

 

Web Meeting

 

The Company will host a webcast to discuss its second quarter 3020 financial results on Monday, November 9, 2020 at 5:00pm ET (7:00pm BRT). To participate in the earnings webcast please subscribe at: 3Q20 Earnings Web Meeting. The replay will be available on XP’s investor relations website at https://investors.xpinc.com/

 

Investor Relations Team

 

Carlos Lazar

 

André Martins

 

Natali Pimenta

 

ir@xpi.com.br

 

14 

 

Important Disclosure

 

IN REVIEWING THE INFORMATION CONTAINED IN THIS RELEASE, YOU ARE AGREEING TO ABIDE BY THE TERMS OF THIS DISCLAIMER. THIS INFORMATION IS BEING MADE AVAILABLE TO EACH RECIPIENT SOLELY FOR ITS INFORMATION AND IS SUBJECT TO AMENDMENT.

 

This release is prepared by XP Inc. (the “Company,” “we” or “our”), is solely for informational purposes. This release does not constitute a prospectus and does not constitute an offer to sell or the solicitation of an offer to buy any securities. In addition, this document and any materials distributed in connection with this release are not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction.

 

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

 

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

 

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

 

15 

 

Market data and industry information used throughout this release are based on management’s knowledge of the industry and the good faith estimates of management. The Company also relied, to the extent available, upon management’s review of industry surveys and publications and other publicly available information prepared by a number of third-party sources. All of the market data and industry information used in this release involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although the Company believes that these sources are reliable, there can be no assurance as to the accuracy or completeness of this information, and the Company has not independently verified this information.

 

The contents hereof should not be construed as investment, legal, tax or other advice and you should consult your own advisers as to legal, business, tax and other related matters concerning an investment in the Company. The Company is not acting on your behalf and does not regard you as a customer or a client. It will not be responsible to you for providing protections afforded to clients or for advising you on the relevant transaction.

 

This release includes our Floating Balance, Adjusted Gross Financial Assets, Adjusted EBITDA and Adjustments to Reported Net Income, which are non-GAAP financial information. We believe that such information is meaningful and useful in understanding the activities and business metrics of the Company’s operations. We also believe that these non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s business that, when viewed with our International Financial Reporting Standards (“IFRS”) results, as issued by the International Accounting Standards Board, provide a more complete understanding of factors and trends affecting the Company’s business. Further, investors regularly rely on non-GAAP financial measures to assess operating performance and such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with IFRS. We also believe that certain non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in the Company’s industry, many of which present these measures when reporting their results. The non-GAAP financial information is presented for informational purposes and to enhance understanding of the IFRS financial statements. The non-GAAP measures should be considered in addition to results prepared in accordance with IFRS, but not as a substitute for, or superior to, IFRS results. As other companies may determine or calculate this non-GAAP financial information differently, the usefulness of these measures for comparative purposes is limited. A reconciliation of such non-GAAP financial measures to the nearest GAAP measure is included in this release.

 

 

 

For purposes of this release:

 

“Active Clients” means the total number of retail clients served through our XP Investimentos, Rico, Clear, XP Investments and XP Private (Europe) brands, with an AUC above R$100.00 or that have transacted at least once in the last thirty days. For purposes of calculating this metric, if a client holds an account in more than one of the aforementioned entities, such client will be counted as one “active client” for each such account. For example, if a client holds an account in each of XP Investimentos and Rico, such client will count as two “active clients” for purposes of this metric.

 

“Assets Under Custody (AUC)” means the market value of all client assets invested through XP’s platform and that is related to reported Retail Revenue, including equities, fixed income securities, mutual funds (including those managed by XP Gestão de Recursos Ltda., XP Advisory Gestão de Recursos Ltda. and XP Vista Asset Management Ltda., as well as by third-party asset managers), pension funds (including those from XP Vida e Previdência S.A., as well as by third-party insurance companies), exchange traded funds, COEs (Structured Notes), REITs, and uninvested cash balances (Floating Balances), among others. Although AUC includes custody from Corporate Clients that generate Retail Revenue, it does not include custody from institutional clients (asset managers, pension funds and insurance companies).

 

Rounding

 

We have made rounding adjustments to some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

 

16 

 

Unaudited Managerial Income Statement (in R$ mn)

 

  3Q20 3Q19 YoY 2Q20 QoQ
Managerial Income Statement          
Total Gross Revenue 2,245 1,453 55% 2,041 10%
Retail 1,698 944 80% 1,475 15%
Institutional 239 173 38% 333 -28%
Issuer Services 169 143 18% 65 160%
Digital Content 32 35 -8% 46 -30%
Other 107 158 -32% 123 -13%
Net Revenue 2,101 1,356 55% 1,921 9%
COGS (706) (445) 59% (579) 22%
As a % of Net Revenue (33.6%) (32.8%) -0.8 p.p (30.2%) -3.5 p.p
Gross Profit 1,395 911 53% 1,342 4%
Gross Margin 66.4% 67.2% -0.8 p.p 69.8% -3.5 p.p
SG&A (669) (481) 39% (638) 5%
Share Based Compensation (44) - n.a. (40) 10%
EBITDA 681 430 58% 664 3%
EBITDA Margin 32.4% 31.7% 0.7 p.p 34.5% -2.1 p.p
D&A (36) (23) 55% (38) -4%
EBIT 645 407 59% 626 3%
Share of profit or (loss) in joint ventures and associates (1) - n.a. - n.a.
Interest expense on debt (12) (24) -53% (16) -27%
EBT 632 382 66% 610 4%
Income tax expense (91) (121) -25% (69) 32%
Effective Tax Rate (14.4%) (31.8%) 17.3 p.p (11.4%) -3.1 p.p
Net Income 541 261 108% 540 0%
Net Margin 25.8% 19.2% 6.5 p.p  28.1% -2.4 p.p
Non Recurring Items 29 - n.a. 24 18%
Adjusted Net Income 570 261 119% 565 1%
Adjusted Net Margin  27.1%  19.2% 7.9 p.p  29.4% -2.3 p.p

17 

 

Accounting Income Statement (in R$ mn)

 

  3Q20 3Q19 YoY 2Q20 QoQ
Accounting Income Statement          
Net revenue from services rendered 1,278 944 35% 1,064 20%
Brokerage commission 548 350 57% 543 1%
Securities placement 388 328 18% 186 109%
Management fees 274 207 32% 280 -2%
Insurance brokerage fee 18 27 -36% 27 -36%
Educational services 25 33 -22% 44 -43%
Other services 155 85 82% 85 82%
Taxes and contributions on services (131) (86) 52% (102) 29%
Net income from financial instruments at amortized cost and at fair value through other comprehensive income 190 27 615% (93) -303%
Net income from financial instruments at fair value through profit or loss 633 385 64% 951 -33%
Total revenue and income 2,101 1,356 55% 1,921 9%
Operating costs (706) (445) 59% (579) 22%
Selling expenses (38) (30) 27% (28) 39%
Administrative expenses (810) (482) 68% (690) 17%
Other operating revenues (expenses), net 98 7 1229% 1 9058%
Interest expense on debt (12) (24) -53% (16) -27%
Share of profit or (loss) in joint ventures and associates (1) - n.a. - n.a.
Income before income tax 632 382 66% 609 4%
Income tax expense (91) (121) -25% (69) 32%
Effective tax rate (14.4%) (31.8%) 17.3 p.p (11.4%) -3.0 p.p
Net income for the period 541 261 108% 540 0%

18 

 

Balance Sheet (in R$ mn)

 

  3Q20 2Q20
Assets    
Cash 642 346
Financial assets 84,433 57,381
Fair value through profit or loss 51,850 42,042
Securities 38,702 26,453
Derivative financial instruments 13,149 15,589
Fair value through other comprehensive income 9,589 5,252
Securities 9,589 5,252
Evaluated at amortized cost 22,994 10,087
Securities 1,366 1,226
Securities purchased under agreements to resell 18,244 6,142
Securities trading and intermediation 1,484 1,949
Accounts receivable 251 346
Loan Operations 1,369 377
Other financial assets 280 47
Other assets 1,484 712
Recoverable taxes 170 225
Rights-of-use assets 182 245
Prepaid expenses 1,091 167
Other 41 75
Deferred tax assets 379 401
Investments in associates and joint ventures 697 -
Property and equipment 95 131
Intangible assets 670 567
Total Assets 88,399 59,537

19 

 

  3Q20 2Q20
Liabilities    
Financial liabilities 69,389 43,013
Fair value through profit or loss 13,841 15,478
Securities 1,112 473
Derivative financial instruments 12,730 15,005
Evaluated at amortized cost 55,547 27,536
Securities sold under repurchase agreements 35,254 10,118
Securities trading and intermediation   15,160 14,851
Deposits 1,627 142
Structured operations certificates 1,142 639
Accounts payables 655 325
Borrowings and lease liabilities 512 640
Debentures 339 777
Other financial liabilities 859 45
Other liabilities 10,299 8,379
Social and statutory obligations 380 583
Taxes and social security obligations   235 395
Private pension liabilities 9,649 7,194
Provisions and contingent liabilities 16 15
Other 19 192
Deferred tax liabilities 41 -
Total Liabilities 79,729 51,392
Equity attributable to owners of the Parent company 8,669 8,143
Issued capital 0 0
Capital reserve 7,022 6,990
Other comprehensive income 172 218
Retained earnings 1,476 935
Non-controlling interest 1 2
Total equity 8,671 8,145
Total liabilities and equity 88,399 59,537

20 

 

Adjusted Net Income (in R$ mn)

 

R$ million 3Q20 3Q19 YoY 2Q20 QoQ
Net Income 541 261 108% 540 0%
(+) Stock Based Compensation 44 - n.a. 41 9%
(+) Offering expenses 2 - n.a. - n.a.
(+/-) Taxes (18) - n.a. (16) 10%
Adj. Net Income 570 261 119% 565 1%

 

Adjusted EBITDA (in R$ mn)

 

  3Q20 3Q19 YoY 2Q20 QoQ
Net Income 541 261 108% 540 0%
(+) Income Tax 91 121 -25% 69 32%
(+) Depreciation and Amortization 36 23 55% 38 -4%
(+) Interest Expense on Debt 12 24 -53% 16 -27%
(+) Share of profit or (loss) in joint ventures and associates 1 - n.a. - n.a.
(-) Interest Revenue on Adjusted Gross Financial Assets (45) (40) 12% (60) -25%
Adjusted EBITDA 636 390 63% 603 5%

21 

 

 

Exhibit 99.2

 

3Q20 Earnings Presentation November 2020

 

 

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

 

 

3 Index 0 1 3Q20 KPIs and Financials 0 2 Growth Strategy Through Technology 0 3 Q&A 0 4 Opening Remarks

 

 

1 Opening Remarks

 

 

5 Accountability: Almost a Year Since our IPO Business Plan Delivery in a Crisis Period OUR PROMISSES AND WHAT WE HAVE DELIVERED... STRONG FINANCIAL RESULTS GROWTH STRATEGIES 2,645k ACTIVE CLIENTS +72% YoY R$ 563 bn TOTAL AUC +61% YoY R$ 161 bn NET INFLOW +29% YoY R$6,142 bn GROSS REVENUE +66% YoY R$3,892 bn GROSS PROFIT +68% YoY R$1,550 bn ADJ. NET INCOME +136% YoY BANKING Credit Card, Cash Solutions, Payments… EXPANDING OUR ECOSYSTEM 26.9% ADJ. NET MARGIN +780bps WHOLESALE BANK Corporate, SMB, FX… TECH - ENABLED PLATFORM Agile, Client Centered, Decreasing Marginal Cost… DISTRIBUTION CHANNELS Investing to accelerate expansion Guidance: + 35% (3 - 5y) Guidance: 18 - 22% (3 - 5y) +277 IFAs / MONTH (GROSS) +502 IFAs Oct’20 (GROSS) Recor d! Note: Data as of 9M20

 

 

2 3 Q20 KPIs and Financials

 

 

7 KPIs AUC, Active Clients and NPS Assets Under Custody (AUC) (R$ in bn) Net Inflow (R$ in bn) 3Q20 3Q19 1,536 2,645 +72% Active Clients (‘000) 350 563 195 3Q19 18 Market Appreciati on Net Inflow 3Q20 61% 36 29 39 1Q20 2Q20 3Q20 15 29 117 1Q20 2Q20 3Q20 Net Inflow Adj. by Extraordinary Inflows (R$ in bn)

 

 

8 KPIs Average Trades and NPS Note: NPS, is an independent widely known survey methodology that measures the willingness of customers to recommend a Compan y’s products and services. The NPS calculation as of a given date reflects the average of the answers in the previous six months Retail Equity DARTs (million) 1.0 3Q19 3Q20 2.7 189% NPS Sep - 20: 70 XP Inc. Retail Equity Market Share Sep - 20 28% Custody Traded Volume 57%

 

 

9 Shift to Higher - Yielding Assets: 3 - year Review S ecular trend with a long journey ahead: R$1 trillion in Poupança 0.23 Pension Alternatives 1.34 Multimarket 0.15 0.73 0.21 0.34 Fixed Income Equities 5.80 0.84 1.92 4.15 0.97 0.50 0.06 REITs Total 2.22 +16% +59% +32% +120% +61% +127% +40% Sep - 20 Dec - 17 Brazil Funds’ Industry AUM (R$ in trillion) ▪ REITs : R $ 145 bn AUM in 3 Q 20 , compared to $ 1 . 3 trillion market cap in the US ; - XP is a key REITs player since the early days, fostering both the primary and secondary markets ; - In 3 Q 20 , we participated in eighteen deals and were ranked # 1 by Anbima for the quarter and the last twelve months . ▪ Alternatives : - International Funds : AUC reached R $ 10 billion in 3 Q 20 , up 367 % vs 4 Q 19 , with a total of 68 funds offered ; - Private Equity : Recent fundraising of our second retail - focused PE fund – EB Capital - raising R $ 787 million with more then 5 , 000 clients . S ource : Anbima , Statista

 

 

10 Pension Funds important growth driver and source of diversification Player 1 Player 2 Player 3 XP Vida e Previdência 9% 33% 30% 27% 18% 6% 20% 1% Net Inflows Market Share YTD AUC Market Share YTD YTD Pension Funds Market Share (R$ in million) 55% Market Share in Transfers YTD: R$5 billion R$9.6 billion AUC in Sep - 20 S ource : Fenaprevi as of September 30

 

 

11 3Q20 Revenue and Breakdown RETAIL INSTITUTIONAL ISSUER SERVICES DIGITAL CONTENT 76 % 11 % 8 % 1 % Other Revenue represented 5% of Total Gross Revenues Total Gross Revenues (in R$ mn) Highlights ▪ Growth was mainly driven by strong performance in Retail ; ▪ In the 9 M 2020 , YoY growth was 66 % vs mid - term guidance of 35 % CAGR . of 3Q20 Total Gross Revenue 3Q19 3Q20 2,245 1,453 +55%

 

 

12 Retail Revenue and Take Rate Strong expansion following client addition and healthy net inflow LTM Take Rate (LTM Retail Revenue / Average AUC) Retail Revenue (in R$ mn) 3Q19 3Q20 1.2% 1.2% 944 3Q19 3Q20 1,698 +80% Highlights ▪ Stable take rate as higher Equities and Futures’ trading volumes and Financial Products distribution offset the lower Selic and the impact from the recent extraordinary equity inflow . Highlights ▪ Key revenue growth drivers were : ( 1 ) Equity and futures ; ( 2 ) Financial Products and ( 3 ) Fixed Income . Note: Average AUC = ( BoP AUC + EoP AUC)/2

 

 

13 Highlights ▪ Main highlights : ( 1 ) REITs, with eighteen executed deals and ( 2 ) Equity Capital Markets (ECM) division, with participation in fourteen deals . 143 169 3Q19 3Q20 18% Highlights ▪ Higher equity trading volume was the main driver, followed by Fixed Income secondary trading . 173 239 3Q20 3Q19 38% Institutional and Issuer Services Institutional benefited from volumes and Issuer Services from market window Issuer Services Revenue (in R$ mn) Institutional Revenue (in R$ mn)

 

 

14 COGS and SG&A Gross margin slight compression following distribution channel investments COGS (in R$ mn) Operating Expenses (in R$ mn) Highlights ▪ Year - over - year gross margin contraction due to product mix and investments in the IFA network . 445 706 3Q19 3Q20 59% 66.4% 67.2% Gross Margin 31.9% 35.5% % of Net Revenue 481 669 3Q19 3Q20 39% Highlights ▪ Mainly driven by investments in technology and other initiatives focused on supporting long - term growth . Excluding Share - Based Compensation

 

 

15 Adjusted Net Income and Margin Net margin expansion driven by strong growth across Retail and a lower tax rate Highlights ▪ Year - over - year growth in Adjusted Net Income and margin driven by ( 1 ) strong performance of Retail and ( 2 ) lower effective tax rate . Adjusted Net Income (in R$ mn) Adjusted Net Margin Note :: 1 – We calculate Adjusted Net Income as net income, plus Itaú Transaction and deal related expenses, plus IPO process related expenses, plus our Share Based Plan expenses, minus one - time tax claim recognition ( 2010 - 2017 ) plus/minus taxes . See appendix for a reconciliation of Adjusted Net Income . 2 – Adjusted Net Margin is calculated as Adjusted Net Income divided by net revenue . See appendix for a reconciliation of Adjusted Net Margin .. 19.2% 3Q19 3Q20 27.1% 261 570 3Q19 3Q20 119%

 

 

3 Growth Strategy Through Technology

 

 

17 Technology Update Comprehensive and robust Fintech ecosystem driving efficiency gains Financial Company ▪ Business Teams control Tech Teams ▪ Technology as a tool Waterfall Model 4 dev teams Agile Model 10 Squads Agile Model 35 Squads 7 Tribes Fintech Transition Ecosystem ▪ Business and Tech Teams side by side ▪ Technology involved in decision making YEARS TO COME 2020 2019 2018 2017 2016 Full Fintech Ecosystem ▪ Business and Tech Teams are the same ▪ Technology as our main service Scaled Agile 81 Squads 18 Tribes TECH TEAMS BUSINESS TEAMS TECH TEAMS BUSINESS TEAMS B.U. TEAMS 41 278 586 ~950 ~1, … Employees 20x 53% Engineering 20% Infra 10% Data 10% Products 6% Design

 

 

18 Growth Strategy Through Technology Social Media and Influencers Info M oney DIGITAL CONTEN T Dedicated Support Teams Trading Desk s 7.0 k IFAs XP Direct / Online Services INSTITUTIONA L ISSUER SERVICE S Capital Market Securities Placement Complementary Services EXPERT Event EXPERT Content Platform Corporate Access RETAIL Digital Bank TECH - ENABLED PLATFORM... ... ALLOWING A CONTINUOUS ENHANCEMENT OF OUR ECOSYSTEM AND SUPPORTING A CONSISTENT GROWTH OF OUR REVENUE TAM 2023 2020 2021 2022 2024 2025

 

 

19 Technology Update Case: XP App Metrics Evolution XP App Launch Wealth Evolution Charts + Stock Trading October 2020 December 2019 Septembe r 2018 New Layout + Banking Capabilities 100k 500k 830k 2018 2019 2020 MAU FREQUENCY PER MONTH NPS APP RATING 3x 15x 18x 2018 2019 2020 18 63 75 2020 2018 2019 2018 1.9 2019 2020 4.6 4.8 Record! Recor d!

 

 

20 Technology Update Goals and Achievements USER - CENTRIC DATA - DRIVEN Higher investment provides a new level of service quality to our customers QUALITY SCALE XP Inc.’s scalable systems accelerate growth Full focus on customer experience  fast solutions for priority problems Data - Driven decision making  optimize efforts WE ARE READY FOR THE FUTURE! TIME TO MARKET Less than 6 months to release projects

 

 

Q&A

 

 

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

 

 

Appendix

 

 

24 Non - GAAP Financial Information Adjusted Net Income and Adjusted Gross Financial Assets 24 Adjusted Gross Financial Assets (in R $ mn ) Adjusted Net Income (in R $ mn ) R$ million 3Q20 3Q19 YoY 2Q20 QoQ Net Income 541 261 108% 541 0% (+) Stock Based Compensation 44 - n.a. 40 10% (+) Offering expenses 2 - n.a. - n.a. (+/ - ) Taxes (18) - n.a. (16) 10% Adj. Net Income 570 261 119% 565 1% Floating Balance (=net univested clients' deposits) 3Q20 2Q20 Assets (1,484) (1,949) ( - ) Securities trading and intermediation (1,484) (1,949) Liabilities 15,160 14,851 (+) Securities trading and intermediation 15,160 14,851 (=) Floating Balance 13,676 12,902 Adjusted Gross Financial Assets (=cash and equivalents, net of floating) 3Q20 2Q20 Assets 83,061 55,384 (+) Cash 642 346 (+) Securities - Fair value through profit or loss 38,702 26,453 (+) Securities - Fair value through other comprehensive income 9,589 5,252 (+) Securities - Evaluated at amortized cost 1,366 1,226 (+) Derivative financial instruments 13,149 15,589 (+) Securities purchased under agreements to resell 18,244 6,142 (+) Loan Operations* 1,369 377 Liabilities (61,514) (33,570) ( - ) Securities loaned (1,112) (473) ( - ) Derivative financial instruments (12,730) (15,005) ( - ) Securities sold under repurchase agreements (35,254) (10,118) ( - ) Private Pension Liabilities (9,649) (7,194) ( - ) Deposits* (1,627) (142) ( - ) Structured operations certificates* (1,142) (639) ( - ) Floating Balance (13,676) (12,902) (=) Adjusted Gross Financial Assets 7,871 8,913 *Banking activities added due to increased relevance in 3Q20

 

 

25 Recent Achievements XP Inc. continues to reinforce its competitive advantages and collect achievements AWARDS x Top of Mind of Best Investment Advisory by Folha de São Paulo x North American Costumer Centricity Awards 2020 in the category “Best Measurement in Customer Experience” x Época Negócios 360 o Award in the Category People ESG Source: XP Inc. x ESG Manifest launched x 4 ESG oriented funds launched x MLHR3 ▪ Target of 50% of female employees ▪ Gender equality fund that donates 20% of its management fee to an NGO ▪ Financial education journey for women

 

 

 

EXHIBIT 99.3

 

 

 

 

 

 

 

Report on review of interim condensed
consolidated financial statements

 

To the Board of Directors and Shareholders

XP Inc.

 

Introduction

 

We have reviewed the accompanying interim condensed consolidated balance sheets of XP Inc. as at September 30, 2020 and the related interim condensed consolidated statements of income and of comprehensive income for the quarter and nine-month period then ended, and the interim condensed consolidated statements of changes in equity and cash flows for the nine-month period then ended, and a summary of significant accounting policies and other explanatory notes.

 

Management is responsible for the preparation and presentation of these interim condensed consolidated financial statements in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting issued by the International Accounting Standards Board (IASB). Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review.

 

Scope of review

 

We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, and ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and consequently did not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements referred to above are not prepared, in all material respects, in accordance with IAS 34.

 

São Paulo, November 06, 2020     

 

 

 

 

/s/ PricewaterhouseCoopers

PricewaterhouseCoopers

Auditores Independentes 

CRC 2SP000160/O-5

 

Tatiana Fernandes Kagohara Gueorguiev

Contador CRC 1SP245281/O-6

 

 

 

 

PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil 05001-903, Caixa Postal 61005, www.pwc.com/br

 

 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated balance sheets

As of September 30, 2020 and December 31, 2019

In thousands of Brazilian Reais

 

 

 

 

 

Note 

September 30, 2020

  December 31, 2019
          
Cash        642,491    109,922 
                
Financial assets        84,432,999    41,888,778 
                
Fair value through profit or loss        51,850,286    26,528,396 
Securities   4    38,701,519    22,443,392 
Derivative financial instruments   5    13,148,767    4,085,004 
                
Fair value through other comprehensive income        9,588,773    2,616,118 
Securities   4    9,588,773    2,616,118 
                
Evaluated at amortized cost        22,993,940    12,744,264 
Securities   4    1,366,038    2,266,971 
Securities purchased under agreements to resell   3    18,243,688    9,490,090 
Securities trading and intermediation   9    1,483,507    504,983 
Accounts receivable        251,194    462,029 
Loan operations   7    1,369,234    386 
Other financial assets        280,279    19,805 
                
Other assets        1,484,110    643,619 
Recoverable taxes        170,066    243,320 
Rights-of-use assets   11    182,014    227,478 
Prepaid expenses   8    1,090,998    89,684 
Other        41,032    83,137 
                
Deferred tax assets   18    378,726    284,533 
Investments in associates and joint ventures   10    696,742    - 
Property and equipment   11    94,756    142,464 
Goodwill and Intangible assets   11    669,534    553,452 
                
                
Total assets        88,399,358    43,622,768 

 

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

 

2

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated balance sheets

As of September 30, 2020 and December 31, 2019

In thousands of Brazilian Reais

 

 

 

 

 

Note 

September 30, 2020

  December 31, 2019
          
Financial liabilities        69,388,840    31,842,054 
                
Fair value through profit or loss        13,841,366    5,250,943 
Securities   4    1,111,770    2,021,707 
Derivative financial instruments   5    12,729,596    3,229,236 
                
Evaluated at amortized cost        55,547,474    26,591,111 
Securities sold under repurchase agreements   3    35,253,928    15,638,407 
Securities trading and intermediation   9    15,159,711    9,114,546 
Deposits   12    1,626,709    70,195 
Structured operations certificates   13    1,142,457    19,474 
Accounts payables        655,117    266,813 
Borrowings and lease liabilities   14    511,981    637,484 
Debentures   15    338,693    835,230 
Other financial liabilities   16    858,878    8,962 
                
Other liabilities        10,298,861    4,619,623 
Social and statutory obligations        379,696    492,723 
Taxes and social security obligations        234,652    345,331 
Private pension liabilities   17    9,649,322    3,759,090 
Provisions and contingent liabilities   21    16,020    15,193 
Other        19,171    7,286 
                
Deferred tax liabilities   18    41,074    5,132 
                
Total liabilities        79,728,775    36,466,809 
                
                
Equity attributable to owners of the Parent company        8,669,470    7,153,396 
Issued capital        23    23 
Capital reserve        7,021,993    6,943,446 
Other comprehensive income        171,841    209,927 
Retained earnings        1,475,613    - 
                
Non-controlling interest        1,113    2,563 
                
Total equity   19    8,670,583    7,155,959 
                
Total liabilities and equity        88,399,358    43,622,768 

 

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

 

3 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated statements

of income and of comprehensive income

For the nine and three month periods ended September 30, 2020 and 2019

In thousands of Brazilian Reais, except earnings per share

 

 

      Nine months period ended September 30,  Three months period ended September 30,
   Note  2020  2019  2020  2019
                
Net revenue from services rendered   22(a)   3,493,231    2,341,100    1,277,745    944,038 
Net income from financial instruments at amortized cost and at fair value through other comprehensive income   22(b)   298,585    204,023    189,527    26,513 
Net income from financial instruments  at fair value through profit or loss   22(b)   1,964,691    891,390    633,465    385,373 
Total revenue and income        5,756,507    3,436,513    2,100,737    1,355,924 
                          
Operating costs   23    (1,864,062)   (1,118,967)   (706,020)   (444,958)
Selling expenses   24    (94,367)   (82,419)   (38,322)   (30,104)
Administrative expenses   24    (2,077,587)   (1,294,039)   (809,596)   (481,605)
Other operating income (expenses), net   25    84,986    118,487    97,801    7,358 
Interest expense on debt        (46,385)   (62,631)   (11,585)   (24,481)
Share of profit or (loss) in joint ventures and associates   10    (564)   -    (564)   - 
                          
Income before income tax        1,758,528    996,944    632,451    382,134 
                          
Income tax expense   18    (279,427)   (297,646)   (91,167)   (121,336)
                          
Net income for the period        1,479,101    699,298    541,284    260,798 
                          
Other comprehensive income                         
Items that can be subsequently reclassified to income                         
Foreign exchange variation of investees located abroad        76,575    12,126    6,900    15,191 
Gains (losses) on net investment hedge   6    (80,370)   (11,829)   (7,531)   (13,911)
Changes in the fair value of financial assets at fair value through other comprehensive income        (33,914)   986    (45,072)   (8,118)
Other comprehensive income (loss) for the period, net of tax        (37,709)   1,283    (45,703)   (6,838)
                          
Total comprehensive income for the period        1,441,392    700,581    495,581    253,960 
Net income attributable to:                         
Owners of the Parent company        1,475,613    692,011    540,434    257,814 
Non-controlling interest        3,488    7,287    850    2,984 
Total comprehensive income attributable to:                         
Owners of the Parent company        1,437,904    693,294    494,731    250,976 
Non-controlling interest        3,488    7,287    850    2,984 
                          
Earnings per share from total income attributable to the ordinary equity holders of  the company                         
Basic earnings per share   27    2.6742    1.3589    0.9794    0.5063 
Diluted earnings per share   27    2.6534    1.3589    0.9710    0.5063 

 

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

 

4 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated statements of changes in equity

For the nine months ended September 30, 2020 and 2019

In thousands of Brazilian Reais

 

 

      Attributable 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 period                                             
Net income for the period        -    -    -    -    692,011    692,011    7,287    699,298 
Other comprehensive income, net        -    -    -    1,283    -    1,283    -    1,283 
Transactions with shareholders - contributions and distributions                                             
Gain (loss) in changes in interest of subsidiaries, net        -    -    -    210    -    210    (1,439)   (1,229)
Allocations of the net income for the period                                             
Dividends distributed        -    -    -    -    -    -    (9,193)   (9,193)
Balances at September 30, 2019        21    927,895    947,696    210,658    692,011    2,778,281    3,590    2,781,871 
                                              
Balances at December 31, 2019        23    5,409,895    1,533,551    209,927    -    7,153,396    2,563    7,155,959 
Comprehensive income for the period                                             
Net income for the period        -    -    -    -    1.475,613    1,475,613    3,488    1,479,101 
Other comprehensive income, net        -    -    -    (37,709)   -    (37,709)   -    (37,709)
Transactions with shareholders - contributions and distributions                                             
Share based incentive plan   26    -    -    78,547    -    -    78,547    (10)   78,537 
Gain (loss) in changes in interest of subsidiaries, net        -    -    -    (377)   -    (377)   1,208    831 
Allocations of the net income for the period                                             
Dividends distributed        -    -    -    -    -    -    (6,136)   (6,136)
Balances at September, 2020        23    5,409,895    1,612,098    171,841    1,475,613    8,669,470    1,113    8,670,583 

 

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

 

5 

XP Inc. and its subsidiaries

Unaudited interim condensed consolidated statements of cash flows

For the nine months ended September 30, 2020 and 2019

In thousands of Brazilian Reais

 

 

     

Nine months ended

September 30,

   Note  2020  2019
Operating activities               
Income before income tax        1,758,528    996,944 
                
Adjustments to reconcile income before income taxes               
Depreciation of property and equipment and right-of-use assets   11    52,972    38,409 
Amortization of intangible assets   11    52,928    23,992 
Loss on impairment and write-off of property, equipment, intangible assets and leases, net   11    61,888    7,606 
Income from share in the net income of associates and joint ventures and other investments        562    - 
Expected credit losses on accounts receivable, loan operations and other financial assets        38,171    6,318 
(Reversal of) Provision for contingencies, net   21    (53)   (2,207)
Net foreign exchange differences        2,981    571 
Share based plan        78,537    - 
Interest accrued        47,529    64,099 
                
Changes in assets and liabilities               
Securities (assets and liabilities)        (23,926,297)   (11,018,501)
Derivative financial instruments (assets and liabilities)        314,825    390,880 
Securities trading and intermediation (assets and liabilities)        5,066,641    1,986,946 
Securities purchased (sold) under resale (repurchase) agreements        10,861,923    6,094,987 
Accounts receivable        178,152    (34,217)
Loan operations        (1,375,823)   - 
Prepaid expenses        (1,001,314)   (142)
Other assets and other financial assets        (216,882)   20,583 
Structured operations certificates        1,122,983    - 
Accounts payable        387,120    72,928 
Deposits        1,556,514    - 
Social and statutory obligations        (113,027)   23,878 
Tax and social security obligations        (262,915)   6,930 
Private pension liabilities        5,890,232    1,705,647 
Other liabilities and other financial liabilities        341,273    5,628 
                
Cash from operations        917,448    391,279 
                
Income tax paid        (48,097)   (355,410)
Contingencies paid   21    (592)   (1,062)
Interest paid   31    (62,015)   (16,386)
Net cash flows from operating activities        806,744    18,421 
                
Investing activities               
Acquisition of intangible assets   11    (79,127)   (39,974)
Acquisition of property and equipment   11    (40,011)   (43,749)
Acquisition of subsidiaries, net of cash acquired   11    (55,741)   - 
Investment in associates and joint ventures        (204,960)   - 
Net cash flows used in investing activities        (379,839)   (83,723)
                
Financing activities               
Payments of borrowings and lease liabilities   31    (130,798)   (101,047)
Payment of debentures   31    (400,000)   - 
Repurchase of debentures   31    (64,717)   - 
Proceeds of debentures        -    400,000 
Transactions with non-controlling interests        831    (1,229)
Dividends paid to non-controlling interests        (6,136)   (9,193)
Net cash flows from (used in) financing activities        (600,820)   288,531 
                
Net increase in cash and cash equivalents        (173,915)   223,230 
                
Cash and cash equivalents at the beginning of the period        887,796    626,863 
Effects of exchange rate changes on cash and cash equivalents        33,814    (4,116)
Cash and cash equivalents at the end of the period        747,695    845,977 
                
Cash        642,491    70,483 
Securities purchased under agreements to resell   3    -    684,964 
Interbank certificate deposits   4    105,204    90,530 

 

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

 

6 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

1.Operations

 

XP Inc. (the “Company”) is a Cayman Island exempted company with limited liability, incorporated on August 29, 2019. The registered office of the Company is Ugland House, 121 South Church Street in George Town, Grand Cayman. The Company’s principal executive office is located in the city of São Paulo, Brazil.

 

XP Inc. is a holding company controlled by XP Controle Participações S.A., which holds 53.38% of voting rights and whose is ultimately controlled by a group of individuals.

 

XP Inc. and its subsidiaries (collectively, the “Company”, “Group” or “XP Group”) is a leading, technology-driven financial services platform and a trusted provider of low-fee financial products and services in Brazil. XP Group are principally engaged in providing its customers, represented by individuals and legal entities in Brazil and abroad, various financial products, services, digital content and financial advisory services, mainly acting as broker-dealer, including securities brokerage, private pension plans, commercial and investment banking products such as loan operations, transactions in the foreign exchange markets and deposits, through our brands that reach clients directly and through network of Independent Financial Advisers (“IFAs”).

 

On November 29, 2019, the Group carried out a corporate reorganization in order to prepare the structure to the Initial Public Offering of its shares. As result, the capital contributed by the shareholders on XP Investimentos S.A. were transferred and incorporated on XP Inc. Therefore the shareholders have a direct stake on XP Inc. which controls XP Investimentos S.A. and the other operating companies of the Group.

 

On November 30, 2019, the Company carried out a reverse share split of 4:1. As a result, the share capital represented by 2,036,988,542 shares decreased to 509,247,136 shares. The reverse share split has been applied retrospectively to all figures in the historical financial statements regarding number of shares (Note 27) and per share data as if the reverse share split had been in effect for all periods presented.

 

1.1Initial Public Offering (“IPO”) and resulting transactions

 

On December 13, 2019, the Company completed its Initial Public Offering (“IPO”), offering 72,510,641 of Class A common shares, of which 42,553,192 new shares were offered by the Company and the remaining 29,957,449 shares were offered by selling shareholders. Additionally, the underwriters executed an option to purchase 10,876,596 additional Class A common shares at the initial public offering price which resulted in a total of 83,387,237 Class A common shares sold.

 

The initial offering price per Class A common share was US$ 27.00, resulting in gross proceeds of US$ 1,148,936 thousand (or R$4,705,803) to XP Inc, deducting R$200,977 thousand as underwriting discounts and commissions. Additionally, the Company incurred in R$44,726 thousand regarding other offering expenses, of which R$21,902 thousand was recognized directly in income statements and an amount of R$22,824 in equity as transaction costs.

 

The shares offered and sold in the IPO were registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form F-1 (Registration N° 333-234719), which was declared effective by the Securities and Exchange Commission on December 10, 2019. The common shares began trading on the Nasdaq Global Select Market (“NASDAQ-GS”) on December 11, 2019 under the symbol “XP”.

 

7 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

1.2Follow-on public offering

 

On July 1, 2020, XP Inc. concluded an underwritten public offering of 22,465,733 Class A common shares offered by General Atlantic (XP) Bermuda, L.P. and XP Controle Participações S.A. (“selling shareholders”) at a public offering price of US$42.50 per share, including the full exercise of the underwriters’ option to purchase an additional 2,930,313 Class A common shares from the selling shareholders. The Company did not receive any proceeds from the sale of Class A common shares by the selling shareholders and there were no changes in the Company’s control structure as a result of such transaction.

 

These unaudited interim condensed consolidated financial statements as of September 30, 2020 and for the three and nine month periods ended September 30, 2020 were approved by the Board of Director’s meeting on November 6, 2020.

 

2.Basis of preparation of the financial statements and changes to the Group’s accounting policies

 

a)Basis of preparation of the unaudited interim condensed consolidated financial statements

 

The unaudited interim condensed consolidated financial statements as of September 30, 2020 and for the three and nine months period ended September, 2020 and 2019 have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”).

 

The unaudited interim condensed consolidated financial statements have been prepared on a historical cost basis, except for financial instruments that have been measured at fair value.

 

The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group’s annual consolidated financial statements as of December 31, 2019. The list of notes that were not apresented in this unaudited interim condensed is presented below:

 

Note to financial statements of December 31, 2019 Description
3. Summary of significant accounting policies
4. Significant estimated and judgements
5. Group structure
10. Accounts receivable
11. Recoverable taxes
19. Social and Statutory obligations
20. Tax and social security obligations
24. (a) Key-person management compensation
33. (b) to (f) Management of financial risks and financial instruments

 

The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period, except for the new accounting policies adopted for the current interim reporting period, see Note 2 (c).

 

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

 

8 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

b)New standards, interpretations and amendments not yet adopted

 

The accounting policies adopted in the preparation of the unaudited interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s consolidated financial statements for the year ended December 31, 2019.

 

Certain new accounting standards and interpretations have been published ,which include Amendments to IFRS 3: Definition of a Business; Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform; and Amendments to IAS 1 and IAS 8: Definition of Material; and Conceptual Framework for Financial Reporting issued on March 29, 2018, that are not mandatory for the period ended September 30, 2020, and have not been early adopted by the group. These standards are not expected to have a material impact on the entity in the current or future financial statements periods and on foreseeable future transactions.

 

c)New accounting policies adopted by the Group

 

Derivative financial instruments and hedging activities

 

In compliance with IFRS 9, as of September 30, 2020, the Group designated certain derivatives as fair value hedges for protection of the exposure of Fixed-Income carried out through structured operations certificates. The following accounting policy is adopted for theses fair value hedges:

 

For the derivative financial instruments that are designated and qualify as fair value hedges, the following policies apply:

a)the gain or loss resulting from the fair value appreciation or depreciation of the hedging instrument at fair value should be recorded in profit or loss; and

b)the gain or loss resulting from fair value appreciation or depreciation of the hedged item, that is attributable to the effective portion of the hedged item should adjust the carrying amount of the hedged item, which will be recorded in profit or loss.

 

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the remaining period until maturity, using a recalculated effective interest rate.

 

d)Basis of consolidation

 

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

 

         % of Group’s interest (i)
Entity name  Country of incorporation  Principal activities  September 30,2020 

December

31, 2019

             
Indirectly controlled                 
XP Allocation Asset Management Ltda. (ii)   Brazil   Asset management   99.97%  -
Track Índices Consultoria Ltda. (ii)   Brazil   Index Provider   100.00%  -
XP Eventos Ltda. (ii)   Brazil   Media and Events   99.00%  - 
Carteira Online Controle de Investimentos Ltda.-ME (iii)   Brazil   Investment consolidation platform   99.99%  - 
Antecipa S.A. (iii)   Brazil   Receivables Financing Market   100.00%  -

 

9 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

Consolidated investments funds                  
NIMROD Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (ii)   Brazil   Investment fund   100.00%       -     
XP High Yield Fund SP (ii)   Cayman   Investment fund   100.00%   - 
XP International Fund SPC (ii)   Cayman   Investment fund   100.00%   - 
Spatha Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (iv)   Brazil   Investment fund   -    100.00%
Balista Debentures Incentivadas Fundo de Investimento Multimercado Crédito Privado  (iv)   Brazil   Investment fund   -    100.00%

(i)The percentage of participation represents the Group’s interest in total capital and voting capital of its subsidiaries.

(ii)New subsidiaries and investment funds commenced operations in the period.

(iii)New subsidiaries acquired in the period.

(iv)Investiments funds closed during the period.

 

e)Interests in associates and joint ventures

 

i.Associates

 

Associates are companies in which the investor has a significant influence but does not hold control. Investments in these companies are initially recognized at cost of acquisition and subsequently accounted for using the equity method. Investments in associates and joint ventures include the goodwill identified upon acquisition, net of any cumulative impairment loss.

 

ii.Joint ventures

 

The Group has joint venture whereby the parties that have joint control of the arrangement have rights to the net assets.

 

iii.Equity method

 

Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint ventures are recognised as a reduction in the carrying amount of the investment.

 

Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity-accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

If its interest in the associates and joint ventures decreases, but the Group retains significant influence or joint control, only the proportional amount of the previously recognized amounts in Other comprehensive income is reclassified in Income, when appropriate.

 

10 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

f)Business acquisitions

 

The acquisitions of Fliper and Antecipa were recently completed and the allocation of the purchase price to acquired assets, including goodwill, and assumed liabilities is still preliminary pending receipt of the final fair value valuations of the acquired assets and assumed liabilities as of the closing date of the transaction. For the concluded acquisitions, the total consideration paid is R$83,925, being: i) R$55,741 paid in cash, ii) R$14,000 payable in three consecutives annual installments from 2020 to 2022 adjusted by the Interbank Certificates of Deposit (“CDI”) rate and iii) R$14,183 as a fair value of the contingent consideration.

 

These acquisitions are not considered material for XP Inc. interim financial statements.The preliminary purchase prices were mostly allocated to goodwill, representing the value of expected synergies arising from the acquisition.

 

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

 

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

 

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 , a digital platform for the financing of receivables.Antecipa's central objective is to offer an efficient alternative for companies to optimize cash flow management. For the Group, the acquisition represents an opportunity to further expand its product range and reinforce the company’s presence in the Small to Medium Enterprise (SME) and corporate segments in Brazil, similar to XP’s transformational initiatives across the Retail, High-Income and Private Market channels. On September 1, 2020, acquisition was consummated, through approval of Central Bank (BACEN).

 

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

 

On June 9, 2020, the Group entered into an agreement to acquire of 100% of total share capital of DM10, a marketplace that connects hundreds of independent distributors with Life Insurance and Pension Plan products, adding value through technology and education. With the transaction, the Group enhances its distribution network in the insurance division. This transaction is expected to close in the fourth quarter of 2020.

 

g)Segment reporting

 

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

 

The CODM considers the whole Group as a single operating and reportable segment, monitoring operations, making decisions on fund allocation and evaluating performance based on a single operating segment. The CODM reviews relevant financial data on a combined basis for all subsidiaries and joint ventures.

 

11 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

Disaggregated information is only reviewed at the revenue level (Note 22), with no corresponding detail at any margin or profitability levels.

 

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

 

See Note 22 (c) for a breakdown of total revenue and income and selected assets by geographic location

 

h)Impacts related COVID-19 in the current period

 

Starting from January 2020, it was reported that a novel strain of coronavirus, later named COVID-19, spread worldwide. The current pandemic has negatively impacted the global, national and regional economies and disrupted supply chains and otherwise reduce international trade and business activity. The Group has reviewed its exposure to economic-related and market volatility, which could negatively impact the value of a certain class of financial instruments however has not identified relevant impact to the financial performance or position of the group as of September, 2020. The company has sufficient headroom to enable it to comply with its covenants on its existing borrowings and sufficient working capital and undrawn financing facilities to service its operating activities and ongoing investments.

 

Although the Group have not identified relevant impacts to its financial performance as at September 30, 2020, the Group is monitoring COVID-19 effects on its business, which are still uncertain and will depend on the severity of the coronavirus and the actions to contain or treat its impact, among others.

 

As a consequence of this pandemic, most of the Group’s employees is working from home. Based on thorough assessments about the well-being and performance of our workforce, management announced on September 11, 2020, the permanent and company-wide adoption of the home-office model.

 

i)Estimates

 

The preparation of unaudited interim condensed consolidated financial statements of the Group requires management to make judgments and estimates and to adopt assumptions that affect the amounts presented referring to revenues, expenses, assets and liabilities at the reporting date. Actual results may differ from these estimates.

 

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

 

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

 

a)Securities purchased under agreements to resell

 

  

September 30, 2020

  December 31, 2019
       
Available portfolio   1,883,825    971,991 
National Treasury Notes (NTNs)   1,639,174    771,099 
Financial Treasury Bills (LFTs)   -    195,980 
National Treasury Bills (LTNs)   244,651    4,912 

 

12 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

Collateral held   16,359,863    8,518,099 
National Treasury Bills (LTNs)   397,275    1,764,410 
National Treasury Notes (NTNs)   15,962,588    6,753,689 
           
Total   18,243,688    9,490,090 

 

Investments in purchase and sale commitments backed by sovereign debt securities refer to transactions involving the purchase of sovereign debt securities with a commitment to sale originated in the subsidiary XP CCTVM and in exclusive funds and were carried out at an average fixed rate of 1.92% p.a. (December 31, 2019 – 4.63% p.a.).

 

As of September 30, 2020 no amounts (December 31, 2019 - R$ 654,057) from the total amount of available portfolio is being presented as cash equivalents in the statements of cash flows.

 

b)Securities sold under repurchase agreements

 

  

September

30, 2020

 

December

31, 2019

National Treasury Bills (LTNs)   12,682,922    5,653,994 
National Treasury Notes (NTNs)   22,571,006    8,533,113 
Financial Treasury Bills (LFTs)   -    1,451,300 
Total   35,253,928    15,638,407 

 

As of September 30, 2020, securities sold under repurchase agreements were agreed with average interest rates of 1.89% p.a. (December 31, 2019 – 4.48% p.a.), with assets pledged as collateral.

 

4.Securities

 

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

 

  

September 30, 2020

 

December 31, 2019

   Gross carrying amount 

Fair

value

  Gross carrying amount 

Fair

Value

Financial assets                    
At fair value through profit and loss   38,569,036    38,701,519    22,332,936    22,443,392 
Agribusiness receivables certificates   179,155    177,095    598,085    589,525 
Bank deposit certificates (i)   368,845    370,385    244,071    246,827 
Brazilian government bonds   25,239,874    25,280,046    15,404,300    15,494,046 
Certificate of real estate receivable   126,791    124,056    75,922    75,123 
Debentures   1,034,742    1,018,893    885,344    885,068 
Financial credit bills   82,439    82,683    98,068    106,759 
Investment funds (ii)   7,656,488    7,656,266    3,047,198    3,047,198 
United States government bonds   666,870    702,869    -    - 
Real estate credit bill   1,632    1,651    1,282    1,300 
Stocks issued by public-held company   2,546,996    2,546,996    1,562,965    1,562,965 
Structured operations certificate   410,022    470,652    237,112    256,381 
Others (iii)   255,182    269,927    178,589    178,200 
                     
At fair value through other comprehensive income   9,637,582    9,588,773    2,608,325    2,616,118 
National treasury bill   9,637,582    9,588,773    2,608,325    2,616,118 

 

13 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

(i)Bank deposit certificates include R$ 105,204 (December 31, 2019 – R$123,817) is being presented as cash equivalents in the statements of cash flows.

(ii)Investments funds include R$ 7,230,918 (December 31, 2019 – R$ 3,759,090) amounts related to Specially Constituted Investment Fund (“FIE”) as presented in Note 17.

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

 

b)Securities evaluated at amortized cost

 

   September 30, 2020  December 31, 2019
   Gross carrying amount 

Book

Value

  Gross carrying amount 

Book

Value

Financial assets                    
At amortized cost   1,366,038    1,366,038    2,266,971    2,266,971 
Bonds   1,366,038    1,366,038    2,266,971    2,266,971 

 

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

 

   September 30, 2020  December 31, 2019
   Gross carrying amount 

Book

value

  Gross carrying amount 

Book

Value

Financial liabilities                    
At fair value through profit or loss   1,111,770    1,111,770    2,021,707    2,021,707 
Securities   1,111,770    1,111,770    2,021,707    2,021,707 

 

d)Securities classified by maturity

 

      Assets     Liabilities
   September 30, 2020  December 31, 2019  September 30, 2020  December 31, 2019
             
Financial assets                    
At fair value through P&L and at OCI                    
Current   22,696,712    9,804,819    1,111,770    2,021,707 
Non-stated maturity   10,466,704    4,999,333    1,111,770    2,021,707 
Up to 3 months   644,886    257,544    -    - 
From 3 to 12 months   11,585,122    4,547,942    -    - 
                     
Non-current   25,593,580    15,254,691    -    - 
After one year   25,593,580    15,254,691    -    - 
                     
Evaluated at amortized cost                    
Current   1,366,038    2,266,971    -    - 
Up to 3 months   194,334    807,218    -    - 
From 3 to 12 months   1,171,704    1,459,753    -    - 
                     
Total   49,656,330    27,326,481    1,111,770    2,021,707 

 

14 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

5.Derivative financial instruments

 

The Group trades derivative financial instruments with various counterparties to manage its overall exposures (interest rate, foreign currency and fair value of financial instruments) and to assist its customers in managing their own exposures.

 

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

 

   September 30, 2020
  

Notional

 

Fair Value

 

%

 

Up to 3

months

 

From 3 to 12 months

 

Above 12 months

Assets                  
Options   602,159,341    6,602,467    50    1,649,905    229,791    4,722,771 
Swap contracts   16,819,387    637,693    5    38,784    156,750    442,159 
Forward contracts   14,566,817    5,901,156    45    5,651,129    161,202    88,825 
Future contracts   22,282,253    7,451    -    7,451    -    - 
Total   655,827,798    13,148,767    100    7,347,269    547,743    5,253,755 
                               
Liabilities                              
Options   574,319,779    6,524,516    52    1,372,572    153,207    4,998,737 
Swap contracts   5,517,378    693,187    5    75,816    170,932    446,439 
Forward contracts   10,248,842    5,492,148    43    5,458,963    13,058    20,127 
Future contracts   20,343,451    19,745    -    19,745    -    - 
Total   610,429,450    12,729,596    100    6,927,096    337,197    5,465,303 

 

 

   December 31, 2019
  

Notional

 

Fair Value

 

%

 

Up to 3 months

 

From 3 to 12 months

 

Above 12 months

Assets                  
Options   498,484,022    2,742,035    67    1,837,073    577,177    327,785 
Swap contracts   3,955,473    1,133,768    27    10,418    700,668    422,682 
Forward contracts   1,857,542    187,392    5    159,163    28,175    54 
Future contracts   15,920,584    21,809    1    21,809    -    - 
Total   520,217,621    4,085,004    100    2,028,463    1,306,020    750,521 
                               
Liabilities                              
Options   488,482,756    2,741,592    85    1,745,532    637,393    358,667 
Swap contracts   3,420,857    485,164    14    15,838    40,687    428,639 
Forward contracts   164,209    2,480    1    1,693    325    462 
Total   492,067,822    3,229,236    100    1,763,063    678,405    787,768 

 

15 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

6.Hedge accounting

 

The Group has two types of hedge relationships: hedge of net investment in foreign operations and fair value hedge.

 

For hedge accounting purposes, the risk factors measured by the Group are:

·Interest Rate: Risk of volatility in transactions subject to interest rate variations;

·Currency: Risk of volatility in transactions subject to foreign exchange variation.

 

The structure of risk limits is extended to the risk factor level, where specific limits aim at improving the monitoring and understanding processes, as well as avoiding concentration of these risks.

 

The structures designed for interest rate and exchange rate categories take into account total risk when there are compatible hedging instruments. In certain cases, management may decide to hedge a risk for the risk factor term and limit of the hedging instrument.

 

a)Hedge of net investment in foreign operations

 

In the nine month period ended September 30, 2020 and in the year ended December 31, 2019, the objective for the Group was to hedge the risk generated by the US$ variation from investments in our subsidiaries in the United States, XP Holdings International and XP Advisors Inc.

 

The Group has entered into forward contracts to protect against changes in future cash flows and exchange rate variation of net investments in foreign operations known as Non Deliverable Forward (“NDF”) contracts.

 

The Group undertakes risk management through the economic relationship between hedge instruments and hedged item, in which it is expected that these instruments will move in opposite directions, in the same proportions, with the aim of neutralizing the risk factors.

 

   Hedged item  Hedge instrument
   Book Value     
Strategies   Assets    Liabilities    Variation in value recognized in Other comprehensive income    Nominal value    

Variation in the
amounts used

to calculate hedge
ineffectiveness

 
September 30, 2020                         
Foreign exchange risk                         
Hedge of net investment in foreign operations   224,539    -    70,882    395,977    (80,370)
Total   224,539    -    70,882    395,977    (80,370)
                          
December 31, 2019                         
Foreign exchange risk                         
Hedge of net investment in foreign operations   186,412    -    5,946    248,896    (7,133)
Total   186,412    -    5,946    248,896    (7,133)

 

16 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

For the period ended of September 30, 2020, there was no ineffectiveness in relation to the foreign net investment hedge.

 

b)Fair value hedge

 

The fair value hedging strategy of the Group consists of hedging the exposure of Fixed-Income securities carried out through structured operations certificates.

 

The market risk hedge strategy involves avoiding temporary fluctuations in earnings arising from changes in the interest rate market in Reais. Once this risk is offset, the Group seeks to index the portfolio to the CDI, through the use of derivatives (DI1 Futuro).

 

The hedge is contracted in order to neutralize the total exposure to the market risk of the fixed-income funding portfolio, excluding the portion of the fixed-income compensation represented by the credit spread of Banco XP S.A, seeking to obtain the closest match deadlines and volumes as possible.

 

The effects of hedge accounting on the financial position and performance of the Group are presented below:

 

   Hedged item  Hedge instrument
   Book Value     
Strategies   Assets    Liabilities    Variation in value recognized in income    Nominal value    Variation in the
amounts used to
calculate hedge
ineffectiveness
 
September 30, 2020                         
Interest rate risk                         
Hedge of fixed-income securities   -    1,142,457    51,787    1,159,250    (51,361)
Total   -    1,142,457    51,787    1,159,250    (51,361)

 

For the period ended of September 30, 2020, there was no ineffectiveness in relation to the fair value hedge.

 

               September 30, 2020
     Book value (i)   
Hedge Instruments   Notional amount    Assets    Liabilities    Variation in fair value used to calculate hedge ineffectiveness    Hedge ineffectiveness recognized in income 
Interest rate risk                         
Futures   1,159,250    -    1,142,457    (51,361)   427 

(i)Amounts recorded under Derivatives.

 

The table below presents, for each strategy, the notional amount and the fair value adjustments of hedge instruments and the book value of the hedged item:

 

   September 30, 2020  December 31, 2019
  Hedge instruments  Hedge item  Hedge instruments  Hedge item
Strategies    Notional amount    Fair value adjustments    Book value    Notional amount    Fair value adjustments    Book value 
Hedge of Fair Value   1,159,250    51,787    (51,361)   -    -    - 
Hedge of net investment in foreign operations   395,977    (80,370)   (80,370)   248,896    5,946    (7,133)
Total   1,555,227    (28,583)   (131,731)   248,896    5,946    (7,133)

 

17 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

The table below shows the breakdown by maturity of the hedging strategies:

 

   September 30, 2020
   0-1 year  1-2 years  2-3 years  3-4 years  4-5 years  5-10 years  Total
Hedge of Fair Value   (2)   (14)   (563)   -    (30,698)   (20,084)   (51,361)
Hedge of net investment in foreign operations   (8,732)   -    -    (30,284)   (41,354)   -    (80,370)
Total   (8,734)   (14)   (563)   (30,284)   (72,052)   (20,084)   (131,731)

 

    December 31,
2019
                               
    0-1 year    1-2 years    2-3 years    3-4 years    4-5 years    5-10 years    Total 
Hedge of Fair Value   -    -    -    -    -    -    - 
Hedge of net investment in foreign operations   (198)   -    -    (2,932)   (4,003)   -    (7,133)
Total   (198)   -    -    (2,932)   (4,003)   -    (7,133)

 

7.Loan operations

 

Following are the breakdown of the carrying amount of loan operations by class, sector of debtor, maturity and concentration:

 

Loans by type 

September

30, 2020

 

December

31, 2019

Retail          
Pledged asset loan   947,449    388 
Credit card   8,061    - 
Corporate          
Pledged asset loan   316,412    - 
Non-pledged loan   104,368    - 
Total Loans operations   1,376,290    388 
Expected Credit Loss   (7,056)   (2)
Total loans operations, net of Expected Loss   1,369,234    386 

 

 

By maturity 

September 30, 2020

 

December 31,

2019

Due in 3 months or less   68,783    388 
Due after 3 months through 12 months   287,720    - 
Due after 12 months   1,019,786    - 
Total Loans operations   1,376,289    388 

 

XP Inc offers several loan products through Banco XP to its customers. The loan products offered to its customers are: (i) "Limite Express": loans fully collaterized by customers’ investments on XP platform and (ii)

 

18 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

"COE Alavancado": credit product strictly related to investments in structured notes, in which the borrower is able to operate leveraged, retaining the structured note itself as guarantee for the loan.

 

XP Inc uses client’s investments as collaterals to reduce potential losses and protect against credit risk exposure by managing these collaterals so that they are always sufficient, legally enforceable (effective) and viable, XP monitors the value of the collaterals. The Credit Risk Management provides subsidies to define strategies as risk appetite, to establish limits, including exposure analysis and trends as well as the effectiveness of the credit policy.

 

As of September 30, 2020, these two products together represented 94% (December 31, 2019: nil) of the Company's credit portfolio. The expected credit loss amounting to R$ 7,056 corresponds to approximately 0.5% of the total credit portfolio as of September 30, 2020 (December 31, 2019: nil).

 

The loans operations have an high credit quality and the Group often uses risk mitigation measures, primarily through client’s investments as collaterals, which explains the low provision ratio. As of September 30, 2020, the loans and expected credit loss are classified as stage 1 in accordance with IFRS 9.

 

This classification is periodically reassessed as provided for in XP Inc.'s credit risk policy.

 

8.Prepaid expenses

 

   September 30, 2020  December 31, 2019
Commissions and premiums paid in advance (a)   1,035,869    49,233 
Marketing expenses   8,110    9,678 
Services paid in advance   1,124    2,043 
Other expenses paid in advance   45,895    28,730 
Total   1,090,998    89,684 
           
Current   461,304    56,605 
Non-current   629,694    33,079 

(a) Mostly comprised by long term investment programs implemented by XP CCTVM through its network of IFAs. These commissions and premiums paid are recognized at the signing date of each contract and are amortized in the statement of income of the Company, linearly, according to the investment term period.

 

9.Securities trading and intermediation (receivable and payable)

 

Represented by operations at B3 on behalf of and on account of third parties, with liquidation operating cycle between D+1 and D+3.

 

  

September 30, 2020

  December 31, 2019
Cash and settlement records   378,727    13,823 
Debtors pending settlement   967,599    477,646 
Other   137,181    13,514 
Total Assets   1,483,507    504,983 
           
Cash and settlement records   378,030    474,759 
Creditors pending settlement   14,781,681    8,639,787 
Total Liabilities   15,159,711    9,114,546 

 

19 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

10.Investments in associates and joint ventures

 

Set out below are the associates and joint venture of the Group as of September 30, 2020. The entities listed below have share capital consisting solely of ordinary shares, which are held directly by the Group. The country of incorporation or registration is also their principal place of business, and the proportion of ownership interest is the same as the proportion of voting rights held.

 

Name of entity  % of ownership interest  Nature of relationship  Measurement method  Equity  Carrying amount
Du Agro Holdings S.A.   49%  Joint Venture (1)  Equity method   479    235 
VPL Gestão Patrimonial e Participações S.A.   49%  Associate (2)  Equity method   150,000    74,851 
O Primo Rico Mídia, Educacional e Participações Ltda.   20%  Associate (3)  Equity method   (520)   (105)
Total equity-accounted investments              149,959    74,981 

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

(2) On September 8, 2020, the Company entered into an agreement to hold a 49.9% minority stake of the total share capital of VPL Gestão Patrimonial e Participações S.A..With this transaction XP Inc. is complementing the existing offering to ultra-high-net-worth individual in the Wealth Management segment.

(3) O Primo Rico is a company focused on digital content services, including developing and selling financial education courses and online events.

 

                   
Entity 

December 31,

2019

  Acquisition/Equity  Equity in earnings  Other comprehensive income  Goodwill (i)  September 30, 2020
VPL Gestão Patrimonial e Participações S.A.   -    74,851    -    -    621,248    696,099 
Du Agro Holdings S.A.   -    572    (337)   -    408    643 
O Primo Rico (ii)   -    242    (227)   (120)   -    (105)
 Total   -    75,665    (564)   (120)   621,656    696,637 

(i) Related to the acquisitions of associates and joint ventures. As of September 30, 2020 the goodwill recognized is preliminary and includes the value of expected synergies arising from the investments.

(ii) As of September 30, 2020 the entity presented a negative net equity. The amounts related to the negative net equity are recognized in Other liabilities.

 

11.Property, equipment, goodwill, intangible assets and lease

 

a)Changes in the period

 

   Property and  Goodwill and intangible
   equipment  assets
       
As of January 1, 2019   99,127    504,915 
Additions   43,749    39,974 
Write-offs   (7,550)   (56)
Depreciation / Amortization in the period   (15,174)   (23,992)
As of September 30, 2019   120,152    520,841 
Cost   165,314    604,298 
Accumulated depreciation / amortization   (45,162)   (83,457)
           
As of January 1, 2020   142,464    553,452 
Additions   40,011    79,127 

 

20 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

Business combination (Note 2(f))   -    83,925 
Write-offs (i)   (61,967)   (185)
Transfers   (6,143)   6,143 
Depreciation / Amortization in the period   (19,609)   (52,928)
As of September 30, 2020   94,756    669,534 
Cost   196,081    767,878 
Accumulated depreciation / amortization   (101,325)   (98,344)

(i)As previously mentioned on Note 2(h), as a result of the COVID-19 pandemic, the Group 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. During the third quarter of 2020, the Company concluded its analysis and wrote-off the corresponding properties and equipments of these offices. Some of these amounts was previously classified as impaired considering that the Conmpany was in the early stages of the assessment.

 

b)Impairment test for goodwill

 

Given the interdependency of cash flows and the merger of business practices, all Group’s entities are considered a single cash generating units (“CGU”) and, therefore, goodwill impairment test is performed at the single operating level. Therefore, the carrying amount considered for the impairment test represents the Company’s equity.

 

The Group performs its annual impairment test in December and when circumstances indicates that the carrying value may be impaired. The Group’s impairment tests are based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the cash generating unit were disclosed in the annual consolidated financial statements for the year ended December 31, 2019. As of September 30, 2020, there were no indicators of a potential impairment of goodwill.

 

c)Leases

 

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

 

   Right-of-use assets  Lease liabilities
As of January 1, 2019   133,870    148,494 
Additions (i)   104,487    105,694 
Depreciation expense   (23,235)   - 
Interest expense   -    12,447 
Effects of exchange rate   6,259    6,460 
Payment of lease liabilities   -    (26,194)
As of September 30, 2019   221,381    246,901 
Current   -    28,970 
Non-current   221,381    217,931 
           
As of January 1, 2020   227,478    255,406 
Additions (i)   45,377    45,129 
Depreciation expense   (33,363)   - 
Write-offs (ii)   (78,321)   (78,322)
Interest expense   -    15,648 
Revaluation (iii)   (9,115)   (10,050)
Impairment, net   264    - 
Effects of exchange rate   29,694    32,675 
Payment of lease liabilities   -    (45,903)

 

21 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

As of September 30, 2020   182,014    214,583 
Current   -    31,566 
Non-current   182,014    183,017 

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

(ii)As previously mentioned on Note 2(h), as a result of the COVID-19 pandemic, the Group 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. As consequence the Group has recorded the corresponding write-off of the right-of-use and lease liabilities related to the early termination of the leasing contracts.

(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$ 1,523 for the period ended September 30, 2020. The total rent expense of R$ 7,853, include other expenses related to leased offices such as condominium.

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

 

   Nine months period ended September 30,  Three months period ended September 30,
   2020  2019  2020  2019
Property and equipment                    
Depreciation in the period   19,609    15,174    6,616    5,298 
                     
Leases                    
Depreciation in the period   33,363    23,235    10,313    8,796 
                     
Intangible assets                    
Amortization in the period   52,928    23,992    19,451    9,361 
    105,900    62,401    36,380    23,455 

 

12.Deposits

 

  

September

30, 2020

 

December

31, 2019

Demands deposits   40,310    70,190 
Time deposits   1,586,399    4 
Total   1,626,709    70,194 
           
Current   997,285    70,194 
Non-Current   629,424    - 

 

 

Maturity – As of September 30, 2020                     
Class  Within 30 days  From 31 to 60 days  From 61 to 90 days  From 91 to 180 days  From 181 to 360 days  After 360 days  Total
Demand deposits   40,310    -    -    -    -    -    40,310 
Time deposits   -    -    141,895    34,544    780,536    629,424    1,586,399 
Total   40,310    -    141,895    34,544    780,536    629,424    1,626,709 

 

22 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

Maturity – As of December 31, 2019                     
Class  Within 30 days  From 31 to 60 days  From 61 to 90 days  From 91 to 180 days  From 180 to 366 days  After 360 days  Total
Demand deposits   70,190    -    -    -    -    -    70,190 
Time deposits   4    -    -    -    -    -    4 
Total   70,194    -    -    -    -    -    70,194 

 

13.Structured operations certificates

 

  

September

30, 2020

 

December

31, 2019

Maturity          
From 91 to 180 days   1,918    - 
After 360 days   1,140,539    19,474 
Total   1,142,457    19,474 
           
Current   1,918    - 
Non-Current   1,140,539    19,474 

 

14.Borrowings and lease liabilities

 

   Interest rate %  Maturity  September 30, 2020  December 31, 2019
             
Bank borrowings – domestic (i)  113% of CDI(*)   March 2021    21,292    52,668 
Related parties           21,292    52,668 
                   
Financial institution (ii)  CDI (*)+ 0.774%   April 2023    276,106    329,410 
Third parties           276,106    329,410 
                   
Total borrowings           297,398    382,078 
                   
Lease liabilities           214,583    255,406 
                   
Total borrowings and lease liabilities           511,981    637,484 
                   
Current           61,226    116,450 
Non-current           450,755    521,034 

(*) Brazilian Interbank Offering Rate (CDI)

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

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

 

All the obligations above contain financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 30 (b)).

 

23 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

15.Debentures

 

On May 15, 2019 and September 28, 2018, the Company issued Debentures, non-convertible into shares, in the amount of R$ 800,000, with the objective of funding the Group’s working capital and treasury investments. As of September 30, 2020, the total balance is comprised of the following issuances:

 

Issuance

 

Quantity Issued (units)

 

Annual

rate

 

Issuance date

 

Maturity date

 

Unit value at issuance

 

Unit value at period-end

 

Book 

value 

1 st   400,000   108.0% CDI  9/28/2018  9/28/2020  R$ 1,000.00  R$1,108.56   - 
2 nd   400,000   107.5% CDI  5/15/2019  5/15/2022  R$ 1,000.00  R$1,009.05   338,693 
Total    800,000                   338,693 

 

   September 30, 2020  December 31, 2019
Principal   400,000    800,000 
Interest   23,746    47,127 
Payments   (20,336)   (11,897)
Repurchase (a)   (64,717)   - 
Total   338,693    835,230 
           
Current   -    435,230 
Non-current   338,693    400,000 

(a)As of September 30, 2020 the Group repurchased 65,611 units of the second series of non-convertible debentures.

 

The principal amount and accrued interest payable related to the first issuance are due on the maturity date, while for the second issuance, 50% of the principal amount is due on May 15, 2021 and the remaining balance on the maturity date, and accrued interest payable every 12 months from the issuance date. There were no interest amounts paid in the period ended of September 30, 2020.

 

On September 28, 2020 the first series of non-convertible debentures was fully prepaid in the amount of R$ 432,793, which includes principal and interest.

 

Debentures are subject to financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 30(b)).

 

16.Other financial liabilities

 

  

September 30, 2020

  December 31, 2019
Foreign exchange portfolio   249,394    8,962 
Contingent consideration (i)   462,000    - 
Financial bills (ii)   16,311    - 
Credit cards operations (ii)   8,294    - 
Others (iii)   122,879    - 
Total   858,878    8,962 
           
Current   380,567    8,962 
Non-current   478,311    - 

 

24 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

(i)Contractual contingent considerations mostly associated to the investment acquisition of VPL, as described in Note 10. The maturity of the total contingent consideration payment is up to 6 years and the contractual maximum amount payable is R$653,222 (the minimum amount is zero).

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

(iii)Include R$58,526 payable through our acquisitions (Note 2(f)) and investments in associates and joint ventures.

 

17.Private pension liabilities

 

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

 

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

 

Changes in the period:

 

  

Nine months period ended

September 30,

  

2020

 

2019

As of January 1   3,759,090    16,059 
Contributions received   984,816    211,396 
Transfer with third party plans   5,087,561    1,466,444 
Redemptions paid   (162,218)   (7,911)
Gain (loss) from FIE   (19,927)   35,718 
As of September 30   9,649,322    1,721,706 

 

18.Income tax

 

a)Deferred income tax

 

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

 

    Balance Sheet  
    September 30, 2020    December 31, 2019 
           
Tax losses carryforwards   38,616    17,146 
Goodwill on business combinations (i)   28,430    22,303 
Provisions for IFAs’ commissions   72,222    68,041 
Revaluations of financial assets at fair value   (9,993)   25,259 
Expected losses (ii)   20,578    5,666 
Financial instruments taxed on redemption   (18)   - 
Profit sharing plan   79,727    141,136 
Net gain on hedge instruments   32,927    (36,384)

 

25 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

Share based plan   47,824    2,950 
Other provisions   27,339    33,284 
Total   337,652    279,401 
           
Deferred tax assets   378,726    284,533 
Deferred tax liabilities   (41,074)   (5,132)

 

 

   Net change in the nine months period ended September 30,  Net change in the three months period ended September 30,
    2020    2019    2020    2019 
Tax losses carryforwards   21,470    (41,725)   24,769    (7,064)
Goodwill on business combinations (i)   6,127    (25,845)   (5,861)   (8,153)
Provisions for IFAs’ commissions   4,181    21,103    1,718    7,698 
Revaluations of financial assets at fair value   (35,252)   (9,374)   3,513    (1,178)
Expected losses (ii)   14,912    1,563    4,248    1,411 
Financial instruments taxed on redemption   (18)   (11,637)   (18)   (18,980)
Profit sharing plan   (61,409)   76,105    (97,272)   (38,295)
Net gain (loss) on hedge instruments   69,311    (1,885)   5,805    3,675 
Share based plan   44,874    -    17,533    - 
Other provisions   (5,945)   5,142    (17,750)   239 
Total   58,251    13,447    (63,315)   (60,647)

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

(ii)Include expected credit loss on accounts receivable, loan operations and other financial assets.

 

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

 

  

Nine months period ended

September 30,

  

2020

 

2019

       
As of January 1   279,401    140,400 
Foreign exchange variations   22,721    21,883 
Charges to statement of income   (28,561)   (8,564)
Tax relating to components of other comprehensive income   64,091    128 
As of September 30   337,652    153,847 

 

Unrecognized deferred taxes

 

Deferred tax assets are recognized for tax losses to the extent that the realization of the related tax benefit against future taxable profits is probable. The Group did not recognize deferred tax assets of R$ 20,610 (September 30, 2019 - R$ 18,731) mainly in respect of losses from subsidiaries overseas and that can be carried forward and used against future taxable income. A deferred tax asset was not recorded as taxable income is not expected.

 

b)Income tax expense reconciliation

 

The tax on the Group's pre-tax profit differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities. The following is a reconciliation of income

 

26 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the period ended September 30:

 

   Nine months period  Three months period
   ended September 30,  ended September 30,
   2020  2019  2020  2019
Income before taxes   1,758,528    996,944    632,451    382,134 
Combined tax rate in Brazil (i)   34%   34%   34%   34%
Tax expense at the combined rate   597,900    338,961    215,034    129,926 
                     
Income (loss) from entities not subject to taxation   (11,358)   (8,228)   (2,630)   (3,659)
Effects from entities taxed at different rates   36,792    16,208    17,630    7,170 
Effects from entities taxed at different taxation regimes (ii)   (285,529)   (24,816)   (111,061)   (9,138)
Intercompany transactions with different taxation   (46,775)   (27,989)   (19,645)   (5,711)
Tax incentives   (2,491)   (2,220)   (4,521)   (2,220)
Non deductible expenses (non-taxable income), net   (12,693)   8,687    (3,434)   4,310 
Others   3,581    (2,957)   (206)   658 
Total   279,427    297,646    91,167    121,336 
Effective tax rate   15.89%   29.86%   14.41%   31.75%
                     
Current   250,866    306,210    (6,732)   49,189 
Deferred   28,561    (8,564)   97,899    72,147 
Total expense   279,427    297,646    91,167    121,336 

(i)Considering 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.

 

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   12,126    -    12,126 
Gains (losses) on net investment hedge   (17,591)   5,762    (11,829)
Changes in the fair value of financial assets at fair value   1,494    (508)   986 
As of September 30, 2019   (3,971)   5,254    1,283 
                
Foreign exchange variation of investees located abroad   76,575    -    76,575 
Gains (losses) on net investment hedge   (121,772)   41,402    (80,370)
Changes in the fair value of financial assets at fair value   (56,603)   22,689    (33,914)
As of September 30, 2020   (101,800)   64,091    (37,709)

 

27 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

19.Equity

 

(a)Issued capital

 

The Company has an authorized share capital of US$ 35 thousand, corresponding to 3,500,000,000 authorized shares with a par value of US$ 0,00001 each of which:

·2,000,000,000 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 September 30, 2020 and December 31, 2019, the Company have US$ 23 thousand of issued capital which were represented by 354,181,346 Class A common shares and 197,618,980 Class B common shares. In the IPO that took place on December 11, 2019, the Company issued 83,387,238 new Class A common shares, with a corresponding increased of US$ 2 in the issued capital of the Company.

 

(b)Additional paid-in capital and capital reserve

 

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

 

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

 

In December 2019, as a result of the completion of the IPO describe in Note 1.1, 42,553,192 new Class A common shares were issued.

 

As mentioned in Note 26, the Board of Directors approved on December 2019 a share based long-term incentive plan, which the maximum number of shares should not exceed 5% of the issued and outstanding shares. As of September 30, 2020, the Company has 3,759,867 (December 31, 2019 – 1,921,669) restricted share units (“RSUs”) and 2,190,377 (December 31, 2019 – 2,190,377) performance restricted units (“PSUs”) to be issued at the vesting date.

 

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

 

28 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

(c)Dividends distribution

 

The Group has not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors such as the Company's results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by XP Inc. board of directors and, where applicable, the shareholders.

 

The proposal and payment of dividends recorded in the Company's financial statements, subject to the approval of the shareholders in General Meetings.

 

For the nine months period ended September 30, 2020, the Company has not declared and paid dividends to the shareholders.

 

(d)Other comprehensive income

 

Increases or decreases in value attributed to assets and liabilities are classified as equity valuation adjustments, while not being computed in the income for the period in accordance with the accrual basis as a result of their valuation at fair value.

 

20.Related party transactions

 

The main transactions carried with related parties, under commutative conditions, including interest rates, terms and guarantees, and period-end balances arising from such transactions are as follows:

 

   Assets/(Liabilities)  Revenue/(Expenses)
         Nine months period ended September 30,  Three months period ended September 30,
Relation and transaction  September
30, 2020
  December 31, 2019  2020  2019  2020  2019
                   
Shareholders with significant influence   (3,891,015)   (732,420)   (36,541)   (14,905)   (13,509)   (18,863)
Securities   105,100    123,813    9,154    7,279    1,895    2,915 
Securities purchased under agreements to resell   14,999    196,009    3,557    -    650    - 
Accounts receivable   10,178    594    233    -    (163)   (2,270)
Securities sold under repurchase agreements   (4,000,000)   (1,000,168)   (48,243)   (18,313)   (15,514)   (18,313)
Borrowings   (21,292)   (52,668)   (1,242)   (3,871)   (377)   (1,195)

 

Mostly represent transactions with Itaú Unibanco who became a shareholder of the Company in 2018 and since than a related party. Transactions with related parties also includes transactions among the Company and its subsidiaries in the ordinary course of operations include services rendered such as: (i) education, consulting and business advisory; (ii) financial advisory and financial consulting in general; (iii) management of resources and portfolio management; (iv) information technology and data processing; and (v) insurance. The effects of these transactions have been eliminated and do not have effects on the unaudited interim condensed consolidated financial statements.

 

21.Provisions and contingent liabilities

 

The Company and its subsidiaries are party to judicial and administrative litigations before various courts and government bodies, arising from the ordinary course of operations, involving tax, civil and labor matters and

 

29 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

other issues. Periodically, Management evaluates the tax, civil and labor and risks, based on legal, economic and tax supporting data, in order to classify the risks as probable, possible or remote, in accordance with the chances of them occurring and being settled, taking into consideration, case by case, the analyses prepared by external and internal legal advisors.

 

  

September

30, 2020

 

December

31, 2019

Tax contingencies   10,062    9,878 
Civil contingencies   3,660    2,673 
Labor contingencies   2,298    2,642 
Total provision   16,020    15,193 
           
Judicial deposits (i)   10,168    18,403 

 

(i)There 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 period

 

   Nine months period ended September 30,  Three months period ended September 30,
   2020  2019  2020  2019
At the beginning of period   15,193    17,474    15,479    17,171 
Monetary correction   1,472    1,499    499    809 
Provision accrued   912    1,726    333    1,657 
Provision reversed   (965)   (3,933)   (78)   (3,931)
Payments   (592)   (1,062)   (213)   (2)
At the end of period   16,020    15,704    16,020    15,704 

 

Nature of claims

 

a)Tax

 

As of September 30, 2020, the Group has claims classified as probable risk of loss in the amount of R$ 10,062 (December 31, 2019 - R$ 9,878), regarding social contributions on revenue (PIS and COFINS), questioning the definition of the calculation base of revenues to pay correctly. This proceeding was pending the expert technical report following the decision of the second instance court to grant the right to provide evidence and send the proceeding back to the lower court. These lawsuits are supported by court deposits in its entirety.

 

b)Civil

 

The majority of the civil claims involve matters that are normal and specific to the business, and refer to demands for indemnity primarily due to: (i) financial losses in the stock market; (ii) portfolio management; and (iii) alleged losses generated from the liquidation of costumers assets in portfolio due to margin cause and/or negative balance. As of September 30, 2020, there were 58 civil claims for which the likelihood of loss has been classified as probable, in the amount of R$ 3,660 (December 31, 2019 - R$ 2,673). An amount of R$ 112 was deposited in court as of September 30, 2020 (December 31, 2019 – R$ 9,744).

 

30 

XP Inc. and its subsidiaries

Notes to unaudited interim condensed consolidated financial statements

As of September 30, 2020

In thousands of Brazilian Reais, unless otherwise stated

 

  

c)Labor

 

Labor claims to which the Group is party primarily concern: (i) the existence (or otherwise) of a working relationship between the Group and IFAs; and (ii) severance payment of former employees. As of September 30, 2020, the Company and its subsidiaries are the defendants in approximately 9 cases involving labor matters for which the likelihood of loss has been classified as probable, in the amount of R$ 2,298 (December 31, 2019 - R$ 2,642).

 

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. These contingencies are not recorded as provisions. As of September 30 2020, for claims classified as possible loss the estimated risk is approximately R$ 191,941 (December 31, 2019 - R$ 153,951).

 

Below is summarized these possible claims by nature:

 

   September 30,2020  December 31, 2019
Tax (i)   70,700    69,386 
Civil (ii)   114,669    81,414 
Labor   6,572    3,151 
Total   191,941    153,951 

 

(i)In 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 592 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.

 

22.Total revenue and income

 

a)Net revenue from services rendered

 

Revenue from contracts with customers derives mostly from services rendered and fees charged at daily transactions from customers, therefore mostly recognized at a point in time. Disaggregation of revenue by major service lines are as follows:

 

  

Nine months period

ended September 30,

 

Three months period

ended September 30,

   2020